As Amazon continues its exponential growth, where will it all end? Growth has to stop, but when and why?
I am a client of Amazon, like almost everybody else, buying my first book from it in 1996, and spending hundreds of thousands on it since. I also really like AWS, keeping a permanent server on it and using it for all my heavy computations. It has saved me a fortune in not having to buy fast computers. I have even written on the political environment of AWS’s cloud computing in Europe,, and did benchmark it here.
I am also a shareholder, and that is what brought me here. When is it time to start selling Amazon?
When I was learning statistics in graduate school, one of my professors used a great analogy for understanding distributions. Athletes supposedly don’t like to be on the cover of Sports Illustrated because their careers tend to take a turn for the worse afterwards — a cover on Sports Illustrated jinxes them. While the athletes are just superstitious, the reason is, of course, that an extreme right tail performance brings them the cover, and tail events don’t repeat often.
Same with companies. If you take the largest companies in any given year and look at how large they are in years and decades to come, they are smaller. Amazon is still number two, by market capitalisation, but it certainly could displace Apple.
I took a quick look at the US data, seven companies have had the highest market capitalisation in any given year since 1928. Five are around today, two exist in name, ATT and GE, but are different companies than in their heyday. So how long did they stay on the top, and where are they now?
And when did they stay on top?
So, by that simple logic, everybody gets dethroned, and so will Amazon.
If we look at the giants of the past, the longest at number one was AT&T, 33 years, and they had a government sanctioned monopoly on telecommunications in the US. When they lost that, AT&T was done for.
The number two, IBM did not have a monopoly but lasted 22 years on the top.
Two firms lasted ten years, GE and Exxon. Apple has been on the top for nine years. GM made five and Microsoft two.
So what took them down? Besides AT&T losing its monopoly, the rest just didn’t survive the competition, GE, GM and IBM certainly.
Take IBM. It had the right culture and leadership for its heyday, but it created a culture that did not adapt to a changing world. By then the founders, and the founder’s immediate successors were long gone. What was left was stifling bureaucracy, perfect for 1960, horribly wrong for 1980. I recently read the story of its demise, a fascinating book by Paul Carroll written in 1994, titled Big Blues: The Unmaking of IBM.
So what about Amazon? It is growing rapidly in share price and market share.
Still, asymptotically, they will run out of things to grow into.
But I think the decline will come before.
The current leadership is fantastic, with a single-minded focus on innovation and growth, fuelled by paranoia. All good.
But, Amazon is creating enemies everywhere. Inevitable as it displaces other businesses and becomes a key provider of services. The leadership will have to allocate ever more time to protect the firm from forces intent on causing damage.
So my prediction for when it’s time to sell.
When the top management has to spend more than 50% of its time on defending the company and thereby less than 50% on business.
Then we get a new class of leadership, one that is great at politics and lobbying — like the leaders of ATT, GM, GE and IBM — but not with a single-minded focus on growth.
Just my two cents as an Amazon investor thinking about when will be the time to sell
© All rights reserved, Jon Danielsson, 2021