Amazon.com (NASDAQ:AMZN) remains the most misunderstood stock in the market.
While enjoying breakfast this morning, I watched it go from down $2 and then up $3, as the averages barely moved. The market is waiting to digest earnings next week that are expected to show the usual top-line growth of 22% over a year earlier and a profit of up to 62 cents/share.
So let me repeat, for those who don't understand, exactly what Amazon is.
Amazon.com is commerce infrastructure.
That is the phrase that unites every single move the company makes. Whether it's a new Kindle, priced high so it can fall gently through the market over the next few years, new video-only pricing for Amazon Prime, or new cloud services, Amazon is in the business of building capitalized commerce infrastructure and then maximizing the use of that infrastructure.
Ultimately, it's a utility, but right now it's a utility that has monopoly power, or something like it, in a shocking number of markets. It has proven its pricing power in cloud, as witnessing last year's 28% margins. It is proving its capability in video, as seen in Netflix's (NASDAQ:NFLX) price action. Over time, it's dedicated to making FedEx (NYSE:FDX) and UPS (NYSE:UPS) squeal as well, as it arbitrages both against the US Postal Service and its own efforts to cut costs with planes, drones and fulfillment services.
And that's just in the U.S.
A successful 21st century utility, however, is going to be different from a 20th century one. The 20th century utility used government to assure itself a monopoly status in order to justify its huge capital spending. A 21st century utility does not that kind of cover. What it requires, instead, are customers, both wholesale and retail, who will see a bargain in using that infrastructure, and the audacity to maintain investment against the pressure of investors for a quick return.
Amazon remains audacious because CEO Jeff Bezos continues to own almost 18% of the common (84 million shares out of 472 million) and maintains the confidence of his board. Losing that confidence, or losing Bezos's vision, could prove fatal to Amazon's audacity, and its stock price, which is completely dependent on growth at scale in order to maintain the valuation.
The Bezos formula used to be the standard for technology. Why am I giving you money to own my stock, in the form of dividends? If my earnings are high, it must mean I can't find anything better to do with the money that is coming in. This is how nearly all tech companies thought in the 1980s, when I first began reporting on the tech beat. It's now an attitude that is singularly Bezos's.
If that attitude should go away, so will the main reason for my owning the stock. In order to justify its current valuation, at a standard tech price/earnings multiple of 30, Amazon would need to report $5.29/share in net income this quarter ($21 per year multiplied by 30 is $630), with visibility on those profits going forward. That may happen someday, but it will only happen at the cost of the capital budget, which for a utility is the one thing that you can't cut, lest you wither and begin to die.
Amazon is on an investment treadmill of its own making, and when it stops I will, too.
Disclosure: I am/we are long AMZN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.