NBA fans remember Allen Iverson’s infamous “practice” moment like it was yesterday.
The ignominious presser (in which a visibly irritated Iverson explained, in no uncertain terms, how the idea that the league’s most talented player needed to “practice” was patently absurd), marked one of many low points in the peaks-and-valleys-ish career of one of the league’s most controversial figures.
To be sure, Iverson probably didn’t need to practice.
In his prime, he was simply unguardable. While famous for his crossover (which, on one play that’s since been enshrined in the annals of basketball history, even confounded Michael Jordan), Iverson once showed off a move in a Reebok commercial that looked like it walked out of a magic show and that, frankly, no one has been able to truly duplicate since. To wit:
But the problem for Iverson was that as good as he was, he wasn’t the winner that other NBA greats were. Hence the public outcry when he suggested that “practice” was something he needn’t concern himself with.
Well, Bloomberg’s Cameron Crise is one person who remembers all of this and he’s applied it to a quick take on Amazon.
This would be the same Amazon which is about to single-handedly deep-six brick and mortar and which is one of the big five stocks (the others being Apple, Alphabet, Facebook, and Microsoft) that together account for 56% of NDX and 33% of S&P returns YTD.
Of course this would also be the same Amazon which perpetually trades at a stratospheric multiple (to be fair, the company has finally put together a string of consecutive quarters of positive net income).
Read below for more on why, when you’re a “franchise player,” “profits” are as superfluous as “practice.”
I was thinking about Amazon the other day during the hullabaloo over its 20 years as a listed company, and for some reason it reminded me a bit of Allen Iverson, the former NBA star. Now, no one will mistake Mr. Iverson for an equity analyst, but it occurred to me that his infamous riff on “practice” was reminiscent of the market’s attitude towards Amazon and “profits.”
- “We’re sitting here, I’m supposed to be a franchise player…” There is no doubt that Amazon is a franchise player. For many people, myself included, it’s the first port of call whenever they want to check the price of a good or make a purchase. This in turn has been rewarded by the equity market; Amazon is now one of the largest companies by market cap in the U.S., indeed the world.
- “…and we in here talking about profits.” Mr. Iverson was famously averse to practicing, and thus far in its two decade history Amazon has been equally shy about delivering profits. By my calculations, the company has generated a cumulative net income of less than $5.7 billion. To put that in perspective, it’s almost exactly the same amount that Facebook has earned over the last three quarters and much, much less than Amazon’s market-cap peers have earned over the past couple of decades.
- “How the hell can I make my growth rate better by profits?” The argument behind Amazon’s lofty share price is that the company is focused on maximizing revenues and cementing its place as an e-commerce hegemon before turning the screws and ratcheting up profits. And to be sure, its revenue growth has been impressive. Over its 20 years of existence, the CAGR of Amazon revenues has been 47%. Of course, as the company matures that growth is slowing; over the past 5 years it’s been 22%. Meanwhile, the growth rate of overall U.S. e-commerce sales has largely flatlined around 15% over the past six years or so.
- “Not sales! Not sales! Not sales! We’re talking about profits.” To be sure, I understand that Amazon has done an excellent job expanding its revenue base away from its original focus as on online bookseller. International sales and web services are notable diversifiers and hopes for continued revenue growth. Still, now that Amazon’s quarterly revenues exceed a third of total US e-commerce sales, I wonder how much longer these growth rates can be sustained.
- “We’re talking about profits. I know they’re supposed to be there, and I’m not shoving them aside like they don’t mean anything. I know they’re important, I honestly do. But we’re talking about profits, man.” Amazon has been around for 20 years, and it delivers a fantastic service. But at what point will the market actually demand that it translate its revenues into profits? Clearly not at the moment – – the company still sports a comfortably triple-digit P/E on both a trailing and forward basis. But surely this cannot go on forever. At some point, the market will demand that Amazon delivers net income, surely?
- Then again, perhaps not. Maybe Amazon will mirror the career of Mr. Iverson, a dazzlingly talented player who has entered the Hall of Fame but never won a championship. For two decades, Amazon has been a Hall of Fame stock without really earning anything.
- But whenever I look at Amazon henceforth I’ll think of Allen Iverson, whom I always thought was a little over-rated. We’re talking about profits, man.
Now if only Jeff Bezos had a crossover.