Amazon’s Paranoia Is Your Prosperity
Anyone looking for apocalyptic drama needs to pull away from programming on Netflix (NSDQ: NFLX) and start reading shareholder letters. Jeff Bezos’ 2016 letter to Amazon (NSDQ: AMZN) shareholders released last month highlights the Darwinian view of the world held by this complex and driven man.
With Amazon’s stock brushing up against $1,000 coincident with the 20th anniversary of its IPO, the scene is set for contemplation on how Amazon has become one of the most successful companies of the 21st century.
As an analyst, I realize that it’s important not only to recognize the brilliance associated with hyper-successful companies but also to scour their road maps for smaller stock plays that can soar by partnering with this Goliath.
In this year’s shareholder letter, Amazon founder and CEO Bezos reveals how fanatically focused he is on staying one step ahead of the competition, customer desires and well, just about everything.
Bezos, who is famous within the corporate confines of Amazon to remind employees that “Today is Day One,” is often asked, “What does Day 2 look like?”
“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.”
It’s the kind of response that would make many employees nervous. This is likely part of the plan. If you’re quivering just toying with the notion of remaining hyper-vigilant and wringing out every morsel of imagination and intellect from your brain on a daily basis, you might not be the right employee for Amazon.
Bezos goes on in the letter to dismantle the concept of blindly following established processes and encourages employees to experiment, to fail and to analyze that failure. At the same time, he notes that Amazon employees need to embrace emerging trends at lightning speed. Waiting for the competition to latch onto a new trend may accelerate the arrival of Day 2.
But quickly embracing that trend is not enough. He goes on to emphasize the critical need for high-quality and high-velocity decisions. It doesn’t sound like those Amazon employees get a lot of sleep.
Jeff Bezos has transformed Amazon from a relatively simple online bookseller to the world’s largest middleman for millions of products. The company has a $10 billion cloud service, more than 60 million prime members and its tentacles reach deep into last-mile delivery, drones, artificial intelligence, checkout-less grocery stores, robotic mechanics, and hundreds of other cutting-edge projects.
It’s no secret why Amazon’s stock has increased almost 500 times since its IPO. Bezos’ relentless drive for constant innovation allows the company to create new markets and therefore new demand. Amazon has birthed new products and services before anyone else. And in a world where competition is so ruthless, this has allowed the e-commerce juggernaut to quickly gain scale.
Certainly, investors can jump on board Amazon’s stock to ride Bezos’ innovation train. But with Amazon’s $15 billion of cash on hand and an annual operating budget of $136 billion, the Holy Grail for investors is to find those small customers that have been chosen to help Amazon reach its goals and to buy those stocks.
In my Profit Catalyst Alert newsletter, I just sold a stock that rose 60% in a year on the backs of supplying Amazon. Last year I booked a 58% gain in one which supplied trucking components to Amazon. I still have one in the portfolio that is rumored to be working with Amazon. That stock is up 32% since December.
As always, the trick is to find high-quality companies that can survive if a big customer like Amazon turns tail but will rocket if it gains a fraction of its spending budget. It’s worth the digging to find companies that can leverage the genius of Amazon.