Investors still fail to understand Jeff Bezos’ strategy for Amazon
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Investors still fail to understand Jeff Bezos’ strategy for Amazon

Jeff Bezos has been resolute about his business strategy over the years: he is not focused on profit, and he doesn’t care whether investors want to see it – he is going to reinvest as much as he possibly can in the business. This approach has worked well for him – Amazon has gone from being a dot-com bubble bookseller into the world’s most powerful online retailer. You might be forgiven for thinking, then, that Amazon investors would look beyond the company’s bottom line when assessing its earnings. You would, it appears, be wrong.

Amazon investors punished the company for a miss on profit – but its share price has still risen by 35% year to date

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SOURCE: Yahoo Finance

Investors became so excited in the run up to Amazon’s earnings that founder and CEO Jeff Bezos was briefly propelled into the position of the world’s richest man. As his company’s market cap rose, his personal fortune eclipsed long-time financial top dog Bill Gates by $500 million. After earnings were released, he dipped back below Mr. Gates, and Amazon’s share price fell by 3%.

Amazon’s business is clearly in great shape. The company reported revenue growth of 24.8% year on year for the second quarter of 2017, accelerating from 22.6% in the first quarter. That beat consensus estimates by 2%. Amazon Web Services was an outperformer, seeing its revenue rise by 42% year on year. Amazon is winning across multiple segments, from online retail to cloud services to (unexpectedly) the smart home speaker market. So why did investors punish it? Against the company’s own longstanding advice, they were looking for profit.

To be sure, Amazon could have delivered that in spades, if it wanted to. But a spate of spending that ranges from the purchase of Whole Foods for $14 billion to inwards investment into products like the Amazon Echo ate up its earnings. This left it with an operating profit of $628 million – a little over half of what analysts had expected to see. But perhaps the craziest thing is just how little people listen to the company’s perspective on bottom line growth: Amazon’s operating profit was well within its own guidance for the quarter.

Bezos has previously spoken about reinvesting profit in his annual letter to share holders. He compared it to swinging for a home run in baseball – but, unlike in baseball, the returns you can achieve for taking risks in business are not truncated.

Investors should be pleased that Amazon’s profit figure wasn’t higher. It shows that Bezos remains dedicated to a strategy that has seen him hit the ball over the fence many times over the past two decades.

Disclosure

Dominion holds Amazon in its Global Trends Ecommerce Fund.


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