Even 20 years on, we still don’t understand Amazon.com, Inc. (NASDAQ:AMZN), which has investors guessing wrong on AMZN stock.
I describe Amazon in a simple phrase, as e-commerce infrastructure. AMZN builds infrastructure for moving products through the Internet, it uses that infrastructure, then leases that infrastructure to others. It’s building the freeways and airports of 21st century commerce, proving their value, then funding it as a toll road to everyone else.
The first key to the operation is efficiently breaking bulk. Wal-Mart Stores, Inc. (NYSE:WMT) could tell, in the mid-1980s, when shampoo was clearing a shelf in Atlanta and have it on a truck the next day. Costco Wholesale Corporation (NASDAQ:COST) now does the same thing with pallet-sized loads.
AMZN is doing it with individual units. It knows precisely how many copies of Jason Isbell’s new album are in precisely which warehouses, throughout its network. It sells that bulk as individual units, taking a retailer’s mark-up, less the cost of warehousing, pulling and packing it.
But every merchandiser has the same problem. You buy in anticipation of demand, and sometimes the demand isn’t there. I have a friend with a shoe store, and she faces this problem every year. What do you do?
You put stuff on sale.
Amazon Prime Day
At its heart, Amazon Prime Day is a clearance sale. It has nothing to do with what Alibaba Group Holding Ltd. (NYSE:BABA) is doing with Singles Day. Amazon is not creating another Christmas. It’s doing closeouts at maximum profit, and minimal cost.
AMZN knows what it has too much of, so it puts low prices on that stuff to clear it out, it creates an event to spur consumer excitement, and today it counts its money, sees how well it did and decides what to buy next.
But here’s the difference. Walmart does this on a store-by-store basis. It puts things on sale in one store. What doesn’t move has to go to a more central location, and eventually be consolidated in an even more central location, if it’s going to move at all. Eventually it may go all the way to a competitor, to a dollar store or a Big Lots, Inc. (NYSE:BIG). Each move costs money, and the value of the merchandise goes down.
With Prime Day, Amazon does this once. The whole global warehouse gets blown out, all at once. What’s left can be remaindered quickly, efficiently and profitably. As merchandising, it’s brilliant. All this is supported by some of the biggest discounts on the site, on Amazon-branded devices. Fire Sticks, Fire tablets and Amazon Echo devices were all on sale yesterday at deep discounts.
This is also a closeout — the kind any computer seller will do, but it’s also about spreading the Amazon brand into homes. Because every Fire, and every Echo, just like every Kindle, is an AMZN sales agent, sitting in a consumer’s home, waiting to connect them to everything else Amazon sells, instantly.
E-commerce infrastructure, in this case, extends from the cloud that sells, to the warehouse that fulfills, all the way to the device from which people order. It’s a complete, closed ecosystem.
It’s brilliant.
I know that on Prime Day a lot of investors were inclined to take profits on their Amazon shares. I was tempted to do so myself. AMZN stock sells for over 300 times earnings. As a retailer, it’s selling at almost four times its annual sales, in an industry where well-run companies like Costco sell at half their sales. I get all that.
But there’s still so much more to do, so much growth to be had, so much infrastructure left to be built, and so much runway Amazon can still run without changing strategy that I just can’t sell. I’m strapped-on to this rocket ship and have no idea how much further it can go.
I just know we’re not there yet.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. At the time of writing he owned stock in COST and AMZN.
