"Earth's Most Customer-Centric Company"

By Palwasha Saaim - September 14, 2012 | Tickers: AMZN, AAPL, M, TGT | 0 Comments

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He may not have worn a turtle neck sweater but he looked just as dedicated in his suit as the much celebrated Apple founder Steve Jobs did every time he got on stage to present his masterpieces. I'm talking about Jeff Bezos, founder of Amazon.com (NASDAQ: AMZN), who presented the new additions to Amazon's tablet family--Kindle Fire HD and Kindle Paperwhite in Thursday's press conference.

To me, Bezos is a true visionary. He inspires many young entrepreneurs today. His ultimate mantra for Amazon has been his “focus on consumers.” Often I like to compare the two brains, Jobs and Bezos, behind the two behemoths of their respective industries. When Jobs revealed the Mac, he was clear in his message;

'...we didn’t build the Mac for anybody else. We built it for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research. We just wanted to build the best thing we could build.'

 Unlike Jobs, Bezos worked differently, or as he puts it—“worked backwards.”

"There are two ways to extend a business. Take inventory of what you're good at and extend out from your skills. Or determine what your customers need and work backward, even if it requires learning new skills. Kindle is an example of working backward."

While the former preached do-what-you-can-best attitude, the latter preached “adaptability.” The former created his own demand, the latter supplied to existing demand. There's been a clear contrast between their ideologies and their companies. However, the thick line that historically divided the online book store from the computer device manufacturer has faded to nonexistence today. Today, we see both the companies trending towards becoming each others' true competitors. The two once-separate industries in which these companies operated have now overlapped and it's only a matter of time before we see Apple making ebook readers or Amazon making phones. Putting it again in Bezos words.

"What's dangerous is not to evolve"..."We watch our competitors, learn from them, see the things that they were doing for customers and copy those things as much as we can.”..."There is no physical analog for what Amazon.com is becoming."

Some argue that Amazon, in and of itself, may be a great company but the stock, that trades at 319x earnings, is not a good bargain. I beg to differ. The Amazon stock that was priced at $3 on this date 15 years ago when it went public, jumped to $16 on the same date 10 years ago in 2002, survived the dot-com bubble, continued to gradually climb, hit $81 on this date in 2008, survived the recession, continued its uptrend and today hit its all-time high of $259.42. What makes the comparison between the two interesting is their % change in price against their % change in revenues.

Apple went up from $380 the same week last year to $680 this year, a percentage gain of 79%. For the same period, we have revenue results available for three quarters. Assuming Apple makes the same amount of sales in the next quarter Q4 as the last quarter Q3 (although, in reality they'll be less with the holiday season coming up and purchase delays because of the new iPhone 5, but nonetheless), the extrapolated total revenues for the year come out to be around $155.6 billion. That's an increase of almost 44% in revenues, up from $108.2 billion last year. Applying the same analogy to Amazon and extrapolating next quarter revenues, we get a 22% increase in price and an approximated 17% increase in revenues for the year.

Comparison of % Revenue Increase to % Price Increase (Sep 2011-Sep 2012)

In a nutshell, for every 1% increase in revenue at Amazon, its price increased by 1.3%. Contrarily, for every 1% increase in revenue at Apple, its price increased by 1.8%. Besides, Nasdaq sets a 1 year price target of $260 for AMZN, so it's not like the stock is insanely overvalued. 

Some also argue about its low operating margin of 1.17% against peer eBay's whopping 20.34% or for that matter Apple's 35.62%. Well, somebody tell that to Buffett who continues to invest in Wal-Mart (NYSE: WMT) with an operating margin of 5.94% when Target (NYSE: TGT) has a 7.43% margin, Macy's (NYSE: M) has 9.3% and Dollar General has 10.18%. Also, where will the margins come from when a company breaks even with its low sales prices? Take, for instance, Amazon's 32GB 4G LTE-run Kindle Fire HD that it sells for only $499 when Apple sells a comparable tablet (iPad 3) for $729? When Bezos said the following, he likely meant investors to understand that Amazon's margins will never be comparable to others in the industry.

"There are two kinds of companies, those that work to try to charge more and those that work to charge less. We will be the second."  

He reiterated his stance in the latest press conference that Amazon wants to make money when people USE their products, not when they BUY them. And this is probably why the online e-commerce company has been able to enter the tablets market and get hold of a good 22% of the market share within 3-5 years time, and will likely continue to pose a threat to Apple's iPad. Whether the Kindle family will prove boon to Amazon's success or not, it's definite good news for the consumers. For us, competition means industry growth, more innovation and affordability for all. 

Additionally, as the e-commerce industry continues to grow with leaps and bounds, we can expect more good news from Amazon in the years to come. According to a study, online shoppers in the US are expected to spend $327 billion in 2016, up 62% from $202 billion in 2011. The study suggests that much of this increase will be the result of online deals that will lead consumers to prefer web stores over bricks-and-mortar retailers. The study found that 70% of holiday shoppers last year made purchases online because of better online deals and that 12% of online shoppers belonged to Amazon Prime-like programs. We can easily figure out that, of the $202 billion online sales, Amazon's $44 billion in revenues account for almost 22% of it. In contrast, eBay's $12B amount to only about 6% of the total online sales. 

To sum it all up, I'll again quote Bezos;

"If there’s one reason we have done better than of our peers in the Internet space over the last six years, it is because we have focused like a laser on customer experience.”

So, if Amazon lays down in its mission statement to be 'earth’s most customer-centric company', I want to give it due credit for keeping us, the customers, in focus and making its stuff available to those who can't afford the likes of Apple. 

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