Amazon (AMZN).com went public 20 years ago today. There was so much demand for Jeff Bezos’s “online bookstore,” as it was then referred to, that the underwriters raised the offering price twice. They settled on $18 per share.
There was some concern whether an online bookseller could truly compete with industry stalwarts such as Barnes & Noble and Borders. Would people really buy books on the Internet? The idea seemed farcical. But two decades later, Amazon has done pretty well for itself.
On Friday, the shares closed at $961.35. And that doesn’t include three stock splits totaling 12-for-1. In 1997 terms, one share of Amazon is currently worth $11,536.20.
In simpler terms, the stock has vaulted 640.9-fold in 20 years. If you had invested $16,000 in Mr. Bezos’s little project, you would now be sitting on a cool $10 million. On average, Amazon’s stock has gained roughly one percent every 11 days for 20 straight years. What’s even more remarkable is that that figure includes the bursting of the tech bubble, when Amazon’s stock plunged 95 percent.
During the palmy days of the Internet Rally, Amazon was one of its biggest stars. In late 1998, Henry Blodget, then a young analyst at CIBC Oppenheimer, stunned the investing world when he raised his price target on Amazon from $150 to $400 per share. Wall Street was aghast. I mean, no ones raises their price target overnight by $250! Amazon’s stock was then trading at $242.75. Blodget was right; Amazon hit $400 three weeks later.
Not only did Amazon conquer bookselling—it’s currently worth 800 times the value of Barnes & Noble—but it’s conquered nearly all of retail. The company is now worth more than Macy’s, Kohls, Sears, J.C. Penney, Nordstrom, Best Buy, Barnes & Noble, Dillard’s, Gap and Target combined. Over the holidays, Amazon hired 120,000 season employees. Recent research shows that most Americans start their online shopping searches at Amazon rather than Google.
Amazon even reached the zenith of brand awareness. This weekend, Saturday Night Live ran a parody ad for “Amazon Echo Silver,” specifically designed for senior citizens. “It’s super loud and responds to any name even remotely close to Alexa.”
Twenty years in, now is a good time for investors to consider lessons from Amazon’s remarkable success.
Focus on the long-term. Investors need to give a business, especially a young one, time to prove itself. Amazon makes a handsome profit now, but it had many years of losses. This is particularly tough on Planet Wall Street, which is obsessed with the short-term. (High-frequency trading is measured in nanoseconds, meaning billionths of a second.)
Traders see the entire universe divided into three-month segments. Either you beat quarterly expectations or you don’t. If you don’t, your stock will be ruthlessly punished. Jeff Bezos, however, always had a long-term strategy.
You’re going to take your lumps. How many investors would have held on during Amazon’s 95 percent crash? That slump lasted nearly two years, and investors saw nothing but relentless losses. Besides this instance, Amazon shares dropped by half two other times as well.
In the investing business, you’re going to see losses even with the best stocks. In fact, you may see even more losses with the best stocks. Just in the last four years, Amazon’s stock has had two separate 30 percent drops. Last year, the stock lost 14 percent in three weeks.
Successful investing is about discipline, and that means holding on during tough times. Kipling wrote, “If you can keep your head when all about you are losing theirs and blaming it on you.”
Understand the power of innovation. In the early days, many investors didn’t understand that Amazon wasn’t simply an online bookstore. Amazon’s goal was to completely change the shopping experience.
With a lot of investing, you’re looking for a well-run enterprise that serves its customers a good product at a reasonable price. But every so often, there’s a company whose product is truly revolutionary. Bezos’s idea was to build a shopping portal for everything. He didn’t stress about short-term losses since he was focused on getting people hooked—and hooked they became.
Don’t be tied to valuation metrics. The investing biz is crammed full of all sorts of ratios—price-to-book, price-to-earnings, dividend-yield, etc. The list goes on and on. Yet these numbers offer only a limited window onto reality.
If you had been a strict adherent of metrics, you never would have invested in Amazon. The stock has never paid a dividend, and it’s only been profitable for a few years. Even if you used more generous metrics such as price-to-sales, you would have concluded that the stock was vastly overpriced.
The key for investors is that it’s hard to put a price on innovation. If your business is selling power tools or cat food, then conventional metrics are fine. But if your goal is to, in Steve Jobs’s phrase, “put a dent in the universe,” then it will benefit from different ways of analysis.
Don’t fear the weird. Today it may seem obvious that Amazon became a smash hit, but its beginnings were humble. Early on, they made their own desks from cheap doors and two-by-fours. Even today, Amazon embraces the unconventional. For example, every Amazon employee is required to spend two days every two years working at the customer service desk—Bezos included. Amazon is also working on autonomous drones to deliver goods right to your home.
When Warren Buffett was asked why he never purchased shares of Amazon, the investing legend had a one-word answer: “stupidity.” There’s another Amazon out there, somewhere, being started today. Think differently, and you just might find it.
Eddy Elfenbein is the portfolio manager of the AdvisorShares Focused Equity ETF (CWS). He’s on Twitter at @EddyElfenbein.
