Some people interpreted my post yesterday on Amazon’s slim and falling earnings as a slam on the company, but while I do find it a bit baffling, I’m by no means a critic. And I’m certainly not trying to give anyone stock advice. The only investment-related advice I would give on this point is that Amazon’s sky-high price-earnings ratio compared with rival retailers or rival tech companies illustrates the point that investing is hard and the stock market is weird.
What Bezos has put together is a real achievement. A great business leader is someone who builds a great company, and Amazon is unquestionably a great company. It’s taken a lot of skill to build it. And one of Bezos’ most impressive skills is extracting patience from Wall Street. Everyone would feel much better about, say, Facebook if they weren’t trying so hard to show large and growing profits. But for all Mark Zuckerberg’s considerable virtues as a founder and CEO, he hasn’t persuaded Wall Street to take on faith that if he just makes his company as great as possible it’ll all work out in the long run. Part of the challenge here is that the obvious long-term strategy for Amazon—drive all rivals out of business with ultra-low margins, then exploit some barrier to entry to hike prices and earn monopoly profits—is probably illegal, so you can’t articulate it publicly. The point is that almost any young company could be more amazing if it were able to deliver consistent shareholder value (which Amazon has done through higher share prices) without needing to turn large profits or even demonstrate earnings growth. But that’s a hard trick to pull off.
Justin Fox has some wise thoughts about how he did it, but this is tough stuff to replicate.
The obvious contrast is Apple, which is operating something like the reverse of Amazon’s corporate charity. Apple sells stuff for much more than it costs to build. They could plow that money into giant dividends for their owners, but they don’t. The dividends are modest. They could plow that money into loosely related ventures the way Google has with Android and the self-driving cars, but, in fact, Apple’s R&D spending is modest and seems tightly focused. They could plow the money on quixotic efforts to compete with market leaders the way Microsoft does with Bing but, again, they don’t. Apple’s ventures always have a clear relationship to its core business, and when they try to compete with market leaders it’s for specific strategic reasons.
For his trouble, Tim Cook has amassed the greatest stockpile of corporate cash in human history and an almost comically low P/E ratio. In other words, while the company may be stronger than ever in terms of its product portfolio, as a financial undertaking the company underperforms. As a guy who uses an iPhone, an iPad, a MacBook Air, and a Thunderbolt Display on a daily basis, I sure wish Cook knew how to get away with Bezos’ low prices and thin margins.