Amazon's mind-boggling ascent

Amazon and its founder, Jeff Bezos, are having a moment. In the past week, the company and Mr Bezos have reached some impressive milestones. Amazon's stock market capitalisation vaulted above US$500 billion (S$678 billion) last Wednesday. And for several hours the next day, the company's soaring share price propelled Mr Bezos into first place in the rankings of the world's richest people.

Once merely an online bookseller, Amazon now appears to be laying claim to the entire retail universe - and beyond. It is a formidable force in such disparate fields as cloud computing, movies, music, food, artificial intelligence and the distribution of washing machines and toasters.

Mr Bezos, who is also Amazon's chief executive, has gone even further afield with ventures as varied as newspaper publishing and rocket launching, and he says he intends to use his immense wealth to reinvent philanthropy. Amazon and Mr Bezos have taken dominant positions in so many areas that they defy categorisation.

Yet noteworthy as these real-world achievements are, they may understate Amazon's importance. Despite an earnings report on Thursday evening that disappointed the market and led to a 2.5 per cent fall in its share price, Amazon is remarkable as a purely financial entity. Its stature as one of the most successful companies in the history of the stock market is already assured. In fact, the numbers show that since 1997, when it became a publicly traded company, Amazon has evolved into one of the century's greatest wealth-generating machines.

"Amazon belongs in a very small group of stocks," said finance professor Hendrik Bessembinder at Arizona State University. "It's one of the greatest wealth creators since 1926, and it's reached that status in a very short period of time."

When I first spoke with Professor Bessembinder in May, he had prepared a list of the 30 greatest wealth creators in the stock market through 2015. But this past week, he showed me a lifetime wealth- creation list, with fresh rankings through 2016. The stocks at the very top remained the same: Exxon Mobil, followed by Apple, General Electric, Microsoft and IBM.

Once merely an online bookseller, Amazon now appears to be laying claim to the entire retail universe - and beyond. Its stock market capitalisation vaulted above $678 billion last Wednesday. ST PHOTO: KUA CHEE SIONG

But further down the list, Amazon appears for the first time. It is at 14th place, just behind such august names as Berkshire Hathaway and Procter & Gamble and ahead of Coca-Cola and DuPont.

In essence, the list shows which stocks have been the most profitable for shareholders over history. A very small group - 4 per cent of all publicly traded stocks - account for all of the stock market's net gains from 1926 through 2016, he found. And only 30 stocks - Amazon is now one of them - account for more than 30 per cent of all of the market's wealth creation in that 90-year period.

What's more, Prof Bessembinder found that Amazon's annualised return through 2016 was 37.4 per cent, the highest of all the top 30 wealth creators. That is partly because Amazon hasn't existed for that long: It's easier to sustain fast growth for shorter periods. Exxon, for example, which has created more than US$1 trillion in wealth for shareholders since 1926, more than any other company, ground out its gains at a slower pace: It has an annualised return of only 11.9 per cent, Prof Bessembinder said.

Even after the earnings blip last Thursday, Amazon's value in the market has skyrocketed this year. It has risen more than 36 per cent. "If it holds onto those gains, we can expect that it will climb higher on the cumulative wealth-creation list," he said.

Of course, while Amazon's market power has been wonderful for its own investors, it has damaged many of its competitors - diminishing the wealth of shareholders of those companies.

Consider how Amazon's cumulative stock returns dwarf those of its retail competitors and the overall market. Using Thomson Reuters data, I calculated that over the last 15 years through Tuesday, Amazon returned more than 8,200 per cent, compared with 125 per cent for Walmart, 2.2 per cent for Sears, and 302 per cent for the Standard & Poor's 500 stock index, dividends included.

If you had invested US$1,000 in Amazon in July 2002 - and had held onto your shares - that money would be worth US$83,000 today.

By comparison, US$1,000 invested in the entire Standard & Poor's 500 stock index, with dividends, would amount to US$4,100 - not a bad performance, until you look at the gaudy Amazon returns. Far worse, if you had put the money in Walmart shares, your investment would be worth only US$2,250. And if you had stuck with Sears during all of its travails, you would be almost where you started, with US$1,022.

Those figures aren't adjusted for inflation, however, so the Sears return is more miserable than it looks. The US Bureau of Labour Statistics calculator shows that US$1,022 is worth only US$751 in 2002 dollars. Ouch. (To be fair, the US$83,000 in current Amazon cash is about US$61,000 in 2002 dollars. But that's still an eye-popping sum.)

Bespoke Investment Group, a stock market research firm, has another way of comparing Amazon's stock returns with those of its retail competitors. It has built the Death by Amazon Index, which it describes as "a way to track the performance of the companies most affected by the rise of".

Those companies - there are now 54 of them - include Barnes & Noble, Best Buy, Costco, CVS Caremark, GameStop, Macy's, Nordstrom, Rite Aid, Sears, Target and Walmart.

The numbers are stark. The Death by Amazon Index has declined 18.9 per cent through last Monday - trailing Amazon by almost 55 percentage points.

No Amazon investor has as much money in the company, or has benefited as much from the stock's rise, as Mr Bezos. He owned 16.7 per cent of the company as of this May, according to a Securities and Exchange Commission filing. His stake is worth more than US$80 billion, according to Bloomberg, accounting for the bulk of his personal wealth. His stake in Blue Origin, the spaceflight firm, is worth an additional US$3 billion, Bloomberg said. His net worth hovers around US$90 billion, placing him neck and neck with Microsoft founder Bill Gates.

Unlike Mr Gates, who has diversified his portfolio and has been giving money to charity at a rapid pace, Mr Bezos continues to bet heavily on Amazon. As Thursday's earnings report showed, that does entail risk.

The company's ever-expanding retail operations are sapping its profits, but it has been raking in earnings through cloud computing. As has been the case since Amazon's inception, it pays no dividends, instead ploughing cash back into the company's core.

For now, the mighty Amazon wealth-creation machine continues to roar. Whatever happens next, this is already one of the great tales in the history of capitalism.


A version of this article appeared in the print edition of The Straits Times on August 01, 2017, with the headline 'Amazon's mind-boggling ascent'. Print Edition | Subscribe