Wednesday, September 10, 2014

Review of The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

I never know what to make of Amazon. I buy more and more there every year. It used to just be new books, but now I buy my used books there instead of (too eBay-ish). Also buy any mp3s, certain office supplies, electronics (sorry Radio Shack), power tools, basically most things that are SKU'd and branded. I would never buy anything unbranded on there because that type of stuff always turns out to cheap junk from China.

Of course, anyone looking at Amazon stock wonders about the $150 billion enterprise valuation versus the $4 billion in EBITDA. Revenue and gross profit (27% gross margin) grow at a fast clip but EBIT does not.

Bezos is also just a fascinating fellow. I've written about the 10,000 Year Clock before. Before reading The Everything Store biography and corporate history, I did not know he had invested in Google. (And I forgot that Amazon was established well before Google.) I wonder how much money the very early Google investment turned into? It also says that he invested in Twitter and Uber.

Certainly the story of Amazon is fascinating. However, It's amazing that people are writing business books that have no charts, no financial statements, no valuation ratios. Journalists really are not good at reporting the type of details that would help you understand a business, and the decisions that management and investors made over time.

Journalists prefer sensational, emotional stories that follow an arc. Bezos' wife was annoyed with The Everything Store and gave it 1 star in her Amazon review! At least with the Vanderbilt or Carnegie biographies, there's the excuse that the detailed financial data would be so hard to come by.

Instead, read last week's Amazon essay, Why Amazon Has No Profits (And Why It Works). As he puts it,

"On one hand, there is the ruthless, relentless, ferociously efficient company that’s building the Sears Roebuck of the 21st Century. But on the other, there is the fact that almost 20 years after it was launched, it has yet to report a meaningful profit."
His take is that Amazon, at the highest level of abstraction, is a venture capital fund.

Amazon wholly owns a number of portfolio businesses which are at different stages of maturity. Certain businesses (books?) are well established and profitable. Others are "startups" that are unprofitable because they are new or because they are using Bezos favorite loss-leader strategy.

Evans thinks that the money is going into more fulfillment capacity and to expanding Amazon Web Services, the "cloud" on which an amazing number of internet companies are run. He says, "when you buy Amazon stock (the main currency with which Amazon employees are paid, incidentally), you are buying a bet that he can convert a huge portion of all commerce to flow through the Amazon machine."

The most important Bezos concept is the flywheel, and it's worth having in your mental toolkit.

With regard to Amazon, I think the bullish thesis - they are unprofitable because of growth investments - is probably right. The problem is, there's a way for that thesis to be right and for bulls to still lose. What happens if the future of discretionary purchasing - and that's all Amazon is for - isn't that bright? What if American consumers find a lower level of confidence that better fits their reduced future circumstances, and they tighten their belts?

Then the flywheel would essentially run backwards; the huge fixed costs of the capex investments working against you.


1 comment:

CP said...

So far, American consumers certainly have not found "a lower level of confidence that better fits their reduced future circumstances"!

Of course, anyone looking at Amazon stock wonders about the $150 billion enterprise valuation versus the $4 billion in EBITDA.

Now its $958 billion enterprise valuation versus $34 billion of EBITDA. From 37.5x to 28x.