All Amazon, All The Time
"[Jeff Bezos's] Death Star moves into striking range of every industry on the planet."
Happy Monday and welcome to our new subscribers!
It’s no exaggeration to say that the intelligent and measured analysis so often found on The Rational Walk blog (and now Rational Reflections) inspired me to start Kingswell in the first place. Thanks so much for the shout out!
Subscribe to Kingswell for free!
Paging Dr. Alexa 🚑🩺
Operating on my typical timeline of lagging three months behind everyone else, I finally got around to reading Amazon’s 2021 Letter to Shareholders over the weekend.
But I did so with a bit of trepidation. For more than twenty years, Amazon founder Jeff Bezos’s annual letters were surpassed by just Warren Buffett in delivering wit, wisdom, and managerial knowhow to readers and shareholders.
And, now, he’s gone.
Off on a super-yacht somewhere — jacked, tanned, and roasting politicians on Twitter.
Good news: Bezos’s hand-picked CEO successor, Andy Jassy, didn’t miss a beat in the letter-writing department. Obviously, it’s very early — but Jassy seems well-schooled in the Amazon ethos and credits the lion’s share of the company’s success to an indefatigable vision and iterative spirit.
While reading Jassy’s inaugural letter to shareholders, my phone dinged with breaking news that Amazon agreed to purchase One Medical, a subscription-based primary care outfit, for $3.9 billion.
As luck would have it, I just so happened to be in the middle of a section of the letter in which Jassy spells out the seven components of Amazon’s iterative innovation. Two of them, in particular, stood out in light of the proposed One Medical acquisition.
6. Adopt a Long-term Orientation: We’re sometimes criticized at Amazon for not shutting much down. It’s true that we have a longer tolerance for our investments than most companies. But, we know that transformational invention takes multiple years, and if you’re making big bets that you believe could substantially change customer experience (and your company), you have to be in it for the long-haul or you’ll give up too quickly.
7. Brace Yourself for Failure: If you invent a lot, you will fail more often than you wish. Nobody likes this part, but it comes with the territory. When it’s clear that we’ve launched something that won’t work, we make sure we’ve learned from what didn’t go well, and secure great landing places for team members who delivered well — or your best people will hesitate to work on new initiatives.
You see, One Medical will not be Amazon’s first foray into the thorny world of health care.
Far from it.
Amazon has had its sights set on the much-maligned U.S. health care system for a while now — and well understands the many trials and tribulations that face any would-be reformers. No one, not even an economic titan like Amazon, can tame the health care beast without a long-term (bordering on stubborn) orientation and the willingness to face failure head on.
Jassy might have written his letter months before One Medical was even a gleam in Amazon’s eye, but his frank discussion of the company’s relentless pursuit of improvement and iteration makes even this cold-hearted cynic feel vaguely optimistic.
Until now, Amazon merely dabbled in the health care space.
In 2018, the e-commerce giant bought online pharmacy PillPack and partnered with Berkshire Hathaway and JPMorgan Chase on the Haven project. Three of America’s top companies — and iconic CEOs — teamed up to “provide U.S. employees and their families with simplified, high-quality, and transparent health care at a reasonable cost”.
Spoiler: It didn’t work.
Haven bowed out with a whimper less than three years later — at least in part because the Covid-19 pandemic monopolized the entire health care system’s attention and resources.
PillPack, though, makes for much happier reading. It quickly became the backbone of the Amazon Pharmacy digital drugstore, which ships prescriptions (at discounted prices) to Amazon Prime members, and the Amazon Care insurance program for company employees (and recently rolled out to select outsiders).
Now, from the wreckage of Haven and the long-term cultivation of PillPack, comes Amazon’s biggest health care move yet.
Here’s a quick background on One Medical: The company currently charges a $199 annual subscription fee and provides 24/7 virtual access to tele-health providers and same/next-day appointments at physical locations across the country.
No one knows exactly what Amazon has planned for One Medical, but I wouldn’t be at all surprised to see the service either folded into an expanded Amazon Care or offered as an additional benefit for Prime members.
John Malone, chairman of Liberty Media, once compared Amazon to the Death Star as it “moves into striking range of every industry on the planet”.
I’m not sure that many would weep if Amazon (and One Medical) gave U.S. health care the ol’ Alderaan treatment. Warren Buffett famously described our current system as “a tape worm in the American economy”.
Not exactly a delightful image, but scarily accurate.
If Amazon can introduce user-friendliness, efficiency, and cost-effectiveness to health care, then this shareholder is all for it.
💰📉 AMZN: Back to Earth 🌎
Is there such a thing as the opposite of a value trap?
A company with a P/E so high that it repels value-conscious investors — and then proceeds to knock the socks off the market anyway?
I gave up on ever buying Amazon at a “normal” P/E a long time ago. After all, over the last five years, the company traded at an average of 147x earnings.
So, with that mind-boggling number in mind, Amazon’s current P/E of 38 looks downright reasonable.
Why is Amazon “on sale”?
To be blunt, Covid-19 was good for business — accelerating the world’s move to online shopping and cloud computing. Customers new and old turned up on Amazon’s doorstep, hat in hand, needing logistical help, shipments of essential items, and digital infrastructure for increasing levels of remote work.
CEO Andy Jassy noted that Amazon realized the equivalent of three years of growth in just fifteen pandemic-fueled months. Hitting the fast-forward button on growth like that will hurt YOY numbers in 2022, but means nothing to the long-term investor.
Since the very beginning, the bull thesis on Amazon has been a simple one: the company would build out an e-commerce and distribution network so vast and powerful that no one else could ever afford to compete with it. Any one foolish enough to try would get squeezed out by Amazon’s low prices and free shipping.
Once Amazon successfully cleared the field, it could start raising prices and ramp up its anemic profit numbers.
True enough — but far from the whole story.
What the naysayers missed was that Amazon’s heavy investment and rapid expansion would not be limited to fulfillment centers, delivery trucks, and the like.
Amazon, instead, would strike out to conquer new frontiers.
Like cloud computing. Or digital advertising. Or streaming. Or even health care.
Amazon Web Services (AWS) deserves special mention. The company’s cloud computing segment grew revenue by 37% in 2021 and might already be worth around $1 trillion all by itself. AWS is the shining star in Amazon’s firmament.
While Amazon’s overall earnings multiple seems to spit in the face of any Grahamian margin of safety theory, its fulfillment network represents the moat to end all moats. The company has spent over $100 billion to create a worldwide shipping and distribution system that includes 410 fulfillment centers, 168 sortation centers, 1,055 delivery stations, over 100 aircraft, and more than 260,000 drivers.
How could any competitor ever hope to supersede (or even replicate) this?
The costs would be staggering.
If Amazon spent $100 billion (and decades) building such a network, could anyone else even do it for $250 billion? $500 billion? $1 trillion?
That’s the magic of Amazon.
📺 Prime Video’s Star Turn
While Netflix, Disney+, and Paramount+ dominate the headlines, Amazon’s streaming service remains something of an industry afterthought.
But that might be about to change.
Chris Pratt’s The Terminal List enjoyed a buzzy release this summer, drawing some much-needed attention to Prime Video ahead of a pivotal few months.
In September, Amazon will lift the curtain on The Rings of Power, the mega-budget series based on J.R.R. Tolkien’s Middle-earth legendarium. Episodes will reportedly cost upwards of $60 million a piece.
That same month, Amazon’s 11-year deal with the NFL for Thursday Night Football officially begins — adding another ratings blockbuster (and sticky asset) to the company’s streaming portfolio.
The Amazon Prime subscription service — which combines free, two-day shipping and streaming video — has become a major cash cow for the company. Billions of dollars flow into Amazon each year from membership fees alone, which become yet another potent weapon for a company obsessed with pouring every last cent back into growth and moat-building.
If Prime Video is really about to take off — and boost subscriber numbers — look out.
If you’ve enjoyed reading this issue of Kingswell, please hit the ❤️ below and share it with your friends (and enemies) so they don’t miss out. It only costs you a few clicks of the mouse, but means the world to me. Thank you!
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.