– 34% organic growth for a $48B retailer in this economy is objectively strong, even if it is short of analyst guesses
– Amazon (and Google and Facebook and Apple) are playing for multi-trillion dollar markets
– The long term potential more than makes up for the short term frustration
The frustrations of an Amazon investor are abundant. Management does not really care about you. Guidance is terse and often inaccurate. Margins bounce around the waterline as unspecified investments in physical, intellectual, and human capital clog the income statement and pile up on the balance sheet. Sales growth is objectively outstanding, but zigs and zags, rendering the terse and inaccurate guidance all the more maddening (Exhibit 1). New products are designed with an intention to sell at a loss to be made up for by the future media sales they inspire. The exact sales of these products and their impact on margins is unspecified, although intentionally vague statistics are offered that make it seem like an important factor. 4Q11 is more of the same.
Why take this abuse? Well, it starts with that 35% sales growth, which occurred in a quarter where Europe was melting down and overall retail sales were slightly over flat. Yes, this is less than the 41% growth that the sell side consensus was expecting, but with companies like Amazon, where guidance is minimal, channel checks are impossible, and there are no real comparables, sell side analysts were basically guessing. Yes, the sales guidance showed a mid-point that was below the consensus for 1Q12 and equated to just 29% growth, but the sales guidance has been historically conservative, including the guidance for this past quarter, where the “disappointing” sales came in at the high end of guidance. Objectively? 34% growth is astounding for a $48 billion retailer in this economy. The kicker? Amazon has only taken a tiny slice of the addressable $13B global retail market. That is a LOT of runway.
Amazon has established a WalMart like advantage in e-commerce and is keeping the foot on the gas pedal, building out physical distribution to manage a broad international expansion. Their Kindle product line is a bold move to vie for leadership in on-line media, not just e-books, but music and video as well, and is establishing a third platform play for the hearts and minds of internet users. The Amazon Prime program ties into this, tying real e-tail benefits, like free shipping, to media freebies, like free movie streaming, to build the loyalty of their user base and expand the range of products and services it can sell to them. Amazon Web Services is another way to exploit the company’s massive investment in IT infrastructure and expertise. All of this offers extraordinary long-term promise, but all of it requires substantial near term spending.
Amazon, like Google and Apple, is a throwback to the days when companies strategized and invested for the long run rather than to beat the next quarter. IPO-to-be Facebook can be expected to behave in exactly the same way. The top executives are staggeringly wealthy and insulated by their substantial ownership from investor pressures to deliver short term performance. Investors have to decide whether or not they are willing to take the roller coaster ride that often accompanies such quarterly indifference. I think that the long term stakes are more than high enough to deal with the frustration.
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