One of the defining characteristics of Amazon from an investor’s perspective is that it has basically never earned a profit.
Despite the lack of profits, the company’s stock has gone up and up and up.
This is something many other companies wish they could get away with. Apple, for instance, was the most profitable company in the world in fourth quarter of 2012 with $US13.1 billion in earnings, yet it still disappointed investors because it didn’t make more money. Its stock started falling after that.
So, how does Amazon get away with it? How can it forgo profits and yet still have a strong stock?
Speaking at Business Insider’s IGNITION conference, Amazon’s founder and CEO Jeff Bezos used a Warren Buffett story to explain how he gets away with it.
Paraphrasing Buffett, Bezos said you could hold a rock concert. Or you could hold a ballet concert. But don’t tell people they are going to a rock concert, then put on a ballet. Or conversely, don’t tell people they are going to the ballet, then put on a rock concert.
So what does that mean? It means, say from the very outset what you’re doing, and stick to it.
Bezos says Amazon has a few strong, profitable businesses. He uses that money to fund other businesses.
The way Bezos sees it, he built a lemonade stand that did really well. So he took the money from the lemonade stand and he built a hot dog stand, and a hamburger stand, and so on and so on.
That has always been the plan for Amazon. Invest its profits in new lines of business. Amazon’s investors know that’s the deal and are OK with it.
This is why Apple couldn’t suddenly shift gears and say, “We’re going to forgo profits to pursue market share!” That’s not the company people are investing in.
So, if you’re starting a company and you want to be like Amazon, do it from day one.
Nobody who pays for a rock show wants to see the ballet.
Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.