I can’t help but laugh when I read analyses of Amazon and this one from Steven Russolillo at the Wall Street Journal is no exception:
Amazon.com Inc. boss Jeff Bezos is fond of saying “your margin is my opportunity.â€
Traditional retailers who scoffed at him 19 years ago when Amazon went public aren’t any more. Shareholders who stuck with the company, on the other hand, are laughing all the way to the bank with a 2,400% gain in the past decade.
Yet, with the e-commerce giant set to report its sixth consecutive quarter in the black on Thursday, the source of more than half of its pretax operating earnings in its most recent report, is someone else’s opportunity.
Amazon Web Services, the cloud-computing unit, will be affected by the offsetting trends of rapid growth and brutal competition that has left much of the market commoditized. Competitors such as Alphabet Inc.’s Google, International Business Machines Corp. and Microsoft Corp. are no dowdy brick-and-mortar merchants. What’s more, AWS might fetch far less as a stand-alone company than what its profits have helped tack onto Amazon’s market value.
Investors therefore need to do more than see if Amazon misses or beats analyst consensus third-quarter estimates Thursday. They will look for signs that its core retail business can eventually be highly profitable.
Massive investment in Amazon’s warehouse and delivery infrastructure makes its position increasingly difficult to challenge. Newer endeavors into music, groceries and apparel are starting to pay off, too. Amazon is expected to top Macy’s Inc. next year as the biggest apparel seller in the U.S., according to Cowen & Co.
From this he concludes that Amazon should focus on retail.
The mistake he makes is in thinking that Amazon’s roots are in retail. They aren’t. They’re in finance.
19 years ago I said that Amazon was an IPO in search of a business model and nothing the company has done over the intervening period has done anything but confirm that. In Amazon Web Services it’s finally found something it can make money doing. If I’m not mistaken retail is still running at a slight loss for Amazon, something that has moved Matthew Yglesias to call Amazon a not-for-profit operating for the benefit of the American consumer.
The “unicorns” of the future won’t be able to follow Amazon’s lead. Today you actually need viable business models in order to succeed. The mid-1990s were a unique time and we shall not see their like again. And don’t be surprised if Amazon disappears as mysteriously as it arrived, still searching for a business model. It will have given its investors a wild ride.
