I've written about Amazon (NASDAQ:AMZN) dozens of times, and will certainly keep trading it for long & short stock picks. But despite my continued attempts to find a good buying opportunity as a long term speculative pick, I just don't see it happening anytime soon. I admire almost everything about Amazon, and over the years have been gradually increasing the proportion of my spending that goes to the Bezos controlled conglomerate. Of course, most of that is irrelevant when I try to determine if I'll buy a stock or not. Yes, using the service helps me understand it better and that makes it more likely that I will buy. But it's certainly not enough for me to pull the trigger.
The Big Problem
If you're Jeff Bezos, an Amazon employee or customer, you've gotta love what the company is doing. Every month, it spends hundreds of millions to improve its infrastructure, services and goods. Sometimes that means building a few warehouses, building a world class cloud infrastructure, starting new initiatives such as its new Fire Phone, or testing things like Amazon Fresh, etc. Amazon seems determined to keep reinvesting until it reaches that "critical" point.
What Is That Critical Point?
In the past few days, I've been thinking about one Amazon initiative that seems to give us a good look into what the company is trying to build; Amazon Fresh. The short story is that it is starting to offer grocery delivery, which makes sense in so many different ways. Groceries are one-- if not the most-- important retail sector and one that has seen little to no disruption from technology. Clearly, there is a big opportunity that several companies are looking to get into.
Instacart is a startup that makes it possible for customers to order groceries which can be purchased and delivered by personal shoppers who get paid to perform the service. It is the "Uber" of groceries. You can imagine that it is a challenge to start such a service because you need to get both demand from customers but also people that will perform the task. It's not easy to do both at the same time. Try finding customers when there is little to no service or getting "shoppers" when no orders are coming in. However, when it does work, the investment required is very small.
Amazon is approaching the problem in its usual way of course, which means massive investments. Amazon is trying to build warehouses to store food, get orders that can be delivered either through its existing distribution or what Amazon has started; its own trucks. The cost of trying this in parts of Seattle are important, but Amazon can clearly afford those. Can Amazon afford to build this across the country and around the world? Clearly not at this point. Yes, once that happens, Amazon would be able to get much higher margins, etc. How long could it take the company to get there, assuming that is its intention? 10 years? 20 years? Longer?
How about same day delivery? Yes, drones might help at some point, but what is the shorter term goal? This story is repeating itself over and over. Amazon is slowly taking over the world. Sales continue to increase with no end in sight.
That is not translating into profits though, as you've heard over and over:
Amazon is a low margin business and is never going to make 20-30% profit margins. There is a difference between 20-30% and 0% though…
The big issue here is not that Amazon can't generate profits. I'm convinced it could decide to turn the switch at any moment. That is not what Jeff Bezos wants to do though. He's probably right as well, because while the internet isn't a "one winner takes all" game, it certainly is closer to that than what you'd see offline. Just look at what Amazon is able to pull off with its dominant book market share.
But as long as Amazon is focused almost entirely on growing and improving its infrastructure, profits will remain close to $0. No matter how much faster sales increase, Bezos will simply use that money to grow everything else more quickly. With no end in sight, it could take several decades before Amazon can start reducing its infrastructure spending.
Can't Blame Bezos
I'd probably be the last guy to blame Bezos. I think the main problem for most public companies and governments is their singular short term focus. If you're using a 20-30 year horizon, sacrificing profitability in order to build what is already the top operation is likely worth it. At some point though, investors will get tired of the profits that never come. Amazon will likely be one of the hardest hit stocks the next time a stock market crash happens. That is exactly when I'll get in. There's more than enough time for that to happen, I'm guessing we'll see a few crashes in the next 20-30 years!
Disclosure: No positions.