Today’s WSJ reports that Amazon is now ending the sale of CRaP. That is their inside way of identifying products that “Can’t Realize a Profit.”
So the richest man in the world, Mr. E-Commerce himself, Jeff Bezos, has finally figured out in December 2018, that the company he founded in 1994 should only engage in profitable activities. No s***hole country, S*erlock!
In fact, he did NOT just figure it out. He knew all the time that his business model was CRaP. What changed is he is having more and more trouble getting away with it.
His stock used to have a P/E ratio of over 800. That meant millions of crazy people believe in Jeff Bezos like millions of toddlers believe in the Easter Bunny.
Like a hot air balloon whose air is not so hot anymore, Amazon’s PE ratio has come down toward earth. That’s toward, not to, earth. 98 is about seven times normal; maybe not so bad for a tech stock, but Amazon is not much more a tech stock than UPS or L.L. Bean or Sears. They receive orders, pick the product ordered off a shelf, put it in a box, and mail it to the customer. Sears was doing that in 1895.
Bezos cynically figured out that:
• The stock-buying public are morons who assign ridiculous PE ratios to any stock seemingly associated with TECH.
• The stock-buying public are morons who think stock value and increase in stock value is a mystical phenomenon inside a MAGICAL BLACK BOX that certain superhumans, like Jeff Bezos have mastered.
• The stock-buying public are morons who think a LARGE TOP LINE = GREAT BOTTOM LINE.
• The stock-buying public are morons who think a company that gives them GREAT PRICES AND SERVICE when they deal with the company as consumers must be a great investment.
The formula for business success is to “Find a need and fill it [at a profit that constitutes an adequate rate of return on the capital invested in the business.]“
“Buying the business” by setting prices too low and giving too much service for the price point of the product means LOSING money, not making a profit, let alone an adequate profit given the amount of capital in the business.
A PE ratio of 98 = a return on equity of 1/98 or less than 1%. The morons can do better than that in a savings account. And the banks actually pay out the 1% interest. Amazon does NOT pay out the earnings. They keep them. Shareholders get all the stock appreciation they can eat, maybe; no dividends.
Amazon does not sell books or other products at a profit. It sells STOCK and uses top-line sales growth, a dubious claim to high-tech status, and coddling consumers to bamboozle stock investors into thinking Amazon is a can’t-miss growth stock. Yeah, they sell cloud services—them and everyone else. So split off the profitable cloud stuff into a separate, actual, high-tech company.
It is likely that Amazon’s new tactic of refusing to sell CRaP will REDUCE their top line. Oooh, Jeff, that may make the morons think you are no longer a high-growth stock. If that, in turn, causes Amazon to be valued at a 13 to 20 PE ratio like a normal Profit- and ROE-seeking company, you will no longer be the richest man in the world.
Get a grip, man. If you have to make a decent profit and ROE on your selling-Mallomars business, you’re going to be about as hot as the CEO of UPS—a fellow delivery company.
Who is the CEO of UPS?