Good morning,
In 2007, the consensus analyst forecast for Amazon's 2020 sales revenues ranged from $26 billion to $27 billion. In 2020, Amazon achieved $386 billion. The pessimists armed with their myriad of reasons continually sounded smart undercooking their forecasts, while the optimists made a killing!
The pessimists sounded smart in 1996 outlining why Barnes and Nobel would crush Amazon’s bookstore. They sounded smart when eight executives and one board member left between 2002 and 2003. They sounded smart in 2005 when google (who had a large market cap at that point) launched their eCommerce offering – Froogle … and few sounded smarter than hedge fund giant, George Soros when he told the investment community that he was short Amazon in the depths of the GFC.
The Amazon story has been retold thousands, if not, millions of times by journalists, analysts, students, and industry participants. Despite this, we still think it is worth taking the time and trying to understand why so many missed it and how one man managed to disrupt two major industries – retail and computing.
The everything store, authored by Brad Stone, is possibly the most comprehensive recount of Amazon’s journey from start-up to 2014. Stone does a great job, detailing the major events in the business’s life through 300 interviews with former staff and from fifteen years of reporting on the company for the Newsweek, the New York Times, and Bloomberg Businessweek.
Amazon’s skeptics have been well documented through time, none more than Jacqueline Doherty, the Barron’s journalist who published the article Amazon.bomb in May 1999 (attached). However, it was only when reading Stone’s book did, I really grasp the sheer number of times the ‘pessimists would have … sounded smart’ over the past 25 years.
For investors, the big gains only come through holding compounding machines over long periods of time, which is far easier said than done. There are few better examples of this than Amazon, trading at $86 ($30.05 billion market cap) and 70x sales in March 1999, before falling 93% over two years and nine months to $5.97 ($2.21 billion market cap) or 2x sales, in September 2001. Today, the stock 547x higher, at $3,271 a share ($1.6 trillion market cap).
Like all great founders, it was the crisis that defined Bezos. Prior to the ‘.com crash’, capital allocation was aggressive, with Bezos using debt to bet big on anything that was a ‘.com’. However, it was only the busting of the bubble along with meeting two retailing greats in Sam Walton (Walmart founder) and Jim Sinegal (Costco founder) did Bezos reassess and turn his laser focus to lower prices, developing technology organically, and only betting on an acquisition when he knew the flywheel was turning.
Using Stone’s work, I’ve tried to document the many times the ‘pessimists sounded smart’ and how ‘the optimists made money’ in one of the greatest compounders of all time.
How the pessimists sounded smart
Short sellers & Bezos sell down
There are few pessimists who can sound smarter than a short seller armed with a few expert calls and a short report.
Amazon was publicly shorted not once but twice!
The first by a 28-year-old Lehman Brothers convertible bond analyst – Ravi Suria who drafted a research paper shortly after the Nasdaq peaked in March 2000, outlining why Amazon would run out of cash ‘in just four months’. Ravi continued to pummel the company with negative reports throughout the summer of 2000 causing the stock price to fall from ~$57 to $33 and also causing suppliers to start to question the businesses viability.
Adding fuel to the fire was a $12m sell down from Bezos which lead to an SEC investigation after it was found that Amazon had seen a Lehman’s negative research report prior to it being published to the market.
It was during this period that Bezos wrote on the wall of his office “I am not my stock price” … telling his staff … ‘don’t feel 30% dumber when your stock is down 30%’ … and … ‘don’t feel 30% smarter when it is up 30%’.
Amazon was again shorted in 2008 by one of the biggest names in the business – George Soros. At a hedge fund conference in New York during the depths of GFC Soros name just one stock that he was shorting as the world was falling apart: Amazon.
Culture & staff turnover
Former staff are rarely a source of unbiased opinion however poor staff reviews coupled with high staff turnover can often tell you something is awry with management.
A common quote amongst Amazon employees was ‘if you’re not good, Jeff will chew you up and spit you out. If you’re good, he will jump on your back and ride you into the ground.’
There were numerous bouts of layoffs in key management, Stone noted staff turnover was typically high however the period following the tech bust from 2002 to 2003, was one of note with departures from:
Doug Boake, Business Development Executive
David Risher, Head of Retail
Joel Spiegel, VP of engineering
Mark Britto, SPV, Worldwide Services and Sales
Harrison Miller, VP, and GM of Platform Services
Chris Payne, VP (numerous departments)
Warren Jenson, CFO
Scott Cook (founder of Intuit) - left the board for eBay
Amazon once had a management policy in place that required managers to fire a certain percentage of underperforming staff each year. However, this policy was revoked when managers were found to be hiring those, they knew they would fire!
Dealing in the grey market
Initially, Amazon faced the ‘chicken and egg’ problem. Customers would only shop where they were offered an adequate range and suppliers would only supply where there was adequate demand.
Early on, the likes of Toshiba, Sony, and Samsung viewed internet sellers like Amazon as ‘sketchy’. Their views were only confirmed when Sony executives who were visiting an Amazon fulfillment center, found unauthorized stock all over the floors!
Debt used to fund failed acquisitions
Between 1998 and 2000, few companies bet bigger on the internet than Amazon, who raised $2.2b via convertible bond offerings to fund acquisitions.
To help the process, Amazon hired Randy Tinsley from Intel in 1998, who said to Bezos … “I’m really looking forward to going shopping with you.”
Bezos and Tinsely acquired movie database IMBD.com; the British Web Bookstore BookPages; the German Web Bookstore Telebuch; the online marketplace Exchange.com; the pioneering social-networking service PlanetAll; and a data collection company called Alexa Internet. They also acquired same-day delivery business kozmo.com and comparison website Junglee, which was shut down quickly after it was diverting traffic from Amazon’s website.
In addition, Amazon’s venture arm invested in pets.com, gear.com, wineshopper.com, greenlight.com. homegrocer.com – almost all of which went bust in the .com crash.
Aggressive accounting
Following the late 90ies acquisition binge and the attention Amazon was getting from short-sellers, Bezos reviewed the cost base and in early 2001 wrote an internal memo to staff declaring that the business would be breakeven by the fourth quarter that year.
Bezos announced this publicly to investors later that year, stating that the company would be profitable based on ‘Pro-forma numbers’ which excluded stock-based compensation and some other expenses.
Competitors
The wall of competition Amazon faced was nothing short of intense. The first major threat came just two years into business (1996) from dominant book retailer, Barnes, and Noble. Founders, the Riggios brothers, told Bezos over lunch that they intended to launch their own website to directly compete with Amazon. At the time, Barnes and Nobel was doing $2 billion in sales v Amazon's $16m.
A year later, Barnes and Noble filed a lawsuit just prior to Amazon’s IPO, alleging that Amazon was falsely advertising themselves as the ‘world’s largest bookstore’.
In 2005, Google showed up, launching Froogle. A direct competitor to Amazon’s eCommerce business.
In 2010, Walmart, Best Buy, Home Depot, and Sears coordinated in backing a new organisation called the Alliance for Main Street Fairness - designed to lobby against online retailers to start collecting sales tax – a significant advantage Bezos didn’t want to lose.
In a similar attack, over the course of 2009, the chiefs of the six major US publishing houses – Penguin, Hachette, Macmillan, HarperCollins, Random House, and Simon and Schuster – gathered allegedly to discuss their shared predicament of the Kindle’s $9.99 new releases.
How the optimists made money
While the pessimists piled on reason after reason, the optimists saw a rare founder CEO who had significant skin in the game and was obsessively frugal and customer-focused. Who instilled a culture of learning and decentralized thinking. Who communicated in an extremely shareholder-focused manner and incentivised his staff to think and act with only one-time horizon in mind: long term.
Thanks for reading.
Lachlan Morgan, CFA Adviser, 318999