Amazon CEO Doing It His Way, Not Wall Street’s
There must be something in the water in Washington state that produces contrarian CEOs.
Jim Sinegal, former CEO of Costco, was famous for rebuffing calls by analysts and investors to increase profits by cutting back on wages and benefits for employees. He steadfastly refused and Costco is top of class in the warehouse sector. Recent research from BIGresearch shows Costco as the one chain where consumers plan to increase their holiday shopping this year.
Also known for "thumbing his nose at Wall Street," as Reuters put it, is Jeff Bezos at Amazon.
Ten years or so ago, some analysts were saying that Amazon would never make money, despite Mr. Bezos making the case for the company investing in its future by sacrificing short-term profits for long-term growth. Today, the Amazon CEO is facing some criticism following a weak quarter for selling the new Kindle Fire tablet at a loss so it can compete for market share with Apple’s iPad and Barnes & Noble’s Color Nook. Amazon has been reporting "razor thin margins" for the past few quarters and Mr. Bezos warned that the company may dip into the red in the 4th quarter due to heavy sales of the Kindle Fire.
Chris Cordaro, chief executive and investment officer at Regent Atlantic Capital, is one critic of Amazon’s strategy.
"What they’re willing to do is trade earnings for ever-increasing market share, but at some point you have to make a meaningful profit," he told Reuters. "We can’t be buying something at 100 times earnings. That doesn’t make investment sense."
Bill Smead of Smead Capital Management has a different take.
"Smart people are focused on how much market share they can get of this wonderful action that’s going to happen in the next five to 10 years," he told Reuters. "They’re sacrificing market capitalization now. Who loses? The only people who lose are the momentum investors who are trying to meet short term performance targets."
Discussion Questions
Discussion Questions: Do you have any concerns about Amazon’s latest financial report? Is Jeff Bezos taking his philosophy of future growth too far this time? Is the market share approach the way to go in the digital retailing arena?
Bezos has been described as the next Steve Jobs and I think he is beginning to deserve the title. This is a company that not only revolutionized e-commerce but also cloud computing (the Amazon cloud is the largest in the world). This is a company that is trying (and doing a pretty good job) selling anything to anyone, anywhere. And, unlike other 800 pound gorillas, they make it seem easy and…rather cool. Let Wall Street be Wall Street; short term analyst thinking is what got us in this economic mess. I have a lot of admiration and confidence in Bezos and the company he’s created. I think Amazon’s long term outlook is very bright indeed.
Amazon is doing the right thing by investing for the long-term, which has always been their strategy. As I wrote on my blog, “I wish more retailers would open their pocketbooks and make more long-term investments in technology. Yes, there’s risk involved, but there’s also reward when its done with passion and conviction. … The big technology companies are changing the retail industry forever, so its time to get on board. If you don’t have a research/innovation team, get one — this month.”
The article says more about Wall Street than it does about Amazon or Jeff Bezos. As noted, Amazon didn’t produce earnings for years and, despite the prognostications of clever people whose only accomplishment so far is to make themselves rich without actually producing anything, has grown into a major force in retailing.
Trying to manage your company to keep Wall Street happy is a sure path to oblivion. The retail graveyard is brimming with managers who tried.
We all knew that Kindle Fire was a Trojan Horse to get Amazon greater share in the digital content market. And we knew they were losing about $25 per unit. So, there really shouldn’t be much shock at this point. This is all in the script in my opinion and kudos to them for daring to take the long view in a chronically short term, investor-driven market.
Amazon is a company that revolutionized the way we shop. Why would we begin to question success? You put your money on the sure thing. There is no reason to believe Amazon is anything but strong and the industry’s competitive leader.
I think when it is investors who are footing the bill of that $25 per device as well as the LivingSocial deal for AMZN gift certificates, they have a right to question the wisdom of never-ending pay for customers — something Groupon seems to feel will reward its IPO in a week.
There is a trend of public companies and their shareholders placing undue focus on quarterly earnings reports. This trend seems pretty unhealthy to me as it diminishes the importance of reinvesting in a business in favor of looking for short term gains. It is really nice to see Bezos bucking that trend. He understands that a new product, like the Kindle Fire probably will see a loss when it first comes out, but that such new products also lay the ground work for future growth.
That said, most public companies’ charters require the executive management of the company to focus primarily on the short term wealth of the company. Bezos can get away with dodging that focus because he and his company are big names. A lot of smaller companies cannot. I’ve heard stories of companies founded on principles of sustainability or other socially aware causes having to agree to buyouts by larger, less ethically focused companies because their small company’s charter necessitates a focus on investor payoff first and to the exclusion of any other principles. It would be nice to see Bezos’s decision not to jeopardize future growth for short term profits trickle down into a new way of looking at investor-management relationships and the role of principles in business, but I rather doubt that would occur. More likely Amazon gets a pass, this time, because they’re Amazon, but nearly every other publicly traded company will continue to bow their heads in supplication to the quarterly earnings report.
The demand for short-term profits has hurt many companies. Managing for the long-term allows companies to build brands and gain market share. Analysts crying for short-term gains do little to help companies grow. Hats off to Amazon and Costco for staying the course.
Trying to meet short-term financial targets to please the stock market is indeed a proven path to failure. Smart CEOs and investors realise that keeping customers happy is the only sustainable way of keeping shareholders happy.
That said, I’m not quite as sure Amazon is as great a company as everyone seems to think. Yes, they are good at what they do, but not that good — part of their success is due to their brick and mortar competitors having taken so long to get their multi-channel operations sorted out. As noted in previous RetailWire discussions, this mostly reflects legacy organisational/cultural issues. As an extreme example, I wonder how many US analysts covering Amazon are aware that Europe’s largest consumer electronics retailer is only now going online (a decade after Best Buy)?! For sure, that is going to take some of the edge off Amazon’s growth rate in Europe (where it has to collect sales tax, in contrast to the US).
The good news for Amazon, its click and brick competitors, and indeed consumers is there is still lots of room for improvement. For instance, there are a few websites that are much more interactive and recreate the in-store experience far better than Amazon currently does. May the very best win!
When it comes to retailing, it’s common knowledge that analysts and bankers look for the short term as opposed to the long term. Common sense would suggest that the more Kindles Amazon sells, the more Amazon customers they have. Why is that so complicated for Wall Street to understand? It’s not sexy in the short term, but Mr. Bezos is more concerned about Amazon’s long-term longevity as opposed to making a quick buck. Makes complete and total sense to people who understand retail.
I admire companies that create a specific strategy and then follow through on it, even though it may have a short-term revenue and margin hit. There are far too few companies with the conviction to be able to weather the “heat” of analysts and shareholders to drive to a specific goal. My hope is that companies like Costco and Amazon continue to win and make the case that short-term earnings are not the best way to just, long-term prospects.
Amazon has decided that the greatest threat they face is the installed base of iPads, and Apple’s ability to control the pipe for Amazon’s books to reach their consumers. The decision to low-ball the Fire to gain market share is both wise and far-seeing. It will cost in the short term but yield results in the long term through additional revenue and customer connection.
The key is that this strategy to drive installed base be successful.
There is a huge difference between knowing finance and knowing business. There aren’t 10 bankers in the USA that would have financed the development of the iPod. No future in a product that everyone else is already making! It takes people like Jobs and Bezos to see beyond today. They build systems to satisfy needs tomorrow or needs we don’t even have yet. If you are buying Amazon as a short term investment then you need to have your head examined. They are a retailer and much of their current fate is directly tied to the current state of the economy. No matter how cheap you are and how good your service is, if people don’t have money they can’t spend it. But Amazon is going to earn a bigger piece of the pie by being more efficient and offering more services.
Just last month I signed up for Amazon Prime. I didn’t do it for the free 2nd day shipping — I did it because of Netflix! Most people don’t know that Amazon has a streaming Movie service like Netflix and that it is free to Amazon Prime members and it is cheaper than Netflix’s streaming service and I get free shipping special offers to boot.
Am I worried about Amazon? Not in the least. Is business slowing — where is it not slowing? Amazon does not live on an island, they are part of the global economy. They will beat the competition, but that doesn’t mean they will be a better investment than Coca-Cola or Exxon. Their business is sound; their stock price is determined by nervous speculators.
There are really two separate issues here. Is Bezos a genius, and is he right to ignore The Street? If the answer to the first is “yes,” then the answer to the second is also “yes”; but it’s easy to turn this into a non-sequitur and imply being a contrarian makes you a genius. A flood of dot-bombs showed the folly of this (non)reasoning, and I’m not yet convinced what history’s verdict on Bezos will be.
I love what Bill Emerson said:
“Trying to manage your company to keep Wall Street happy is a sure path to oblivion.”
Why do so few corporate “leaders” have the brains or the courage to understand this and act on it?
A officer of a public corporation has a fiduciary responsibility to manage stock price. On the other hand, lest we not forget that their sales were up 44%.
Growth doesn’t come without continued investment in the company.
The disconnect is communicating strategies and where they’re making investments that negatively affect profit. Wall Street’s definition of “long term” is likely different than Mr. Bezos.
The problem is that none of this should be a surprise to those who have invested in Amazon.
It’s refreshing to see a CEO of a major company think past his next earnings report. He very well could be the next Steve Jobs as he appears to have the foresight to plan for the future and execute the plan.
It’s rare that I have given retailers second chances like I gave to Amazon in their early times. Never has a retailer continued to deserve them as much as Amazon has done.
I have no concerns whatsoever.
Analysts are just that — analysts. We need to remember that. We also need to remember that they have little at stake. Amazon has everything at stake for Amazon. Which one has a better track record on Amazon — Mr. Bezos or the analysts.
Famous last four words generally coming out of the mouth of analysts. It will never work.
Amazon’s last quarter was stunning in terms of sales growth, especially considering the environment and their previous quarter (+50%). As our clients and readers of our posts both here and on our blog (www.rDialogue.com/blog) are aware, we believe Amazon is the best retailer in the world right now. The fact that they invest for the long-term only makes them better.
The contrast between the two investment analysts speaks to what makes a market. We’re bullish on Amazon, and any CEO that invests for the long-term and is also focused (in the case of Bezos, obsessed) with customers.
I don’t think Bezos gives a fig what the short-termers say. Amazon is moving aggressively to dominate the retail space, and NOW is the time for bold moves. Now is the time for the world’s greatest SELLING organization to make massive advances on their logistics-only giant competitors. Bezos thinks right, and the opportunity for needed brain-transplants at the competition is fading.
These types of decisions are not simply made in a vacuum…a solid dose of confidence in the case of Bezos is shored up with extensive enterprise analytic prowess.
A missing signal here is the ability for analytically driven companies such as Amazon to separate themselves from the pack of ‘me too’ retailers and continue to drive further distance between themselves and competitors by leveraging a core enterprise asset — data. Sure there are some risks involved, but don’t kid yourself, this is a calculated risk with known probabilities of both success and failure and given a solid track record of success at Amazon — not concerning at all.
Indeed, there may be “something in the water in Washington State,” but intense focus on serving customer needs vs. short term gains is not a bad recipe either.