For a brief, glorious moment last Thursday, Jeff Bezos, the founder and guiding light of Amazon, was the world’s richest man, passing Bill Gates, as Amazon stock popped to record heights, hours before the company released its second-quarter earnings.
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Amazon's share price fell back again when the company's earnings proved to be a disappointment. The stock didn't take much of a hit, though, considering how far short Amazon’s bottom line was below forecasts. Instead of being worth $92 billion as he was on Thursday, Bezos is now worth a few billion less.
Either way, by most people’s reckoning Bezos deserves his many billions.
Shoppers enjoy low prices, an unrivaled selection and speedy delivery. If Amazon has run over the competition, it did so by giving consumers what they want, not by abusing them.
Shareholders are just as happy: Someone who bought Amazon stock 15 years ago would have enjoyed an 8,000% return on their investment as of today, according to The New York Times.
This is an amazing statistic for any publicly traded company, but even more so for a publicly traded company that is barely profitable.
Finally, Amazon has had consistent profits over the last two years for the first time, but nothing spectacular. In the second quarter they amount to a wafer-thin 0.5% of revenues and they were down 80% from a year earlier. But investors reacted with characteristic indifference, as always.
The Macy's measure
Over the last 20 years Amazon’s profits have been half of what Macy’s earned. Yet the old-line department store chain is regarded as a dying has-been and is in the process of closing 100 of its stores.
In fact, no other tech company can match Amazon for the disconnect between market value and profitability. The retailer trades at nearly 116 times its forecast earnings over the next 12 months while other tech giants like Microsoft and Alphabet trade at a mere 22-26 times.
Investors don’t have a problem with the paucity of profit because Bezos has been using the cash Amazon generates to expand into new segments, grow market share, and develop new technologies to keep the business growing. It’s the kind of business model young companies use but Amazon has been using it for two decades with no end in sight, even though by one estimate, it already commands a third of online retail.
A less kindly way of looking at this is that Amazon is engaging in plain old predatory pricing like 19th-century American robber barons.
The idea is to price your goods so low that you drive out the competition; and then when there isn’t any competition left, raise your prices without any consequences.
I doubt Bezos looks at it that way, and for now it seems antitrust regulators don’t either.
But here is one small piece of evidence that it is in effect what Amazon is doing. Last year its retail business earned just $1.1 billion in operating profits on sales of close to $124 billion. It much smaller cloud-computing business earned $3.1 billion on just $12.2 billion in revenues.
In other words, retail is pretty much a loss leader while most of the profits the company earns come from another, unrelated business.
Oh so Old Economy
The high-tech industry loves to talk about disrupting industries and old ways of doing things, about revolutions and a brave new world of semiconductors and big data. During the dot.com boom, we were told that profits were something oh-so Old Economy and nothing compared to the big changes that tech was bringing to the market.
Back then, the important thing was gaining eyeballs and market share. But that turned out not to be true, as the dot.com crash came to teach us.
Now we’re being told that monopolies are also oh-so Old Economy. The big tech companies that dominate sectors like search (Google) and social media (Facebook) are doing us a favor, just like Amazon is, by delivering goods and services for lower prices, or even for free.
The new tech monopoly is all about innovation and doing things better. That makes them fundamentally different than the old-fashioned trusts and monopolists, which used their market power to raise prices and deter innovation and efficiency.
“Creative monopolies aren’t just good for the rest of society; they’re powerful engines for making it better,” as Peter Thiel, the tech entrepreneur, put it in a 2014 opinion piece “Competition is for losers” for The Wall Street Journal.
Thiel is right that technology does on the whole make society better. But that’s not why Amazon or any other tech business exists, despite what they tell you. Their executives and owners want profits like any other business, and they want them to grow.
For Amazon, the inflexion point where the imperative for growth surrenders to the imperative to make real money has to come sooner or later: otherwise it will become another bubble. That point will come when Amazon is confident its rivals are so weakened that when it raises prices, no one will be left to effectively challenge it.