Shares tumbled last week following a Wall Street Journal report that claimed the e-commerce giant prioritizes its own products in site search algorithms. At first glance, the practice looks like an abuse of its gatekeeper power.
Take another look, though. Amazon isn't doing anything untoward.
Amazon.com has come a long way from the business Jeff Bezos built in the early 1990s. Then it was a seller of books and media. Bezos often tells the story of schlepping parcels from his suburban garage to the local post office for shipping. The business really was that small.
Today the company is a behemoth. Sales soared to $232 billion in 2018. And Amazon Prime, its subscription business that provides free 2-day shipping (soon to be 1-day), free video, music and special Prime Day sales, has swollen to 100 million members.
eMarketer, an e-commerce researcher, noted in February that 51.3% of U.S. households have a Prime account. That's 63.9 million customers paying an average of $119 per year.
The company overtook Google and Apple in 2019 to become the world's most valuable brand, according to Kantar, a WPP research agency.
Amazon is succeeding because people love the service it provides.
It's popular now to defame the company. Politicians, when they're not conflating the online retailer with the Washington Post, another business controlled by Bezos, like to point to the dearth of taxes paid. How can a company that is driving Mom and Pop shops out of business pay no taxes, politicos whine.
The idea that companies should be mandated to earn profits to create applicable taxes, as opposed to investing in the business, is silly on its face. Amazon is paying very little in taxes because managers decided long ago to continually invest cash flow back into vertical integration, new products and services.
A big part of this winning strategy derives from Amazon Marketplace, an e-commerce platform that third party sellers can use to sell their goods alongside Amazon. For a fee, they get inventory storage, fulfillment and most importantly, access to Amazon's customer base. In 2018, those patrons made up 49% of online sales in the United States.
In his 2018 letter to shareholders, Bezos noted that third party sellers, in excess of 300,000 in the United States alone, accounted for more than half of total Amazon sales.
Amazon isn't putting small shops out of business.
In the case of Marketplace, it's giving Mom and Pop the same winning tools Bezos used to build an online giant. In addition to mind-boggling selection, low prices and fast shipping, Marketplace excels at customer service.
Critics argue that Amazon should not promote its own products over third party sellers, and that seems reasonable. Except that every retailer promotes its white label goods over competitors. It's one of the benefits of store ownership.
Costco (COST - Get Report) gives prominent space in its warehouses to its Kirkland brand. Walmart (WMT - Get Report) promotes its George clothing line at every opportunity. And grocery store chains live and die with the margins they earn hawking their own products alongside Heinz (HNZ) , Colgate Palmolive (CL - Get Report) and Proctor & Gamble (PG - Get Report) .
Ultimately, politicians are waging a losing battle because customers (their voters) are not being hurt by Amazon. They benefit.
Amazon shares trade at 52.5x forward earnings and 3.4x sales. These metrics are not cheap, but then again, the stock has never been inexpensive. It trades at a premium because it is the best in class operation.
That has not changed. Ignore the politicians. Focus on growth.
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To learn more about Jon Markman's recommendations at the crossroads of culture and technology, check out his daily investment newsletter Strategic Advantage. To learn about Markman's practical research in the short-term timing of market indexes and commodities, check out his daily newsletter Invariant Futures.