Amazon Is Not Too Big To Fail
Yesterday, CNBC reported that Jeff Bezos, in an all-hands meeting earlier this month, said: “Amazon is not too big to fail…In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not a hundred-plus years.” He was responding to an employee asking if the CEO had learned any lessons after Sears and other big retailers recently filed for bankruptcy.
There are a few reasons why Bezos right. As one retail investor said to me, “the nature of all retailers is to eventually go bankrupt.” It’s a cynical point of view but it reflects reality: Retail goes through cycles. Certain kinds of retailers become popular, but then they fail to adapt and their businesses decline and eventually vanish. We see that over and over again. The retailers who can change are the exceptions, not the rule.
But Amazon is now the second-largest retailer in the United States. How is it possible that a thing that big could vanish?
It’s possible that the company could lose touch with its customer, but that seems highly unlikely for Amazon. That’s the one thing it’s known for being hyperfocused on.
There’s a different scenario that’s scarily real for Amazon.
It’s well known that Amazon is not judged on its profitability. If it were, its stock price would be a small fraction of what it is now. Amazon has done an incredible job at many different things, and one of them is getting the financial markets to value the company based on its revenue growth, with the assumption that profitability will come later. Amazon explains away its low profits by saying that it uses what profit it makes to invest in new ideas and experimentation to stay ahead. So far, the market has accepted Amazon’s explanation. People I talk to say that as long as Amazon keeps growing its revenue by 20-25% per year, the market will impute future profitability to the company and the stock price will continue to rise.
For over 100 years before it went bankrupt, Sears had everything for everybody and successfully adapted to what its customers wanted. Amazon has been great about that so far. It hasn’t tried to be better at retailing than people who’ve succeeded at retail for a long time. Instead, it perfected skills that weren’t viewed as retail skills at all. Amazon hammered at logistics and technology—things that previously weren’t core value drivers of retail—to offer better value to consumers. And as it developed resources internally, Amazon smartly turned some of them into businesses, like Amazon Web Services, which today makes more money than the rest of Amazon combined.
But as Amazon blows past the $200 billion revenue threshold, it gets harder to find sources of revenue that will have the impact it needs on revenue growth. You can’t, for example, double the number of Prime subscribers in the country; there aren’t enough households left to do that and the saturation is already too high. It needs to find new sectors to bring online, like it first did with books. It needs new industries, like grocery, health care, banking or automobiles, that have relatively low online penetration and the potential for conversion to online sales to sustain its revenue growth. But the thing about that is, it’s hard and it’s uncertain. Amazon has owned Whole Foods for well over a year and the conversion to online doesn’t appear to be happening, at least so far.
If Amazon doesn’t find new sources of revenue growth in other industries, its expansion will slow. And because its stock price has been so influenced by revenue growth, it won’t continue to rise. That’s key for Amazon more than for most companies because so many of its middle- and upper-level employees are incentivized by company stock. An important part of their compensation, more than for most other companies, is based on the stock price continuing to rise. If that stops happening, Amazon employees, who are already very sought after by other companies, will be more susceptible to other offers than ever before. When they start to leave, the stock price stagnation will make it hard for Amazon to replace them and the whole wheel can stop spinning in a hurry.
You may say that Amazon is too much a part of people’s daily habits for it to vanish. That’s true for a while, but when a company loses its best people, the ability to innovate goes away, too. It isn’t long before it’s overtaken.
For companies that Amazon competes against head-to-head, it has been a very tough road. Amazon’s ability to access capital cheaply without regard to profits, combined with its ability to hire the best people has enabled it to dominate industries. But Bezos is right and nothing goes on forever. The end for Amazon may be very far off—or it may not be. This year is shaping up to be a great one for the U.S. economy. But you don’t have to be as good in this kind of environment as you do when times are tougher. When the lean years come, will Amazon be able to sustain its growth? And will the financial markets be as forgiving? How long the circumstances will continue to align in Amazon’s favor is anyone’s guess—but it’s not forever.