Ama­zon’s mind-bog­gling as­cent

Miami Herald - - FRONT PAGE -

The com­pany and its founder have taken dom­i­nant po­si­tions in so many ar­eas that they defy cat­e­go­riza­tion.

Yet note­wor­thy as th­ese real-world achieve­ments are, they may un­der­state Ama­zon’s im­por­tance. De­spite an earn­ings re­port Thurs­day evening that dis­ap­pointed the mar­ket and led to a 2.5 per­cent de­cline in its share price, Ama­zon is re­mark­able as a purely fi­nan­cial en­tity. Its stature as one of the most suc­cess­ful com­pa­nies in the his­tory of the stock mar­ket is al­ready as­sured. In fact, the num­bers show that since 1997, when it be­came a pub­licly traded com­pany, Ama­zon has evolved into one of the cen­tury’s great­est wealth­gen­er­at­ing ma­chines.

“Ama­zon now be­longs in a very small group of stocks,” said Hen­drik Bessem­binder, a fi­nance pro­fes­sor at Ari­zona State Univer­sity. “It’s one of the great­est wealth cre­ators since 1926, and it’s reached that sta­tus in a very short pe­riod of time.”

When I first spoke with Bessem­binder in May, he had pre­pared a list of the 30 great­est wealth cre­ators in the stock mar­ket through 2015. But this past week, he showed me a Life­time Wealth Cre­ation list, with fresh rank­ings through 2016. The stocks at the very top re­mained the same: Exxon Mo­bil, fol­lowed by Ap­ple, Gen­eral Elec­tric, Mi­crosoft and IBM.

But fur­ther down the list, Ama­zon ap­pears for the first time. It is ranked 14th, just be­hind such au­gust names as Berk­shire Hath­away and Proc­ter & Gam­ble and ahead of Coca-Cola and DuPont.

In essence, the list shows which stocks have been the most prof­itable for share­hold­ers over his­tory. A very small group — 4 per­cent of all pub­licly traded stocks — ac­count for all of the stock mar­ket’s net gains from 1926 through 2016, he found. And only 30 stocks — Ama­zon is now one of them — ac­count for more than 30 per­cent of all of the mar­ket’s wealth cre­ation in that 90-year pe­riod.

What’s more, Bessem­binder found that Ama­zon’s an­nu­al­ized re­turn through 2016 was 37.4 per­cent, the high­est of all the top 30 wealth cre­ators. That is partly be­cause Ama­zon hasn’t ex­isted for that long: It’s eas­ier to sus­tain fast growth for shorter pe­ri­ods. Exxon, for ex­am­ple, which has cre­ated more than $1 tril­lion in wealth for share­hold­ers since 1926, more than any other com­pany, ground out its gains at a slower pace: It has an an­nu­al­ized re­turn of only 11.9 per­cent, Bessem­binder said.

Even af­ter the earn­ings blip Thurs­day, Ama­zon’s value in the mar­ket has sky­rock­eted this year. It has risen more than 36 per­cent. “If it holds onto those gains, we can ex­pect that it will climb higher on the cu­mu­la­tive wealth cre­ation list,” he said.

Of course, while Ama­zon’s mar­ket power has been won­der­ful for its own in­vestors, it has dam­aged many of its com­peti­tors — di­min­ish­ing the wealth of share­hold­ers of those com­pa­nies.

Con­sider how Ama­zon’s cu­mu­la­tive stock re­turns dwarf those of its re­tail com­peti­tors and the over­all mar­ket. Us­ing Thom­son Reuters data, I cal­cu­lated that over the last 15 years through Tues­day, Ama­zon re­turned more than 8,200 per­cent, com­pared with 125 per­cent for Wal­mart, 2.2 per­cent for Sears, and 302 per­cent for the Stan­dard & Poor’s 500-stock in­dex, div­i­dends in­cluded.

If you had in­vested $1,000 in Ama­zon in July 2002 — and had held onto your shares — that money would be worth $83,000 to­day.

By com­par­i­son, $1,000 in­vested in the en­tire Stan­dard & Poor’s 500stock in­dex, with div­i­dends, would amount to $4,100 — not a bad per­for­mance, un­til you look at the gaudy Ama­zon re­turns. Far worse, if you had put the money in Wal­mart shares, your in­vest­ment would be worth only $2,250. And if you had stuck with Sears dur­ing all of its tra­vails, you would be al­most where you started, with $1,022.

Those fig­ures aren’t ad­justed for in­fla­tion, how­ever, so the Sears re­turn is more mis­er­able than it looks. The Bu­reau of La­bor Statis­tics cal­cu­la­tor shows that $1,022 is worth only $751 in 2002 dol­lars. Ouch. (To be fair, the $83,000 in cur­rent Ama­zon cash is about $61,000 in 2002 dol­lars. But that’s still an eye-pop­ping sum.)

Be­spoke In­vest­ment Group, a stock mar­ket re­search firm, has an­other way of com­par­ing Ama­zon’s stock re­turns with those of its re­tail com­peti­tors. It has built the Death by Ama­zon In­dex, which it de­scribes as “a way to track the per­for­mance of the com­pa­nies most af­fected by the rise of Ama­zon.com.” Those com­pa­nies — there are now 54 of them — in­clude Barnes & No­ble, Costco, Best Buy, GameS­top, Macy’s, Nord­strom, Sears, Tar­get, CVS Care­mark, Rite Aid and Wal­mart.

The num­bers are stark. The Death by Ama­zon In­dex has de­clined 18.9 per­cent through Mon­day – trail­ing Ama­zon by al­most 55 per­cent­age points.

No Ama­zon in­vestor has as much money in the com­pany, or has ben­e­fited as much from the stock’s rise, as Be­zos. He owned 16.7 per­cent of the com­pany in May 2017, ac­cord­ing to a Se­cu­ri­ties and Ex­change Com­mis­sion fil­ing. His stake is worth more than $80 bil­lion, ac­cord­ing to Bloomberg, ac­count­ing for the bulk of his per­sonal wealth.

His stake in Blue Ori­gin, the space­flight firm, is worth an ad­di­tional $3 bil­lion, Bloomberg said. His net worth hov­ers around $90 bil­lion, plac­ing him neck and neck with Bill Gates, the founder of Mi­crosoft.

Un­like Gates, who has di­ver­si­fied his port­fo­lio and has been giv­ing money to char­ity at a rapid pace, Be­zos con­tin­ues to bet heav­ily on Ama­zon. As Thurs­day’s earn­ings re­port showed, that does en­tail risk. The com­pany’s ever-ex­pand­ing re­tail oper­a­tions are sap­ping its prof­its, but it has been rak­ing in earn­ings through cloud com­put­ing. As has been the case since Ama­zon’s in­cep­tion, it pays no div­i­dends, in­stead plow­ing cash back into the com­pany’s core.

For now, the mighty Ama­zon wealth-cre­ation ma­chine con­tin­ues to roar. What­ever hap­pens next, this is al­ready one of the great tales in the his­tory of cap­i­tal­ism.

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