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Revenue growth is a beautiful thing.
As major financial markets reel from economic stagnation, uncertainty and fear about sovereign debt failures and America's debt ceiling debacle, Amazon is achieving its highest valuation ever. Amazon blew out revenue and earnings expectations this week. How? By achieving record revenue growth. Sales are up 50% compared to last year!
The result of this impressive growth has been a remarkable valuation increase - comparable to Apple!
- Since 2009, valuation is up 5.5x (almost 240% rate of return for 2 consecutive years)
- Since 2006 valuation is up 8x (over 150% annualized rate of return for 5 years)
- Over the last decade Amazon's value has risen 15x (over 130% annualized rate of return for 10 years)
How did Amazon do this?
Not by "sticking to its knitting" or being very careful to manage its "core." In 2001 Amazon was largely an on-line book seller - and not all that profitable at it. Despite its "roots," or "DNA," being in U.S. books and retailing, the company has pioneered off-shore businesses and high-tech products that help customers take advantage of big trends - often far removed from what Amazon set out to do when founded some 16 years ago.
Amazon's earnings release provides insight to its fantastic growth. Almost 50% of revenues lie outside the U.S. Traditional retailers such as WalMart, Target, Sears, etc. have struggled in foreign markets, and blamed poor performance on weak infrastructure and complex legal/tax issues. Instead of modifying their success formula to meet market needs, their efforts to export what worked in the USA have not done well.
But where competitors have seen obstacles, Amazon connected with market trends and offered new solutions changing the way customers buy - and changing the industry. In the process, Amazon developed game-changing technology and capabilities allowing it to do what customers wanted, but other retailers were unwilling to create. Now, according to Silicon Alley Insider, "Amazon is About to Invade India," a huge retail market, in an economy growing at over 7%/year, with rising affluence and spendable income - but almost universally overlooked by most retailers due to problematic distribution, complex supply chains and rapidly evolving local tastes. By entering growing markets, largely eschewed by locked-in traditionalists, Amazon sets itself up for future growth!
Amazon has grown despite decline in its "core" market
Amazon's remarkable growth has occurred even though its "core" business of books has been declining - rather dramatically - the last decade. Book readership declines have driven most independent book retailers, and large chains such as B. Dalton and Borders, into liquidation. But rather than using this as an excuse for weak results and ultimate failure, Amazon invested heavily in trends toward digitization and mobility, eventually launching the wildly successful Kindle e-reader. Today about half of all Amazon book sales are digital, creating growth where most competitors (hell-bent on trying to defend the old business) have stagnated and declined.
Amazingly, Amazon invested in Kindle - and is now developing a tablet - even though these products cannibalized the historically "core" paper-based book sales. Further, Amazon has pursued market shifts, in fact augmented and accelerated them, even though these new solutions create a significant threat to Amazon's largest traditional suppliers - book publishers. And, Amazon accomplished this without a background as a technology company, an electronics company, or a consumer goods company.
Invest in trends - not your "core"
Rather than trying to defend its old core business, Amazon has invested heavily in trends - even when its investments were in areas where Amazon had no history, capability or expertise! Amazon created 5,300 U.S. jobs last quarter. Organic revenue growth was 44%. Cash flow increased 25%. All because the company continued expanding into new markets, including not only new retail markets and digital publishing, but video downloads and television streaming - announcing a deal to deliver CBS programs.
Amazon has also followed the market trends into a leading position delivering profitable "cloud" services. Amazon Web Services (AWS) generated $500M revenue last year, is reportedly up 50% to $750M this year, and will likely hit $1B or more before next year. Revenues could exceed book retailing in a few years.
In addition to simple data storage Amazon offers cloud-based Oracle database services, and even ERP (enterprise resource planning) solutions from SAP. Amazon now leads historically dominant IT services companies like Accenture, CSC, HP, Dell, TCS and Infosys with its cloud services. By offering solutions that fulfill the emerging trends, rather than competing head-to-head in traditional service areas, Amazon is capturing a large share of the growing segment in an historically a price-war-intensive industry. Amazon thus avoids the gladiator war killing profits for most of these competitors as it generates profitable new revenues. By offering game changing solutions that create growth Amazon positions itself to unseat old competitors and continue its growth.
Amazon didn't play "bet the company"
Amazon's willingness to go beyond the conventional wisdom of investing in its "core" has been critical to its success. Where most leaders fear these investments, preferring to invest only in the narrowness of their historical products and markets, such investments are not seen as risky at Amazon. GeekWire.com published CEO Jeff Bezos' insight into how Amazon makes these critical resource decisions in "Jeff Bezos on Innovation" (taken from comments at a shareholder meeting June 7, 2011):
- "you just have to place a bet. If you place enough of those bets, and if you place them early enough, none of them are ever betting the company"
- "By the time you are betting the company, it means you haven't invented for too long"
- "If you invent frequently and are willing to fail, then you never get to the point where you really need to bet the whole company"
- "We are planting more seeds...everything we do will not work...I am never concerned about that"
- "my mind never lets me get in a place where I think we can't afford to take these bets"
- "A big piece of the story we tell ourselves about who we are, is that we are willing to invent"
If you want to succeed, there are clear lessons at Amazon. Amazon has grown by moving into new businesses, where its products have supported trends for digitization, immediate responsiveness, ease of access/use, mobility and globalization. By focusing on emerging trends, Amazon has far exceeded economic growth, blown past traditional competitors in several markets and given investors an incredible rate of return. All while positioning itself for 5 or 10 more years of growth and success! That's what makes Amazon a good investment - even for the skeptical.
You too can grow like Amazon, and create high returns for investors.
- Be willing to enter new markets,
- Be willing to experiment and learn
- Don't play "bet the company" by waiting too long
- Be willing to invest in trends - especially when existing competitors (and suppliers) are hesitant.
Links:
How Amazon overcame historical bias to out-grow Wal-Mart
How Amazon leverages, and creates, market shifts to beat competitors
How Amazon outsmarted publishers by recognizing market trends and acting on them
How Amazon introduced the Kindle right in 2009 - lesson in new product introduction
Why being first is better than being a fast follower - Kindle case study
Why focusing on growth is more valuable than focusing on cost savings - Amazon example
