“You do not want to give Jeff Bezos a seven-year head start,” Warren Buffett on CNBC in 2017.
Amazon (NASDAQ: AMZN) is a massive disruptive force rather than a company. The Everything Store’s success is based on its ability disrupt rather than its moneymaking capacity.
Therefore, the $2,012.71 question is how long can Amazon sustain its ability to disrupt everything around it? The $2,012.71 is what you would have paid for a share of AMZN on 31 August 2018.
Amazon will disrupt industries and economies for a long time because of its revenues. Amazon generated $52.866 billion in revenues in 2nd Quarter 2018. That volume of revenue gives Amazon the ability to do almost anything Jeff Bezos wants it to.
The revenue compensates for Amazon’s income, which is low for its size. Amazon reported an operating income of $2.983 billion and a net income of $2.534 billion for 2nd Quarter 2018.
Amazon’s Income is Exploding
Interestingly, Amazon’s income has grown dramatically over the past year. Amazon reported net incomes of $197 million in June 2017, and $2.534 billion in June 2018. By my calculation, Amazon’s net income increased 20 times in just one year.
Amazon is making a lot of money from its business. The income is finally catching up to the revenue.
I base Amazon’s ability to disrupt on one thing–its ability to generate cash. Amazon reported an operating cash flow of $7.449 billion and a free cash flow of $4.5 billion for 2nd Quarter 2018.
Cash is Amazon’s Secret Weapon
Those cash flows gave Amazon $19.823 billion in cash and equivalents and $27.05 billion in cash and short-term investments on June 30, 2018. Amazon looks like a value investment from a cash perspective.
Amazon will keep disrupting industries for a long time because of the vast amount of cash it has accumulated. This gives Amazon a critical edge because no other retailer has that kind of cash.
Walmart (NYSE: WMT) reported $7.885 billion in cash and equivalents on April 30, 2018. Walmart could barely accumulate one third the extra cash of Amazon even though it reported $122.690 billion in revenues for 2nd Quarter 2018.
The cash is Amazon’s secret weapon and the key to its success. Amazon is able to outspend and out-borrow any potential retail rival.
Even with all that cash, I cannot consider Amazon a value investment for two reasons. First, the stock price is too high and second there’s no dividend. Any extra money Amazon makes gets plowed back into the company. That is good for Jeff Bezos but bad for you.
How Much Longer will Amazon’s Ability to Disrupt Last?
History shows that Amazon’s ability to disrupt will last far longer than most people think it can. Sears, the great American retailer of the 20th Century, used its money and market position to dominate first catalogs and then brick and mortar.
Sears launched the consumer revolution with its catalogs. Sears used the cash it accumulated in catalogs to dominate the middle-class brick and mortar retail business that replaced catalogs.
Sears had the money to build vast numbers of department stores that allowed it to capture the new middle class market. Amazon is replicating that strategy by building large numbers of fulfillment centers to dominate the post brick and mortar retail market.
Disruption benefits Amazon because it has the cash to take advantage of new trends. By investing in those trends, Amazon further disrupts the market and knocks competitors off balance.
The Disruption Machine
Therefore, Amazon’s ability to disrupt will remain as a long it generates vast amounts of cash. Jeff Bezos has not built a company he has created a disruption machine that thrives on chaos.
There are some potential threats to the disruption machine. The greatest of which is economic collapse.
Consumer booms; like the one we are in now, can suddenly collapse. America was in the middle of a similar consumer boom in 1929 just before the onset of the Great Depression. The Depression came because consumers suddenly ran out of money.
Conversely, consumer booms can last a long time. The great consumer boom that started after World War II did not peter out until inflation in the early 1970s.
Beyond consumer economics, there are new technologies and business practices. Amazon is great at adopting innovations, but even the most innovative companies can run out of steam. Sears; the most innovative retailer of the 20th Century, got caught completely off guard by the rise of Walmart and big box retail in the 1980s, for example.
Who can compete with Amazon?
I see no direct threats to Amazon from innovators. However, some same-day delivery options are a potential threat.
Instacart which can leverage the resources of existing stores has the potential to halt Amazon’s expansion into groceries. Instacart or GrubHub (NYSE: GRUB) would become direct competitors to Amazon if they delivered general merchandise.
A more direct threat is Britain’s Ocado Group PLC (LON: OCDO). Ocado is developing robotic fulfillment centers and self-driving delivery vans to compete directly with Amazon in groceries. Moreover, Ocado is invading the USA through an alliance with Kroger (NYSE: KR).
Ocado will only become a direct threat to Amazon if it can match Amazon’s cash. Frankly I don’t see that happening for the foreseeable future.
A more realistic scenario is Amazon abandoning markets to competitors like Ocado because of government pressure. Politically, allowing competition in markets like groceries would be a smart strategy for Bezos. Politicians; like President Donald J. Trump, are already targeting Amazon. The best way to counter their attacks is to allow competition.
How Far can Amazon Disrupt?
Geography is the other limit on Amazon’s disruptive capabilities. There are only so markets it can disrupt.
Amazon has been wildly successful in Europe and North America where there are few government barriers to its business. Amazon has been far less successful in India, and the People’s Republic of China where governments have blocked it. Outside of developed nations, Amazon has been less successful because consumers lack the cash and technology to access its services.
That situation is changing fast, smartphones provide people in developing nations access to the internet. Statista calculated that there will be five billion mobile phones and 2.71 billion smartphones on Earth next year.
Smartphones give people access to the internet. All they will need for access to Amazon is delivery or mail service and cross-border payment options.
How Cryptocurrency can Help Amazon Disrupt Everything
The payment option may exist in the form of cryptocurrency. Amazon is disrupting the economy of Venezuela through cryptocurrency gift cards.
Venezuelans buy Amazon cards with cryptocurrencies like Bitcoin (BTC). Then use the gift cards to order Amazon merchandise.
Cryptocurrencies are catching on in places like Venezuela. Tens of thousands of Venezuelans a month are downloading Dash’s (DASH) digital wallet, Dash Core Group CEO Ryan Taylor bragged. The Business Insider reported that up to 200 Venezuelan merchants are signing up for DASH payment.
That commerce allows Amazon to disrupt Venezuela’s economy without a physical presence in the country. A potential problem is that Amazon can drive Venezuelan merchants out of business; and drain large amounts of cash out of the national economy, without a physical presence inside the country’s borders.
Bizarrely, Amazon does not have to accept cryptocurrency to achieve such disruption. Other companies that accept cryptocurrency sell Amazon gift cards. Venezuelans buy those cards and use them to buy from Amazon.
An obvious future conflict will be national governments trying to block access to Amazon to protect their cash reserves. Class warfare between affluent or middle-class people that can meet all their needs from Amazon, and working-class people; that have to rely on brick and mortar, is another likely scenario.
Is Digital Currency the Key to Amazon’s Future?
The M-Pesa, an unencrypted digital currency has been even more successful in Africa. M-Pesa reportedly had 30 million users in 10 countries in March 2017, according to CNN. Vodafone reportedly processed six billion M-Pesa transactions in 2017.
More importantly, M-Pesa is already the basis of a widely used Pay as You Go or PAYG system for electronics in Africa. PAYG enables people to buy goods via payment plans. Vendors automatically collect payments in M-Pesa from their smartphone apps.
A PAYG system and digital currency would allow Amazon to enter developing markets with widespread smartphone use. Amazon has been experimenting with a digital currency called Amazon Coins for a while.
They can only use Amazon Coins to purchase apps, games and other digital products. Amazon Coins could logically form the basis of a digital payment system for Amazon. Amazon has revealed no cryptocurrency plans but rumors of an Amazon cryptocurrency have been floating around for years.
Amazon’s potential to disrupt is only beginning. Only history will tell us if Amazon itself can survive that disruption.
One thing is clear investors should stay far away from Amazon stock. Amazon’s shares are far too expensive even with the company’s disruptive potential. There are better, cheaper retailers that pay dividends out there.
This story first cropped up at Market Mad House your ringside seat for the evolution of retail.