Amazon.com Inc. (NASDAQ:AMZN) has continued to grow at an impressive rate, and has become the juggernaut in e-commerce. The company has provided online convenience, efficient delivery and of course, rock-bottom prices. How in the world does the company provide such low prices for its products and services, and continue to generate buzz among investors or potential investors in the company’s stock?
As Amazon.com Inc. (NASDAQ:AMZN) CEO Jeff Bezos admitted in a recent interview, his business model is not about profits. While that may be no surprise with consumers, how would investors flock to the stock when profits are not the ultimate goal?
It’s all about the Benjamins.
“Percentage margins are not one of the things we are seeking to optimize,” Bezos said to the Harvard Business Review. “It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.”
What does this mean? Free cash is what comes after capital expenditures are subtracted from cash from operations. He believes that the big payoff is not about profits, but it’s about having the cash available to reinvest in the company. Bezos has made it his mission in running the company to have very small margins for a couple of reasons. First, the e-commerce market is a last frontier with a lot of territory still up for grabs. One estimate in a report by Morgan Stanley has the e-commerce marketplace increasing to $1 trillion by 2016, and Amazon.com Inc. (NASDAQ:AMZN) is predicted to occupy about one-fourth of that land area. And part of being able to claim that much market is to provide the best prices to customers so they will more likely go to Amazon.com first for all future purchases – whether they be products or services.
What is the second reason for this model?
It’s about competition, or a lack of it, for Amazon.com Inc. (NASDAQ:AMZN). You see, with e-commerce being dominated by a company with low profit margins, there is little room for other companies to be competitive and profitable in the marketplace. In markets where the leader has comfortable margins, there are opportunities for competitors to offer lower prices. But in the e-commerce world, Bezos has pinched margins to the point that any company who wants to jump in, will have a lot of difficulty making money if it wants to be competitive. And tighter margins that squeeze out competitors for that $1 trillion land area means there is more of that land area available for those competitors in the market already.
Late in Tuesday’s trading session, Amazon.com Inc. (NASDAQ:AMZN) stock was down about 1 percent on the day to $265.65.
What do you think of the Amazon.com Inc. (NASDAQ:AMZN) business model? Would you be a buyer of Amazon.com stock, and what is your prognosis for the stock in 2013? We’d love your comments!
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