The list of stocks that I can say I’ll never sell is very short. In fact, Amazon.com (NASDAQ:AMZN) may be the only one.
Virtually every company tries to expand. If or when those growth prospects dim and revenue begins to stagnate, they tend to focus on maximizing current earnings and returning cash to shareholders through dividends and/or share repurchases. That’s usually the rational decision when there are limited opportunities to use cash to reinvest in their own businesses.
The ideal corporate culture
When a company comes along that reinvests virtually all of its resources, year after year, into growth at the expense of current earnings, it’s a whole different ballgame. Amazon founder and CEO Jeff Bezos wrote in his 1997 letter to shareholders, “When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”
Being willing to sacrifice near-term earnings to invest in growth wasn’t that common when Amazon came onto the scene. As a result, the business was misunderstood for a long time. One journalist famously called it “a charitable organization being run by elements of the investment community for the benefit of consumers.”
The truth is that Amazon’s willingness to reinvest and to try (and potentially fail) at its new ventures is a corporate superpower. And it’s certainly had its share of failures. The Fire phone was a high-profile flop. It has tried at least twice, unsuccessfully, to get into the online travel game. Amazon tried to compete with Blue Nile by selling high-end jewelry many years ago. It even tried to compete with eBay and build an online auctions business, which failed.
But these failures are valuable. Being willing to take risks explains why Amazon has also had huge success building big new businesses. That failed online auction business eventually led to what is now the company’s third-party marketplace, which is responsible for the majority of physical units shipped.
None of Amazon’s successful businesses were perfect from day one. They had to be iterated and optimized to get right. Imagine how much smaller Amazon would be as a company today if it wasn’t willing to risk failure. That willingness, which sometimes enables enormous success, is a big part of why I’ll never sell my Amazon shares.
Core businesses are still in the very early stages
Amazon’s core e-commerce and cloud businesses are dominant, but both are still in their very early innings. Consider the mind-boggling size of the global retail market: $25 trillion. There is no company better positioned to attack that market over time than Amazon, given its willingness to invest where it sees opportunity.
And Amazon’s retail business is no longer exclusively in e-commerce. It’s relentlessly experimenting with physical retail concepts, like Amazon Go convenience stores with their futuristic “just walk out” technology. It’s now opening Amazon Go grocery stores and Amazon Fresh grocery stores. It has also been testing several other physical retail concepts like bookstores, Amazon 4-star stores, and others. So while e-commerce’s share of the global retail market will almost inevitably continue to rise over time, benefiting the company, Amazon will also be expanding into the enormous physical retail world.
As for Amazon Web Services (AWS), it is addressing the $3.7 trillion global IT market, according to CEO Andy Jassy. The business has the product, the head start, and the culture of innovation to build out new features and products to increasingly address that market. For context, AWS just reported almost $11 billion of net sales in the second quarter, a $43 billion annual revenue run rate. The runway to grow into that $3.7 trillion market is enormous, and AWS is in the pole position, ahead of Microsoft Azure and Alphabet‘s Google Cloud Platform.
The unique reason I’ll probably never sell my Amazon shares is that it’s very hard for the stock to get obviously overvalued when the company is relentlessly focused on building these big new businesses from scratch. The market will probably never be willing to bake these future businesses into Amazon’s market valuation, which is perfectly understandable given that many of them don’t even exist yet. But in hindsight, ascribing no value for future businesses would have been a huge mistake.
I’m willing to bet Amazon successfully creates a lot more of this sort of value out of thin air in the future. In 10 years, we may look back wistfully on today, when Amazon was just getting started in physical retail and only had a few grocery stores. We may tell our children there was a time — before Amazon bought self-driving technology company Zoox and invested hundreds of millions of dollars — when its delivery vans did not drive themselves. Similarly, we’ll say there was a time when Amazon didn’t even use drones to deliver packages. The list goes on.