Jeff Bezos Is the New Warren Buffett
Regular readers of Profit Confidential know that I frequently compare Jeff Bezos, CEO and founder of Amazon.com, Inc. (NASDAQ:AMZN), to legendary investor Warren Buffett.
They have the same gift—an eye for value.
Buffett used his talents to amass the greatest investing record of all time, while Bezos built an unstoppable, ever-expanding gargantuan of a company. He keeps redeploying capital into new business lines, crushing entire industries whenever he has to.
But that’s not all Bezos and Buffett have in common.
Both of them have a literary streak that’s rare in corporate boardrooms. We get a glimpse of these talents, when, in their annual “letter to shareholders,” they illuminate the secrets of success.
CEOs often draft these letters to keep shareholders in the loop. However, Buffett and Bezos go way beyond numbers. They give investors an Ivy-League crash course in business.
As Andrew Ross Sorkin put it, Warren Buffett “turned [shareholder letters] into an art” and Jeff Bezos “wrote one of the most engaging I’ve ever seen.”
— Andrew Ross Sorkin (@andrewrsorkin) April 19, 2018
Today, we’re going to review Bezos’ most recent shareholder letter, the one Sorkin thinks is so “engaging.” It is shorter than Buffett’s winding tomes, making it easier to spot the gems that Bezos sprinkles throughout.
Bezos’ Amazon Letter: 5 Takeaways
Although I made sure this list has very specific items, I want to take a moment to touch on Bezos’ core management philosophy of customer satisfaction.
It’s a very simple idea, really. Bezos thinks that a delighted customer is a loyal one. That’s why he opened the letter by rattling off Amazon’s list of customer satisfaction awards.
Amazon ranks No. 1 in the U.S. and the U.K. when it comes to pleasing their audience. They have managed to hold those titles for eight and five years, respectively, without ever getting complacent or cocky.
Here’s a revealing quote as to how they did it:
“People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. I see that cycle of improvement happening at a faster rate than ever before…You cannot rest on your laurels in this world. Customers won’t have it.”
(Source: “2017 Letter to Shareholders,” Amazon.com, Inc., April 18, 2018.)
Keep this quote in mind whenever you think about AMZN stock. It is the ultimate tailwind.
But let’s get down to specifics. Here’s what stood out in the Amazon letter:
- Amazon employs 560,000 people. Many people have criticized Silicon Valley firms for not hiring enough people. Instagram is the perfect example. When it sold to Facebook, Inc. (NASDAQ:FB) for $1.1 billion, only 13 people worked at the company. Amazon, on the other hand, is like the industrial giants of old, which secured their political strength in part by employing hundreds of thousands. After all, politicians won’t dare to challenge a company that their constituents rely on for jobs. It’s good insulation from regulatory risk.
- Amazon Prime has 100 million members. Until this letter, no one knew how many subscribers paid for “Amazon Prime.” Apparently, it’s 100 million. Ignoring the fact that some of them have discounts on the $80.00 annual fee, we can reasonably assume that Amazon brings in approximately $8.0 billion per year. Not bad, right? It’s especially great because Amazon uses that money to sweeten the pot of Prime goodies, which draws in more users and more revenue to play with.
- AWS users increased by 250% last year. Amazon Web Services, the cloud computing division of Amazon, is a golden goose for shareholders. Every quarter it delivers strong, high-margin growth for the company, thereby elevating both revenue and profits. And what effect do you think that has on Amazon stock? It ain’t bad, I’ll tell you. Whatever happens with Amazon’s push into video streaming and drone delivery (I believe they’ll be successful, but who knows), the one thing it cannot afford to lose is AWS. It is the engine that keeps the Amazon stock price moving up and to the right.
- Amazon Prime India has 40 million local products. The success of Amazon India is one of the greatest business achievements of the last decade. Even 50 years from now, Harvard will teach its students how Amazon managed to pull it off. It’s astonishing, really. With no domestic roots and a business based on buying things online, Amazon managed to conquer India, a country where only one in three people have access to the Internet. Part of the success came from local third-party sellers hawking 40 million products on their web site. But more importantly, Amazon realized that what works in the U.S. might not work in India. They tweaked their business and it’s paying dividends.
- Since 2011, Amazon invested $150.0 billion worldwide. Some companies have one successful business line. They pull in a ton of cash, stuff it in low interest bonds, and maybe buy back a few shares. But that’s not a useful way to spend profits, because the company doesn’t get any more fuel for growth. Amazon is completely different. It has built fulfillment centers and server farms, bought a fleet of planes for distribution, poured money into AI research—it is constantly expanding. This insatiable growth is what makes AMZN stock incredible.
What makes these numbers special? For one thing, Amazon is stingy with specifics. Bezos rarely gives us hard numbers on Amazon’s inner workings, so we cling to details whenever they emerge. But more than that, they show that Amazon is a systemically important company in America. It provides jobs, goods, services, and everything else you can think of.
The Extra Bezos Wisdom
Like Warren Buffett, Bezos isn’t content to scribble down some achievements and call it a day. He wants to pass on his wisdom; the things he’s learned while at the helm of a multi-billion-dollar company.
In his letter, he wrote about “high standards.” How to have them, define them, build them into your company. He says it’s important to understand high standards because customers are “divinely discontent.”
“Their expectations are never static – they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied.”
This mentality is what makes Amazon an 800-pound shark that swallows whole industries in a single bite. Bezos has drilled this ruthless mentality into Amazon’s DNA. But he’s also very particular about how you get high standards.
They must be, according to Bezos:
- Teachable. Think about great athletes. They have high standards for success. They also train incessantly, but no amount of hard work can make you 6’ 7”. So there’s an unteachable component to those high standards. Bezos thinks you need teachable high standards to make a successful company.
- Domain Specific. Don’t just say you want high standards across the board. Be specific about what you’re aiming for and if you don’t know, hire someone who does.
- Recognition. Know what high standards/success looks like. If you don’t, you’re likely to miss it, or else waste time chasing something completely different.
- Scope. Also, don’t kid yourself about how long it takes to achieve high standards. It won’t happen overnight.
These may seem pretty obvious, but at least they’re clear. Bezos gives some great examples of how he implements these standards in Amazon. If you’re interested, check out his full letter.
I personally love Jeff Bezos’ Amazon letter. It reminds me, each year, about the importance of good management. After all, five different people can have the same idea, but the person with the best execution always wins.
Bezos is that guy. He’s got the rubber stamp from Warren Buffett, as well as dozens of CEOs in Silicon Valley. Everyone is half-admiring, half-terrified of him, which says to me he’s doing something right. (At least in business; you don’t want your friends scared of you.)
In any case, remember that you’re investing in these companies. You are a part owner. Jeff Bezos works for you and I can’t think of any reason better to own Amazon stock.
I see this company advancing beyond $2,000 in the next 18 months, with $2,500 not much further on the horizon.