We live in an investment world where profits matter far less an uninterrupted series of quarterly expectations-beating growth.
The most valuable companies are the ones that keep growing at over 20% a year even as their revenues top tens of billions.
Amazon — which exceeded analysts’ estimates by reporting a 44% rise in sales for the March-ending quarter — is a case in point.
Between 2010 and 2020, its revenue and share price growth averaged 27.9% and 33.2%, respectively.
Sadly, through April 2021 Amazon stock had lagged the market — up 8.8% to the S&P 500’s 13%, according to Morningstar.
What’s holding back Amazon’s stock? Are investors worried that the company’s growth prospects will dim once CEO Jeff Bezos passes the baton to Amazon Web Services (AWS) head Andy Jassy?
I don’t know why Amazon — whose shares outstanding were worth $1.75 trillion at the end of April — has lagged this year.
However, if it keeps growing at that 33% ten year annual rate, Amazon’s market cap could top $30 trillion by 2031.
Here are six reasons I think that Amazon will keep growing:
- Jassy is a good choice and Bezos is not going away
- Amazon empowers people to decide and act
- It hires and motivates excellent talent
- It invents new products and services that customers crave
- It sets goals and holds people accountable
- It fights bureaucracy and encourages learning
In response to my request for comment, an Amazon spokesperson emailed me a list of links — mostly from its website.
(I have no financial interest in the securities mentioned in this post).
Amazon’s Excellent First Quarter Report
Amazon beat expectations for the quarter. Revenue rose 44% to $108.5 billion — about $4 billion more than Refinitiv expected, according to CNBC.
Amazon’s guidance for the second quarter also beat expectations — implying that its momentum is continuing — albeit with some slowing down.
Amazon forecasts 27.1% revenue growth in the June-ending quarter from $88.9 billion in 2020 (which was up 40% from the year before) to a range between $110 billion and $116 billion — the midpoint of which is $113 billion — $4.4 billion more than analysts projected, according to CNBC.
Amazon’s Q1 revenue growth was strong in most segments:
- E-commerce-related businesses — its online stores, third-party and subscription segments—grew 49% to $84.2 billion, according to the Wall Street Journal
- AWS net sales grew 32% to $13.5 billion
- Other — which includes advertising — enjoyed a 77% revenue increase to $6.9 billion
The bad news was that physical stores revenue — including Whole Foods Market and Amazon — fell 16% to $3.9 billion, according to CNBC.
Jassy and Bezos Will Keep Running Amazon
Jassy — who has been with Amazon since 1997 — helped create its most profitable business, AWS.
As I wrote in February, Jassy is a hard-driving leader who gets results in part by keeping close tabs on how things are going every week. As Jeff Barr, AWS chief evangelist told me in a July 2018 interview, “We review thousands of metrics during our weekly business reviews. To keep our business growing we need our general managers to meet demanding weekly goals. If they do not meet a goal, the general managers must explain to Jassy why and what they are doing to get back on track.”
Bezos has said that he will stay on as Executive Chairman after Jassy takes over as CEO in the third quarter of 2021. While Bezos may keep thinking big thoughts about growth for Amazon, it will fall to Jassy to deliver expectations-beating growth each quarter.
The question is whether Bezos’ continued presence will crimp Jassy’s style. Perhaps we’ll have to wait until Bezos steps aside completely to know whether Jassy can spur innovation at Amazon.
It’s also possible that five gr0wth-sustaining processes that Bezos put in place during his tenure will enable Amazon to keep doing well after he leaves — especially if Jassy can improve how well Amazon does on some of them — most notably hiring and motivating talent and holding people accountable for goals.
Empowering People to Decide and Act
Growth comes from a company’s ability to win new customers and keep them buying. Since many rivals compete for the same customers, the winner will the one that makes the right decisions — the ones that give customers the most compelling value proposition — and acts on them fastest.
To do that, a company must give its people a clear idea of the company’s mission and goals and empower people who are closest to its markets. Conversely, it must avoid bogging down those people with exhaustive requests for data and analysis before letting them act.
Bezos — who in his 2016 letter to shareholders articulated his Day 1 philosophy which sustains a company’s vitality — described how Amazon’s leadership principles and processes empower people to decide and act quickly and effectively.
As I interpret them, three specific principles support this aim:
- Ownership. Amazon’s wants its leaders — and by extension everyone — to have an ownership mindset so they act in the long-term interests of the entire company rather than privileging short term, team-specific goals.
- Highest Standards. Amazon sets and raises high standards for products, services, and processes. Its leaders fix deviations from these standards quickly and effectively.
- Have Backbone; Disagree and Commit. Amazon’s leaders respectfully challenge decisions with which they disagree, they act with conviction and tenacity, and commit to whatever decision is made.
As I see it, these leadership principles provide a context in which people closest to the customers and markets can make decisions and execute them quickly.
Along with these principles, Amazon approaches decision-making differently depending on the type of decision. Amazon approaches a so-called two door decision which is easily reversible differently than one-door decisions — such as its $13.4 billion acquisition of Whole Foods — which are much more expensive to reverse.
Bezos places great value in making reversible decisions — in environments of great uncertainty — quickly. Here are Amazon’s principles for making reversible decisions:
- Don’t wait to get 90% of the information you need, 70% of the information is good enough and if the company executes the decision and finds out it didn’t know enough, additional information could be collected later.
- Use the phrase “disagree and commit.” Bezos does not want one dissenter to stop a project from moving forward. For example, he disagreed with greenlighting an Amazon Studios project. However, the Amazon Studios executive team had an excellent track record, so he let them proceed by telling them that he disagreed with the project but was committed to doing it. This saved the time that would have been required to try to convince Bezos before moving ahead.
- Recognize and escalate disagreements between teams with different objectives and views. Amazon’s move to allow third-party sellers onto its ecommerce platform spurred considerable internal disagreement. Bezos did not want the outcome to be determined by the team that exhausted its opponent. Once the decision was made, everyone was expected to commit.
These principles and processes strike me as sustainable after Bezos leaves Amazon — particularly since Jassy, after 24 years with the company, probably helped create them.
Hiring and Motivating Great Talent
Amazon aspires to hire and develop leaders who hire and develop even better people. That is, Amazon’s leaders “raise the performance bar with every hire and promotion; recognize exceptional talent, and willingly move them throughout the organization.”
Amazon also invents mechanisms — such as Career Choice — for development of its people. An extreme example of how well its career development process works is that its head of global retail, Dave Clark, began his Amazon career as an operations manager at a Kentucky fulfillment center.
What does great talent mean to Amazon? In my view, its definition springs from other Amazon leadership principles — highlighting the traits that Amazon ought to be seeking in the talent it hires and promotes:
- Are Right, A Lot. Amazon wants leaders with strong judgment and good instincts who “seek diverse perspectives and work to disconfirm their beliefs.”
- Learn and Be Curious. Leaders at Amazon should keep learning, seek to improve themselves, and explore new possibilities that inspire their curiosity.
- Think Big. Amazon urges leaders to create and communicate results-inspiring bold directions and to “look around corners for ways to serve customers.”
- Frugality. Amazon sees value in leaders whose resourcefulness, self-sufficiency, and invention are inspired by resource constraints.
- Earn Trust. Leaders at Amazon “listen attentively, speak candidly, and treat others respectfully. They do not allow embarrassment to get in the way of being vocally self-critical and “[benchmarking] themselves and their teams against the best.”
How well does Amazon deliver on these principles? Amazon tops the 50 best workplaces to grow your career in the U.S., according to LinkedIn, which ranked the companies based on how well they “help employees build a professional foundation that sets them up for success both at the company and beyond.”
Yet Amazon employees have a mixed view of the company. Glassdoor draws on 77,000 employee reviews to give Amazon 3.8 out of five stars — 73% of whom would recommend the company to a friend and 81% of whom approve of the CEO.
Employee comments blend positive and negative observations. The positives include challenging and sometimes fun work with a great team doing great things. The negatives? Difficultly navigating the organization and challenges in balancing work and outside work life.
Bezos noted in Amazon’s 2020 shareholder letter that its employee satisfaction is higher. As he wrote, “When we survey fulfillment center employees, 94% say they would recommend Amazon to a friend as a place to work.”
If I were Jassy, I would focus my attention on how Amazon can keep delighting customers without burning out its employees.
Inventing New Products that Customers Crave
Amazon’s ability to invent new products and services that customers crave is best evidenced by its growth since getting started in 1994.
A core idea at Amazon is Bezos’s desire to give its endlessly dissatisfied customers something better. To that end, he required Amazon to “experiment patiently, accept failures, plant seeds and double-down [on evidence of] customer delight.”
Moreover, once Amazon can get a seedling to sprout, it uses a flywheel to scale it into a significant new revenue line, explained Jeff Wilke, former head of Amazon Worldwide Consumer. Fantastic customer experience increases traffic which allows other sellers to use its store.
This widens customer selection — boosting growth. Greater scale lowers the cost per unit, which Amazon passes on to the customer in the form of lower prices — and the virtuous cycle spins anew.
One example of Amazon’s success at innovation is its AWS business — which Jassy is credited with creating. As I wrote in January 2020, underlying AWS’s creation and growth are four principles:
- Provide industry thought leadership. Amazon knew AWS well because it used its systems to run its e-commerce business. Over 10 year ago, Amazon was investing in computers and servers to run its core business and realized it could rent that capacity to other companies — which would save them the investment of building their own computing systems. As Barr told me, by the time it launched AWS in 2006, Amazon believed that it excelled at “operating massive scale technology infrastructure and data centers.”
- Hire hundreds of CEOs. To keep AWS in the lead, Amazon hires what it calls builders — people with CEO-like skills — for each of its AWS services. “On our development team we hire hundreds of CEOs. They each own their own destiny. We show them an opportunity and they pick it up, study it, and build a business around it,” said Barr.
- Listen to customers and build what they need quickly. Rather than dream up new products in the lab, AWS listens to customers and launches solutions to their problems quickly, gets feedback, and makes the services better.
- Cut prices and let customers know how to save the most money. Amazon customers remain loyal because AWS looks at its customers’ utilization of the service and suggests that they stop spending on components that they don’t use. “Over the last couple years, we’ve sent out 2.6 million notifications that have led to actual annualized savings of $350 million a year from the Trusted Advisor service. That is in addition to the savings from the price cuts,” Barr told me in 2018.
Can Jassy lead Amazon to keep creating the future as Bezos has done? In my view, this is the most important question facing investors.
How so? Over time, every industry declines and this means that to sustain its rapid growth, Amazon will need to get better at what it does now and keep investing in new opportunities that are poised to enjoy rapid upward growth.
Acquisitions — of which Amazon has made 40 in its original businesses and 71 in new sectors, according to the Washington Post — will likely continue to be used to bolster its growth.
However, ultimately, Amazon’s ability to keep grow will depend on how inventive it can be under Jassy’s leadership.
Setting Goals and Holding People Accountable
Two Amazon leadership principles suggest to me that the company places great value on setting and achieving goals:
- Dive Deep Leaders. Amazon wants its leaders to “operate at all levels, stay connected to the details, audit frequently, and [to be] skeptical when metrics and anecdote differ.”
- Deliver Results. Leaders at Amazon are expected to achieve results “with the right quality and in a timely fashion” and to overcome setbacks.
The challenges that so many of its workers face in achieving work-life balance, coupled with the way Jassy has managed AWS suggest to me that Amazon is going to continue to excel at setting goals and holding people accountable.
However, I think Amazon would be even better at doing this were Jassy to find a way to increase employee satisfaction and reduce its turnover — a Payscale report puts Amazon’s median employee tenure at about 12 months.
Were Jassy to solve this problem, Amazon would retain more employees who accumulate knowhow and become more effective and productive.
Fighting Bureaucracy and Encouraging Learning
In addition to the value it places on learning, Amazon weeds out bureaucratic processes that threaten to compete with its efforts to exceed the expectations of its delightfully-dissatisfied customers.
Bezos urges Amazon’s leaders to “resist proxies” for what he thinks is most important. To that end, he asks managers questions such as: Is rigorous adherence to process replacing a focus on outcomes that benefit the customer? In inventing a new product is market research taking the place of the “heart, intuition, curiosity, play, guts, [and] taste] characteristic of a deep understanding of customers?”
To keep Amazon from getting bogged down by bureaucracy — instead of continuing to create the future as it has since Bezos founded it — Jassy must keep asking such questions.
Implications for Investors
What does this mean for investors?
In his 2020 shareholder letter, Bezos took a broad view of the value Amazon creates for its stakeholders. By his estimate, in 2020, the company created $301 billion in value — broken down as follows:
- $164 billion for customers (saving their time),
- $91 billion for employees (salary and benefits),
- $25 billion for third-party sellers (profits from selling on Amazon), and
- $21 billion for shareholders (net income).
How much higher could Amazon’s $1.75 trillion market cap go?
Morningstar Equity Analyst Dan Romanoff set a $4,200 price target — which if realized would bring Amazon’s market capitalization up another 21.1% — to $2.1 trillion. Romanoff’s bullishness keys off of Amazon’s ability to sustain its strength as the lockdowns ease and “grow into its 50% fulfilment capacity expansion from 2020.”
If Jassy can do an even better job of applying the five growth-sustaining processes I described above, Amazon could add another $28.3 trillion to its market cap by 2031.