Amazon Is Selling Value Through Hope

NEW YORK (TheStreet) -- It's not even close: Amazon's (AMZN) Jeff Bezos is the greatest and most brilliant CEO of all time. If you measure shareholder value delivered relative to the amount of investment and company performance, Bezos beats Apple's (AAPL) Steve Jobs, Microsoft's (MSFT) Bill Gates and others with ease.

Brilliant is a strong and sometimes overused adjective, but how else can you describe a CEO who has once again delivered a loss, will likely deliver a loss in the best retail quarter of the year and Wall Street collectively says "Hey, we need to buy more of this  100 P/E stock because it offers such a solid risk to reward ratio"?

Bezos didn't create shareholder value by creating the most profitable retailer -- that position belongs to Wal-Mart (WMT). Amazon isn't even the largest online seller; Yahoo! (YHOO) may sell more online this year including its share of Alibaba.

Bezos is creating value through hope. It didn't start that way, albeit for those who understand how retail works it's obvious. Bezos understood how to exploit online affiliate marketing faster than anyone else. That single stroke of genius may be why so many others failed during the dot-com bust while Amazon prospered.

Prospered is a relative term, though. In Amazon's case, it means it was able to grow revenue, and that fueled hope. Amazon demonstrates perfectly what anyone in retail already knows: If you sell your products cheaper than anyone else, you will sell more. The problem, especially for Amazon investors, is that increases in revenue doesn't mean greater profits

The investment thesis follows along a path that assumes once Amazon finally reaches some magical pie-in-the-sky size, it will simply increase prices and shareholders will be rewarded with incredible margins other retailers -- online or off --can't match.

Where I come from that's called a bubble. Bubbles can last a long time as the housing market demonstrated for years. The weak link for Amazon shareholders is how unlikely the company can achieve pricing power over and above other dominant retailers.

Adding physical locations won't work, Wal-Mart has more locations than anyone. Selling digital media is a margin race to the bottom. Cloud hosting is a low-margin business with low barriers to entry that already includes Microsoft (MSFT), Google (GOOG), Rackspace (RAX), IBM (IBM) and countless others. Good luck trying to achieve outsized margins in that space.

If it's so obvious that at some point the music will stop -- without enough chairs for everyone, why do investors continue to hold and buy more shares? Because what makes a bubble a bubble is investors ignore everything negative and focus on anything that supports the bull case. It literally becomes an investment supposedly worth buying simply because the price continues to climb.

Why did tulips trade for more than a year's pay, Molycorp (MCP) (another company I warned about) or Crocs (CROX) for over $70? For the same reason a company can trade for $350 that may not generate a profit next year, the mob doesn't care why it's appreciating, until it's not.

Hopefully, you care enough not to get caught up in the euphoria and avoid the Amazon musical chair game, or at least be quick enough to grab a chair when the music stops.

At the time of publication, the author had no position in any of the stocks mentioned.

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

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