Where Bezos Leads, Amazon Shareholders Blindly Follow
June 22 2017 - 12:42PM
Dow Jones News
By James Mackintosh
Investors think Jeff Bezos has the magic touch. Few companies
other than Amazon could announce a $14 billion takeover of a mature
firm, give no details of why they are buying the very business
model they're trying to disrupt, and have their market value rise
by more than the takeover price.
Since Amazon said last week it would buy upscale grocery chain
Whole Foods Market, multiple theories have circulated about what it
is up to. Some think it is about convenience shopping. Some that it
is about customer data. Some suggest logistics, the grocery supply
chain, or an extra distribution channel for the company's growing
range of own-brand electronics. Still others think Amazon hasn't
really got a strategy yet. What all seem to agree on is that Amazon
will make it work, and other grocers should be cowering in the
their freezer cases.
Amazon doesn't inspire the near-religious fervor found among
Apple's true believers, but the online-shopping-to-movie-studio
conglomerate does depend on faith, hope and charity. Faith in Mr.
Bezos's inventiveness provides the essential underpinning for
Amazon shares, while investors hope that he doesn't really think of
the company as a charity to finance wacky new ideas.
Amazon -- like Google and Facebook -- has a successful core
business, pays little heed to shareholders and plows its spare cash
back into expansion and research and development rather than
dividends. In the 20 years since it listed it's made a total of
$5.7 billion in net income, more than half of that in the past two
years. It's spent $64 billion on R&D in the same period,
including $4.8 billion in the first quarter alone.
Mr. Bezos set out his principles in 1997. "We will continue to
make investment decisions in light of long-term market leadership
considerations rather than short-term profitability considerations
or short-term Wall Street reactions," he told shareholders.
Investors have bought in to the idea that by not maximizing
profit in the short term, Amazon can maximize profit in the long
term -- even if, 20 years later, the long term still hasn't
arrived. At most listed companies, the exact opposite is true, with
management under constant pressure to boost dividends and
buybacks.
"It's become easier to invest as a private company than as a
public company," says James Anderson, a partner at Edinburgh-based
Baillie Gifford & Co. whose biggest holding is Amazon. "There's
a small number of companies that appears permitted to do this, and
it's very difficult for most other public companies."
Holding shares in Amazon requires the belief that Mr. Bezos will
find enough good investments to offset the mistakes -- such as cash
Amazon put into Pets.com, the epitome of badly-thought-through
dot-com bubble catastrophes. So far, just one of his successes
would cover a lot of mistakes, with Amazon Web Services alone
making almost 90% of operating profit in the first quarter.
Investors also need to believe that eventually Mr. Bezos will
start paying out some of the cash. The value of a company
ultimately comes from future dividends -- and Amazon has yet to pay
a cent.
The long-term danger is that instead of paying dividends, the
cash is wasted. History is littered with examples of chief
executives indulged by shareholders who become so enamored of their
own brilliance that they fritter away shareholder money on wasteful
expansion.
So far, the founders of the big tech stocks have mostly made
good decisions, and while they aren't exactly humble, hubris isn't
apparent either. But their secrecy -- on display again with the
lack of explanation of the Whole Foods deal -- shows a degree of
contempt for investors.
The short-term danger doesn't involve Amazon, but its
shareholders. Investors seem to have suspended disbelief. However
brilliant Mr. Bezos, it's extraordinary that he is able to launch a
big takeover without offering any strategic or financial rationale.
The same glass-half-full attitude was behind shareholder acceptance
of nonvoting shares in the Snap IPO. When doubt returns, as it
always does, Amazon shares will suffer.
In many ways Amazon is an exemplar for investors. In most
companies shareholders should encourage more R&D spending,
worry less about quarterly targets, and tell managers to focus on
the business, not the share price. In Amazon's case, the
willingness to accept no explanation at all for a $13.7 billion
purchase suggests faith has run too far.
Write to James Mackintosh at James.Mackintosh@wsj.com
(END) Dow Jones Newswires
June 22, 2017 12:27 ET (16:27 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Mar 2024 to Apr 2024
Whole Foods Market, Inc. (NASDAQ:WFM)
Historical Stock Chart
From Apr 2023 to Apr 2024