I was wrong about Amazon.
In July 2015, I predicted its shares would double by 2018. Amazon -- in which I have no financial interest -- got there nine months ahead of schedule. Back then a share of its stock could he had for a mere $443 and as of April 28 they were worth $954 -- having hit $886 on March 31.
I think it's the world's greatest company and that its shares could keep doubling every three years.
Before getting into why, let's look at its latest financial report -- which reveals that generating more than $100 billion in annual revenue is no impediment to growing consistently at more than 20%.
Amazon's first quarter 2017 sales grew 23% to $35.7 billion -- $400 million above analyst expectations while profit popped 41% to $724 million. Amazon forecasts more to come -- operating income in the current quarter ranging from $425 million to $1.08 billion on net sales between $35.3 billion and $37.8 billion -- (analysts project sales of $36.9 billion in the current quarter), according to Bloomberg.
In my book, what makes Amazon the world's greatest company is its disciplined growth strategy that taps five dimensions of growth as follows:
- Customers. Amazon started off selling books to consumers and now it sells many more things -- from movies to detergent -- to consumers (it had 300 million user accounts as of February 2017) and computer services to companies.
- Geography. Amazon began in the U.S. and now has offices in 30 countries -- suggesting to me that geography offers significant growth potential. And it has enjoyed big growth in India where its Prime selection has increased "75% since in launched there in July 2016 and fulfillment capacity for sellers is up 26%," according to CNBC.
- Products. Through internal development and acquisitions, Amazon continues to widen its product and services offerings -- it sold 368.8 million products as of December 2016.
- Capabilities. Amazon used to operate websites but it has since gotten good at logistics -- operating warehouses with at least 45,000 robots in 20 fulfillment centers from its 2012 Kiva acquisition and delivery networks -- to fulfill orders fast at low prices.
- Culture. Bezos's over-riding value is to keep Amazon from becoming irrelevant - what he calls Day 1. To that end, he has created a culture that attracts talented people and pushes them hard to create an ever-greater customer experience.
There are four reasons that Amazon is the world's greatest company.
1. Bezos is a startup CEO who runs a huge public company
Bezos is the leader of the pack of large public companies -- including Alphabet, Facebook, and Netflix -- being run by their founders -- that keep growing at over 20% per year.
Such CEOs are possessed of talents that our economic system rewards handsomely -- to wit, Bezos's net worth of $78.7 billion, according to FORBES, drew him a mere $9 billion from surpassing fellow Seattle resident Bill Gates's $87.7 billion on April 28.
2. Amazon Web Services profitably dominates an industry it created
Amazon Web Services, its cloud-computing division, grew 42.6% to $3.66 billion "slightly topping estimates" and reported operating income of $890 million -- a whopping 89% of the company's total. AWS's 24.3% net margin was higher than the previous year's 23.5%, according to MarketWatch.
AWS still leads the pack in this rapidly growing industry that it created. Synergy Research reports that Amazon's 40% share of the cloud-computing market beats that of Microsoft, Google, and IBM which together control a mere 23% share.
3. Amazon Prime offers consumers an irresistible value
When I predicted in July 2015 that Amazon shares would double, it was just getting started with its $99-a-year Amazon Prime service that offers free two-day shipping and one-hour delivery on certain orders.
This loyalty program designed to boost the lifetime value of each Amazon customer includes "delivery discounts, music and video streaming and photo storage that keep shoppers engaged with the website," according to Bloomberg. Amazon added audiobooks and podcasts to Prime in 2016 according to Fortune.
By the end of March 2017, 80 million people subscribed to Prime -- 36% more than the year before, according to Consumer Intelligence Research Partners.
4. Amazon keeps experimenting to create growth
A company of Amazon's size that wants to grow at over 20% -- must add at least $27 billion in new revenue each year. That is a daunting task.
While growth from AWS and Amazon Prime will ultimately slow down, the biggest reason to bet on Amazon is that the very existence of these businesses flows from Bezos's willingness to bet on growth -- and accept the choppy quarterly financial results that such bets entail.
To that end, Amazon is investing in "various initiatives such as expanding into India and Australia, speeding up delivery times to as little as an hour on select products, adding new skills and devices for its voice-activated Alexa platform and producing original movies and shows," noted Bloomberg.
“We’re continuing to look for things customers love, can grow to be large and provide strong financial returns in the long run and can last for decades,” CFO Brian Olsavsky said in a conference call.
Amazon's proven ability to earn a return on its investment in disciplined growth is the best reason not to miss out on owning its shares.
