Amazon – an anomaly or proof against the existence investors’ myopia?
There is an ongoing discussion about whether or not listed companies should be required to publish quarterly reports, one reason being the claim that these create a short-term behavior among both investors and corporate management. One can find many different companies to argue both in favor and against this, but one of the brightest examples is Amazon.com Inc.
With an increase of approximately 45 percent since January Amazon reached a new all-time high yesterday (13 Sep), despite the fact that profit margins have been under pressure for several quarters. To this, one can add that over the past decade the share has risen by almost inconceivable 1,700 percent.
The margin squeeze is an effect of that the president and principal owner Jeff Bezos is, yet again, willing to make investments in the future and focus on the long term goals without regard to the short-term margin pressure. In other words, investors seem to like this long-term strategy, which runs counter to the general belief that investors would punish investments in future growth and profits.
At the moment the company is valued at over P/E of 100 on the expected profit for 2013, so it is clear that sooner or later the company must start delivering profits and once again grow into the valuation, but it is apparent that for the time being investors expect this will happen.
One reason for shares to trade at high multiples can be speculative bubbles driven by short-term money, but the ownership structure in the Amazon is, and has for a long time been, very stable with many of the larger U.S. funds on the shareholder list.
As one analyst puts it, ”Amazon has never been a company concerned with meeting its quarterly earnings estimates. And it has delivered outstanding returns to shareholders by doing so. If the quarter beats analyst estimates, wonderful. And if not, then so be it.”
Another argument that runs counter to the view that investors’ short-termism would force management of listed companies to constantly sacrifice long-term growth in order to achieve short-term goals is that in such case privately held companies should generally fare better than their listed peers. That is not true!
Amazon has had a high valuation virtually ever since the listing, which falls back on high confidence in the company’s president and principal owner Jeff Bezos. That some shares fall under pressure while others are hailed for long-term initiatives may simply be explained by rational behavior of the investment community, if you have proven that what you do actually creates shareholder value, you get ”the benefit of the doubt”, but the opposite is also true of course.