Jeff Bezos, Amazon a Half-Step Above 'Idiot?'

NEW YORK ( TheStreet) --If you listen to the rhetoric from Amazon.com ( AMZN) bears, you would think the company's CEO, Jeff Bezos, is little more than a bumbling idiot who oversees a fledgling e-commerce firm on the verge of extinction.

Even a person I deeply respect, fellow TheStreet contributor Robert Weinstein, exhibits a gross misunderstanding of what Amazon is about and why, even though by traditional quantitative measures AMZN is overvalued, it simply does not matter.

In his article Amazon: No Such Thing as Free Shipping, Weinstein says things such as:

Investments are based on numbers. At the end of the day the only thing that goes into a bank account is profits. Without profits, there is nothing. Amazon doesn't have any profits, and there is little to demonstrate the situation will change any time soon.

... Amazon is no different from the local shopping mall. There are a host of stores within the Amazon shopping experience all tied together by an Ethernet cable connecting to Amazon's payment system.

As physical delivery of content moves to digital delivery, Amazon will lose another competitive advantage; its superior logistics ability. Anyone can sell an online e-book, and the ability to margin a commodity item like an ordinary digital download will not be easy.

Weinstein also throws in pieces of the standard valuation argument, trotted out by AMZN bear after AMZN bear. He chides Jeff Bezos' more-than-decade-long strategy of sacrificing the short term in order to maximize massive long-term opportunity.

I'm staying at Weinstein's home this fall in the backwoods of Wisconsin. The closest big city is Minneapolis-St. Paul. I might have to take him there to expose him to the air the civilized world breathes.

Robert and I are actually great friends; therefore, I can say these things to him and about him without restraint. But, in all seriousness, it bewilders me when otherwise incredibly intelligent people make this type of argument against Bezos and Amazon.

Farhad Manjoo wrote an article for Slate the other day I wish I had written.

In it, Manjoo contends that Amazon decided to cave in and cut sales-tax deals in states across the country for reasons that will ultimately benefit the company. Pulling from an investigative report the Financial Times published on Amazon, Manjoo explains how and why this is the case.

He points out that, up until now, Amazon located distribution warehouses in tax-friendly states. From these bases, Amazon delivers product to customers across the nation, including major urban markets such as New York, Los Angeles and San Francisco. That's all changing.

Manjoo runs down Amazon's extensive program of building distribution centers: One in New Jersey not far from New York City. Two near San Francisco and Los Angeles with tentative plans to open up to 10 more in California. That's hundreds of millions of dollars' worth of spending (and loads of jobs) in addition to the $200 million it spent in Texas, $150 million in Indiana, $150 million in Tennessee and $135 million in Virginia, just to name a few.

Amazon no longer seems to care that if it establishes a physical presence in a state, it must collect sales tax in that state. It's building a presence in strategic portions of the country. But why?

When Amazon CFO Thomas Szkutak speaks about spending money on distribution centers during his company's quarterly conference calls, he's pretty vague and imprecise. He speaks generally:
And as I mentioned on one of the earlier questions, we've announced approximately 13 new fulfillment centers. So those are as a result of the growth that we're experiencing. (From Amazon.com's Q1 2012 conference call, via Yahoo! Finance

The bears take a statement like that at face value. They diverge from Amazon bulls, who view the company as a perpetual startup and start yelping about how, sooner or later, Amazon needs to stop spending. Even when and if it does, they're still screwed. Simply put, they take Bezos, Szkutak and the rest of the Amazon team for fools. You're watching the ultimate bear trap get built.

Amazon spends, no doubt, to maximize long-term opportunity. That's how exciting and innovative companies with the most potential roll -- executives from Facebook ( FB) and Pandora ( P), for example, openly state this.

In fact, when I interviewed Pandora CFO Steve Cakebread earlier this year for Seeking Alpha, he said (in summary):
Cakebread told me that he can list "plenty of companies" that were wildly profitable early on, but are no longer with us. The endpoint -- Pandora is in rapid growth mode. And fast-growing, pioneering companies that are disrupting industries risk sacrificing long-term profitability and sustainability by not investing enough in the business early on just to achieve profits. While you cannot spend recklessly, you have got to spend. In other words, by not spending today to grow in the name of profitability, Pandora could very well not position itself properly for the long haul.

Mark Zuckerberg at Facebook and Twitter CEO Dick Costolo, for all intents and purposes, echo Cakebread's and Bezos' sentiment. Bezos, however, should trademark the speech; through Amazon's 13 years or so worth of success, he has had to repeat the "we will not sacrifice long-term opportunity for the sake of short-term profits" line for reporter after reporter.

Bears didn't get it in 1999, shortly after Amazon's initial public offering, and they clearly do not get it in 2012 with the stock consistently over $200.

So, yes, Amazon spends for the reasons it speaks about publicly: We're growing. We need to spend. On its own, that makes sense, although I guess I can see how people like Weinstein and other AMZN bears question the philosophy.

Amazon's critics really miss the mark, however, when they presume that that's all there is. They insult Bezos' intelligence. They discount the incredible ecosystem he has built and continues to build at Amazon.

Practically everything Amazon does justifies one end -- to lock more and more people into its ecosystem. And, to forge a stronger bond between the ecosystem and its heaviest users.

As Manjoo noted in Slate, Amazon Prime members already receive next-day shipping from time to time. It's unexpected. And it's a welcome surprise. I experience that, on occasion, as a Prime member myself.

Now, it appears that Amazon dropped the sales tax fight in favor of strategy that could bring same-day shipping, presumably for an additional fee, to the masses. Manjoo mused -- imagine ordering a laptop in the morning only to have it waiting for you when you arrive home from work. In this regard, the possibilities are endless.

Manjoo thinks the strategy "will destroy local retail." I agree. And it will add to the pain persistent, but misguided AMZN bears have been feeling for years.

At the time of publication, the author was long FB and P.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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