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Amazon's corporate bulldozer is fueled by Wall Street

Amazon is a wrecking ball. It has bankrupted bookstores, crippled clothing stores, shaken the grocery industry and tu...

Posted: Dec 19, 2017 3:39 PM
Updated: Dec 19, 2017 3:39 PM

Amazon is a wrecking ball. It has bankrupted bookstores, crippled clothing stores, shaken the grocery industry and turned strip malls into ghost towns.

It does all this while barely turning a profit.

Wall Street would punish almost any other company that operated that way. But Amazon gets away with it because investors believe in CEO Jeff Bezos' vision and Amazon's ability to keep growing.

"Amazon's dominance and revenue growth have freed it from the nuisance other firms endure -- profitability," said Scott Galloway, a professor at NYU's Stern School of Business.

Last year, Amazon earned $2.3 billion, despite posting nearly $136 billion in sales. That's a super-tight profit margin of 1.7%.

Other tech giants including Apple and Google operate at much loftier margins. Apple posted a 21% margin last year while Google was slighly under 22%. Amazon's profit margin is even razor-thin for the retail sector. Walmart's margin was 3.1% and Target's was 4.5% last year.

Yet shares of Amazon have risen nearly 60% this year. The company's worth close to $600 billion. Bezos is the richest man in the world, surpassing $100 billion in net worth last month.

Related: Jeff Bezos is now worth $100 billion

Investors continue to reward Amazon's forward-looking strategy over its earnings. Shareholders are willing to pay $297 for every $1 of Amazon's earnings. The average for S&P 500 companies is under $24.

Bezos' sprawling business model isn't designed with short-term profit in mind. He wants to grab market share and drive up sales, noted Columbia Business School professor Kinshuk Jerath.

Related: Amazon now has more than 500,000 employees

One way to do that: Offer lower prices than competitors.

Shortly after Amazon acquired Whole Foods for $13.7 billion in June, Whole Foods slashed prices, forcing other grocers to cut prices to remain competitive.

In a similar move, Amazon is lowering prices on Echo products, pushing rival Google to drop the cost of its Home smart speakers. Apple's higher-priced HomePod speakers could now have trouble competing.

Amazon is able to take these kinds of risks and experiment in ways that would look puzzling for other companies, explained Piper Jaffray analyst Michael Olson.

That's because Bezos is playing by a different set of rules than everybody else.

"Other firms are punished for straying from their familiar areas of strength, [but] Amazon sucks value from sectors in which it has had no previous involvement," said Galloway.

Other sectors can hear Bezos' footsteps too: CVS made its $69 billion deal with Aetna, which could go down as the largest health insurance deal in history, with Amazon stalking the pharmaceutical industry.

Related: Amazon may be factor behind rumored CVS, Aetna merger

Amazon was able to punish Blue Apron, once a hot meal-kit startup, just by suggesting it might get involved in the home-meal delivery business.

Investors cheer when Amazon enters a new industry or region because its addressable market grows.

Last year, Amazon accounted for more than 53% of online shopping in the United States, according to Slice Intelligence. Jumping into cloud computing and groceries has added a trillion dollars of additional market, according to Olson.

The cloud is Amazon's biggest success story. It has actually helped Amazon consistently turn a profit for the first time, according to Morningstar analyst R. J. Hottovy.

"The more e-commerce they do the more money they lose," said Smead Capital Management CEO Bill Smead. "They lose on everything they do except Amazon Web Services."

Momentum around Bezos' strategy and a focus on growth companies over value investing in an era of low interest rates has led investors to brush off profit concerns, Smead claimed.

"Jeff Bezos did what he said he was going to do in era coming off biggest financial meltdown in 80 years," he said. "Investors are willing to capitalize income so far out in the future that it leads them to financial euphoria."

Mississippi Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 39797

Reported Deaths: 1308
CountyConfirmedDeaths
Hinds318859
DeSoto211220
Madison158940
Jones126651
Harrison126017
Rankin123420
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Neshoba105978
Lauderdale98383
Scott84315
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Washington80615
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Leake66420
Lee66223
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Oktibbeha64428
Lamar6257
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Holmes61442
Leflore58856
Wayne58819
Yazoo5847
Lowndes56917
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Lincoln54436
Pike53724
Lafayette5364
Panola5176
Monroe49139
Simpson4803
Covington4735
Bolivar46318
Tate43113
Pontotoc4066
Attala39424
Adams39221
Newton38410
Marion36312
Pearl River32332
Claiborne32212
Winston31413
Chickasaw31319
Marshall3104
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Noxubee2869
Clay27411
Union26611
Smith26312
Coahoma2516
Clarke24125
Tallahatchie2394
Lawrence2222
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Montgomery1973
Carroll19611
Kemper18914
Calhoun1875
Humphreys18410
Itawamba1638
Hancock16214
Tippah15411
Webster13611
Jefferson1353
Prentiss1344
George1313
Jefferson Davis1304
Tunica1293
Greene12510
Tishomingo1251
Amite1243
Alcorn1232
Quitman1111
Wilkinson1079
Perry994
Stone852
Choctaw794
Franklin602
Benton580
Sharkey540
Issaquena111
Unassigned00

Alabama Coronavirus Cases

Confirmed Cases: 60158

Reported Deaths: 1200
CountyConfirmedDeaths
Jefferson7449176
Mobile5349157
Montgomery4732118
Madison290112
Tuscaloosa283754
Marshall213313
Shelby188027
Lee179337
Baldwin149912
Morgan14897
DeKalb11457
Etowah113614
Walker113537
Elmore111825
Dallas103312
Franklin97016
Unassigned84228
Russell7610
Autauga74318
Limestone7254
Cullman7136
Chambers69932
Houston6848
St. Clair6714
Lauderdale6647
Tallapoosa66272
Butler65931
Calhoun6426
Colbert6138
Escambia56212
Jackson5113
Pike5016
Lowndes49723
Coffee4734
Covington45214
Talladega4517
Dale4283
Barbour4263
Bullock38110
Marengo38111
Hale37523
Chilton3693
Blount3671
Marion35514
Clarke3396
Wilcox3328
Winston3167
Sumter30613
Randolph28610
Monroe2833
Pickens2827
Perry2702
Conecuh2558
Bibb2382
Macon2359
Choctaw22112
Greene2029
Washington1679
Henry1653
Lawrence1590
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