Einhorn Doesn't Buy the Amazon Story
When the activist investor David Einhorn hinted that he's betting against Amazon.com, the usual Bezos fans came out of the woodwork to deride him, a coterie that includes the venture capitalists Marc Andreessen and Peter Thiel.
Now I agree that Amazon is going to come under pressure to deliver profits; and I think the company is at a turning point. But before I get into all that, let's take a look at the Amazon defense, which goes something like this: Wall Street always favors short-term gains over long-term growth. Benedict Evans, a partner at venture capital firm Andreessen Horowitz, penned one of the most detailed and widely cited defenses of Amazon. (It's long, but well worth the read.) He writes:
When you buy Amazon stock (the main currency with which Amazon employees are paid, incidentally), you are buying a bet that he can convert a huge portion of all commerce to flow through the Amazon machine. The question to ask isn't whether Amazon is some profitless ponzi scheme, but whether you believe Bezos can capture the future. That, and how long are you willing to wait?
But Wall Street hasn't been impatient when it comes to Amazon. The stock has been a widow-maker for almost anyone who sold it short since it went public in May 1997. Amazon shares have risen about 16,900 percent since then and 135 percent during the past five years. That handily beats the Nasdaq Composite Index and the Standard & Poor's 500 Index, even though the company has never delivered significant profits.
This makes Einhorn's description of Amazon especially interesting. In his latest letter to investors, he talks about the online retailer as if it's a cloud-computing company. Cloud companies famously forgo profitability in favor of growth. Bulls say that once those companies capture huge markets they can stop plowing money into marketing and other initiatives and let the profits flow. Einhorn writes:
One of the principal bullish assumptions supporting many bubble stocks is, 'The company is growing too fast to be very profitable.' We think AMZN is just one of many stocks for which this narrative will ultimately prove false.
I'm sure this description is no coincidence. Cloud companies generally have to spend a lot of money to grow, and they do so in a world where margins tend to be tight. That formula has tripped up cable-TV companies, airline operators and automakers. But short sellers, again, have gotten destroyed when they've bet that cloud companies would run into similar troubles.
The recent pressure on Amazon -- and cloud stocks, too - hasn't come from activists such as Einhorn. Broader forces such as slow global economic growth have recently felled a lot of momentum stocks. Amazon is down 16 percent this year, but for more than 15 years Amazon investors bought into Bezos's vision even when quarterly earnings disappointed them. Only after the stock hit historic highs during a particularly frothy investment period has it come down. Is Wall Street deciding that Bezos is building a "profitless Ponzi scheme" or is it a natural pullback in a hot stock? I'm inclined to think it's the latter.
So if short sellers such as Einhorn aren't going to change the way Amazon does business, why would the company come under pressure? Why am I not all the way in the Andreessen/Thiel camp of cool kid VCs, who believe that betting against Bezos is like fighting the Federal Reserve?
First, it's likely that Amazon will neither fail nor represent the future of worldwide retailing. It will likely create a business that floats somewhere in between. And that opens the door to competition from companies such as Alibaba. The Chinese online retail company has captured one of the world's largest online retail markets. It's ahead of Amazon in mobile. It's exploring pretty much every non-core market that Amazon is already in, including payments, cloud computing, ad-tech, ride sharing and content. It's growing. Oh yeah, and it's profitable. In September, it had an initial public offiering and now investors have a choice (a very expensive choice) if they want to invest in online retail, mobile and payments.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the editor on this story:
James Greiff at firstname.lastname@example.org