At $1 Trillion, Amazon Is Still Not Its Stock Price

(Bloomberg) -- Sept. 28, 2001, marked this century’s nadir for the stock price of Amazon.com Inc. Air was gushing out of the dot.com bubble, the world was reeling from the 9/11 terrorist attacks, and investors had lost confidence in the promises of a balding entrepreneur with an unsettling, riotous laugh.

In Seattle, 37-year-old Jeff Bezos scrawled “we are not our stock price!” on the white board in his office in a shambly old VA hospital atop a hill south of downtown. At the time, it seemed, everyone was panicking except the boss. He reminded his ragtag band of employees, many of them rushing for the exits, that “in the short run, the market is a voting machine, but in the long run it is a weighing machine,” borrowing a phrase often attributed to renowned investor Benjamin Graham.

Amazon’s stock is up more than 30,000 percent since those dark days and today notched another incredible benchmark: surpassing $1 trillion in market capitalization and joining Apple Inc. in the rarefied club. Much else has changed too. Bezos is now fully bald and buff; he’s the wealthiest person in the world, with a fortune that’s almost twice the size of Bill Gates’s. If the stock market does indeed weed out capricious human sentiment over time to reflect the true value of a company, then it’s now clear that in two decades, Bezos has forged one of the most impressive business franchises in all of human history.

The road from near ruin to recovery has been well-chronicled. Amazon once lost so much money that Bezos started a shareholder annual letter with the word “ouch.” Then he set about meticulously refining how he ran his company, cutting costs and fat, and ordering a full reassessment of his fulfillment centers, steadily working to increase efficiencies and lower costs.

Using its hard-won logistics prowess as a springboard, Amazon then solidified customer loyalty with offerings like Amazon Prime and Fulfillment by Amazon, which lets other merchants pay Amazon to store and ship their goods. At the same time, innovations like Amazon Web Services (the cloud business), the Kindle and Alexa popped provocatively out of Bezos’s fertile mind and redefined the company as much more than an online retailer.

But here’s the funny thing about a $1 trillion valuation: it’s less a time for celebration than an occasion to wring hands about the future. And Amazon’s current challenges seem even more daunting than the tests of 20 years past. The president is not a fan, tweeting that the company exploits the post office, squeezes small businesses and evades taxes. On the left, Senator Bernie Sanders charges that Amazon pays its workers such a low wage that many of them have to apply for public assistance. Amazon has responded that Sanders doesn’t have the full picture. And politicians on both sides of the aisle seem to be wondering about a company whose rigorous commitment to low prices is seen as limiting inflation and wage growth and eclipsing the authority of central bankers.

Amazon, it seems, is running up against something like the corporate equivalent of the illusory law of large numbers. When companies get this massive, a sort of inexorable gravitational pull naturally emerges to try to slow them down. This dark magic can work in hard-to-see ways. The company now has almost 600,000 employees, and while a majority work in the fulfillment centers, it’s still an unwieldy number, with lots of layers of bureaucracy between the boss and his troops. One of Bezos’s answers to the potential for corporate decay is HQ2, where Amazon teams will get to work far from the mother ship. Another, according to his last shareholder letter, is to set realistic goals but hold high standards, which he says are contagious in an organization.

The biggest challenge facing Amazon though may be that stock price, and the atmospheric expectations it conveys. Today, many Amazon investors are probably giddy, and they have a right to be. It’s been an amazing ride. But Amazon is priced for perfection, with an astronomical price to earnings ratio of about 207 (Walmart’s: 20). Wall Street is expecting flawless execution from Amazon in the cloud, in apparel and with Whole Foods Markets, and overseas in countries like Australia and India. If everything doesn’t go exactly right in the years ahead, Bezos may want to get that white board out again.

To contact the editor responsible for this story: Molly Schuetz at mschuetz9@bloomberg.net, Robin Ajello

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