Background

Amazon is a hugely successful business with a very simple strategy – customer satisfaction.

This simple, guiding principle has fostered phenomenal growth. When Jeff Bezos launched his on-line book store from a garage in 1994 he achieved revenues of $20,000 a week within 30 days. And the business has just kept growing, growing, growing resulting in the behemoth that Amazon is today. The business has outgrown books to encompass the retailing of almost everything. And it has outgrown retailing to become a device manufacturer, a third party marketplace, and a rapidly growing web-services business. It is developing artificial intelligence. It has become an award-winning film producer. It is developing a transport-business. And it is developing the technology to ship products within the hour, delivered by autonomous drones.

The experience you get when you place an order with Amazon, reflects a business that does everything it can to nurture its customers. It knows your likes and suggests products. It makes the ordering process easy, and despatches items promptly. If there is a problem, it makes it easy for you to make a return and will give a no-quibble rebate.

In the 2015 shareholder letter, Jeff Bezos notes that, although Amazon’s retail and web services businesses are completely different on one level, ‘They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence’.

That phrase customer obsession says it all. Amazon has a distinctive culture and a basic set of values that are unchanging.

That doesn’t mean these are the values that every business should have. As Bezos himself says, ‘We never claim that our approach is the right one – just that it’s ours’.

The most impressive thing about Amazon is not its culture – it’s the way that it has adhered to it over the long-term. To reinforce that, Amazon includes a copy of its 1997 shareholder letter with each  new, annual letter.  Explaining the company’s approach back then, Bezos writes, ‘We will continue to focus relentlessly on our customers’.

Jeff Bezos exhibits the same drive and ambition today that he displayed in that garage back in 1994. As long as he stays at the helm, Amazon will remain a massive, disruptive phenomenon, tearing through the business world like a force of nature.

Financials

Many investors feel that they already ‘know’ Amazon. It has a reputation for being a ridiculously expensive stock. Value investors have been saying for years that one day it will ‘come back to earth’, and cautious investors have stayed away for fear of getting their fingers burnt.

But a quiet change has been taking place. Recently, Amazon has traded at about 3.5 times sales with a P/E ratio well over 50 – not low, for sure, but  well within bounds for a company with stellar growth that prioritises cash flow over earnings.

AWS is currently 12% of the business, but with its current growth trajectory this will keep increasing. With a net profit margin of 25%, AWS is hugely lucrative. As AWS becomes an ever larger part of the business, Amazon’s profit margins will get better and better.

Problems and Pitfalls

Amazon today is a reflection of the passion, drive and commitment of Jeff Bezos, and if anything happens to him, or if he becomes overly distracted by his other interests, then the outlook for Amazon may change.

Amazon’s profitable AWS business faces severe competition from Microsoft and Google – and this may impact profit margins.

There has been an upsurge in complaints from suppliers that Amazon does not do enough to prevent illegitimate sellers. If Amazon’s reputation for integrity becomes tarnished, it may see a decline in business.

Ali Baba, has global ambitions, and if Jack Ma succeeds in expanding his business internationally, this could eat into Amazon’s pie.

The Bottom Line

Amazon has grown relentlessly since its inception in 1994, with an unwavering obsession for customer service. By offering its Prime customers free delivery and a free streaming service it is building a very sticky, loyal customer base.

Amazon has been adept at moving into other areas, such as AWS. And by offering customers an intelligent assistant sat permanently in the kitchen – Alexa – Amazon has created a convenient, purchasing path of least resistance. Customers will keep ordering and reordering without having to think about it.

With revenues that are still well below Walmart’s and 60% of its retail sales confined to North America, Amazon still has huge growth potential. Existing investors have been richly rewarded, but it is still early days, and investors joining now can expect market beating returns for decades.