Company Do the Right Thing at the Right Time
Amazon was founded by Jeff Bezos in 1994 and went public in May of 1997. The IPO price of Amazon (AMZN) was US$18.00. Fast forward 23 years later and Amazon’s stock price was US$1910, well over a 100-fold increase.
Amazon was the best-performing stock during the past 20 years. However, Amazon didn’t get success overnight. The stock was relatively flat for a long time. It didn’t really start to increase in value for about ten years.
When Jeff Bezos started his online business in 1994, the environment for online business wasn’t mature yet. The first week, Amazon only received a total of US$12,000 in orders. For the second week, it received a total of US$7,000 in orders.
Amazon has used a strategy of continually investing in itself (such as to build warehouses) in order to win new customers and generate more revenue. What would have been profits were used to enlarge the business.
This is a dizzying way to run business that brought in revenue but didn’t result in profits on the financial reports. So, investors had to be very patient before they started to see returns.
Barron’s Weekly is a famous professional finance magazine for investors. Back in 1999, a Barron’s reporter, Jacqueline Dohert, wrote a cover story about Amazon entitled “Amazon.bomb.” Dohert argued against this business model, and she doubted that Amazon could generate profits anytime soon. Dohert also seriously questioned whether Amazon could compete with traditional stores like Walmart and Barnes who had much deeper pockets than Amazon.
However, Amazon’s stock price increased around 4606% between May of 1999 and May of 2019. The average yearly return was around 22.1%.
From today’s viewpoint, it seems that we can conclude that the description of “Amazon.bomb” was totally wrong. If investors read the report and sold their Amazon stock, they would have missed a huge opportunity to earn money.
However, the price of Amazon’s stock dropped around 95% within two years after the article was published. That means that, if an investor bought Amazon at US$100.00, the price would have dropped to only US$5.00. That’s a scary drop!
We know that there was a “.com bubble” during the early 2000’s. And the average stock price of NASDAQ technology companies dropped around 70% during the dot-com bubble.” However, Amazon’s stock price dropped 95%, so it appears that Amazon faced problems beyond the dot-com bubble.
Amazon needed to do something to turn things around. Amazon made many new investments during the dot-com bubble which made its stock price increase. For example, Amazon invested in Amazon Web Services (AWS) in 2002.
AWS provided on-demand cloud computing for individuals, companies and governments. As with its retail business, it was not such a smooth beginning for its AWS business, as it was still early days for cloud-based services. For example, Microsoft’s Azure launched four years later, and Google’s Cloud Platform launched five years later. But once the environment matured, AWS was positioned to be the leader in providing web services.
A company’s success usually is the result of good products or service, strong leadership or proper business strategy. However, if these successful factors don’t exist at the right time, then nothing much will become of such success factors. Some people credit Bezos’ leadership for Amazon’s success, but it appears that timing was very important for Amazon’s success. If Bezos were to create Amazon today, he would likely fail.
A company’s growth is affected by a kind of “surface tension” within the industry. When the surface tension increases, all companies in that industry—no matter whether good or bad companies—will experience growth at the same time, and vice-versa. However, a company that tries to provide products or services that surpass the opportunities provided by the environment will be pulled down by the surface tension in its industry. Perhaps, the infrastructure for such products or services isn’t complete yet, or the users need to be educated in how to use such products or services. So, a successful business depends on timing. That is, a company that wants to be successful must make its moves when the conditions are right.