July 24, 2015

Amazon is now the largest US retailer

Amazon is now the largest US retailer by market capitalization.  Let's take a moment for that to sink in. Amazon is now more valuable as a company than Walmart. I have written in the past about Amazon (here and here) and I continue to find this company amazing. I think there is great merit in studying and learning from a company that truly knows what it is, where it wants to go and is not afraid to do what it takes to get there, outsiders and shareholders be damned.

Why did Amazon market cap increase? Well, Amazon's stock price went up after it surprisingly turned a profit last quarter. Amazon has famously kept a strategy of having close to zero profit quarter on quarter because they continue to plough back revenues into capital expenditures to improve their products and services. 

During Amazon's early days, many people speculated that the company would not survive with such a strategy. But it goes to show that a company can survive and thrive as long as the investments result in continued growth and increasing market value. Having a clear vision and strategy also helps. It keeps employees aligned and focused on the bigger picture.

Amazon has kept shareholders happy, not with dividends and stock buybacks as many companies do, but by increasing the value of their investment through the increasing market cap of the company. 

I learned in business school that once a company starts issuing dividends, it's a signal to the market that the company no longer has any better use of their money than to return it to shareholders. The thinking is that it should rather reinvest this money back to increase company and shareholder value. Does this rare occurrence of Amazon turning a profit fall under this same category? Is Amazon growth slowing down?

At this point I would argue that growth is not slowing down. For sure sales of e-readers have slowed down over the years. But Amazon was one of the first companies to embrace providing cloud solutions and that part of their business is clearly growing very fast. There are also plenty of growing e-commerce markets outside of the US that Amazon can enter and invest in. These are but two possible areas of growth and I am sure there are many more in the pipeline for Amazon.

The future continues to look bright for Amazon, and the analysts are all in agreement, resulting in an increase in stock prices. However, I would be careful and have an eye towards the future. If we see Amazon making a profit again in the next quarter, it could be the start of a trend. It could mean a shift away from their high investment strategy and a signal that they have entered the next life stage: from being a fast growing company to becoming a large and stable company.

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