On May 30, Amazon stock topped $1,000. This got some media attention as will another nice round number: $2,000 a share -- which I think its stock will hit in 2019 if it keeps going up at 40% a year. (I have no financial interest in the securities mentioned in this post).
Are you going to wring your hands and worry about how its shares are over-valued at a forward Price/Earnings ratio of 65 or will you throw in the towel and buy because you suspect Amazon will keep growing revenues faster than the 20% that most investors expect?
If you can find a better CEO on this planet -- or any other -- you can invest in her. But until then, nobody beats Bezos. As I pointed out in Disciplined Growth Strategies, companies that sustain 20% or higher growth after they hit $10 billion in revenue share four traits -- which Bezos brings to life:
- He's a founder who propels his public company -- something he's been doing for two decades;
- He leads enormous markets by giving consumers a better deal;
- He attracts and motivates the most talented people in the world through his vision, charisma, and ability to execute; and
- He keeps investing in growth opportunities -- learning from failures and expanding where he finds success.
Here's why each of these factors lead me to believe Amazon will be able to sustain its 40% annual stock price growth.
Bezos
I have little to add to all the hagiography about Bezos whose wife drove him across country to Seattle in 1994 as he typed a business plan for an online book store.
But his success and that of other entrepreneurs -- like Bill Gates, Mark Zuckerberg, Larry Page and Sergey Brin, and Reed Hastings -- who have gone on to run successful public companies are among the handful of individuals who are ideally suited to the American economic system.
Simply put, there is no way to make more money in America than to start a company, take it public, and keep it growing at better-than-expected growth rates for decades at a time.
At the moment, Bezos leads the pack of still-operating CEOs -- FORBES estimates his net worth as of May 31 at $84.8 billion -- he is gaining ground on long-time wealthiest person Gates whose edge -- at a net worth of $88.5 billion -- could be narrowing uncomfortably.
There is a flip side to the great leader theory of capitalism -- as we saw in the case of Microsoft, it is nearly impossible to replace the great leader with one who can do as well or better.
That means investors should expect Amazon stock -- which has soared over 499,000% since its 1997 IPO -- to wit, a $1,000 investment on Amazon's first day of trading in 1997 would have been worth more than $500,000 on May 30 -- to veer off of its rapidly ascending trajectory should Bezos leave Amazon's CEO slot.
Winning in Enormous Markets
Amazon is a leader in many industries -- two of which stand out.
At roughly $395 billion, ecommerce accounted for 11.7% of the $3.4 trillion retailing market, according to the Department of Commerce. And Amazon -- with 33% of that market, according to Euromonitor -- drove about 66% of 2016's e-commerce growth.
Then there is the $30 billion cloud services market. Amazon controlled 40% of that, according to Synergy Research, after posting 55% growth and hitting $12 billion in AWS revenue in 2016 -- beating projections by $2 billion, according to Geekwire.
Amazon's lead in these markets has something to do with its ability to deliver great customer service. According to the American Customer Satisfaction Index, Amazon beats its rivals with a customer satisfaction score of 86 -- a lead it has sustained for the last 16 years.
According to AP, Amazon says, "We've had competition every day of our existence at Amazon and it's never changed our approach. We obsess over customers and the things we believe customers will always care about — low prices, vast selection, and fast delivery."
Attracting And Motivating The Right Talent For The Job
Much has been written about Amazon's tough work environment -- resulting in rapid turnover of employees who can't satisfy Bezos's high standards.
But it may be that Amazon is great at attracting and motivating two kinds of talented people -- those who fulfill customer orders and those who invent new products and services.
According to Harvard Business Review, Amazon would be imperiled if it showed its most creative engineers the door. As James Heskett wrote, "if well-paid, smart techies making things happen in AWS (Cloud computing) leave because they are treated poorly ... that is a problem.”
Yet high turnover may work for improving customer service -- especially if only the best performers survive. “Amazon’s business model is perhaps about scale, automation and efficiency. I will imagine the HR or people strategy would be geared towards attracting and retaining the employees that will help to accelerate and improve these key performance and competitive advantage factors,” noted HBR.
Betting on New Growth Opportunities
If investors knew the value in today's dollars of all the payoffs from Amazon's investments in growth, there would be no upside to holding its shares.
But the truth is that not even Bezos knows just how much Amazon is likely to exceed investor expectations in the future.
Yet that uncertainty has not stopped him from continuing to place big bets on Amazon's future. After all, Amazon has branched out from selling books online to building a gigantic infrastructure of warehouses loaded with robots, massive computer systems, and extensive delivery networks to fulfill orders for all sorts of products from toilet paper to sneakers.
Along the way it has had some big misses -- such as Amazon Fire -- and some compelling hits such as Amazon Prime and Amazon Echo that sits in consumers living rooms and takes verbal orders for more goods.
According to AP, Evercore analyst Greg Melich estimates that the average Amazon customer spends $800 a year on the site and members of its "$99-a-year Prime program spend on average 2.7 times more than others."
Amazon has also been working patiently to develop a viable grocery delivery service and it's even opening up bricks-and-mortar bookstores to the delight of irony-embracing journalists everywhere -- including at Bloomberg -- which speculates that Amazon may be using these bookstores to refine technologies that eliminate the need for cashiers and generally shave friction from the customer purchasing process.
Were these experiments to yield more successes than failures and exceed investors' expectations, Bezos's net worth could double to $170 billion by 2019. Will you miss out on that joy ride?
