Amazon.com, Inc. (NASDAQ:AMZN) CEO, Jeff Bezos, has publicly stated that he doesn’t care about profit margins. The surprising comment, which sounds more at home coming from the head of a non-profit, has some basis when considered in light of the alternate business philosophy Bezos has been verbalizing for years.
In Bezos’ view, Amazon.com doesn’t need to increase its profit margin, what’s important is that Amazon.com, Inc. (NASDAQ:AMZN) maximizes its free cash flow. According to the CEO “It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.”
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Amazon.com, Inc. (NASDAQ:AMZN) stock has risen in price impressively in the last year. Much of that increase has been associated with more optimistic opinions of the future of online commerce, and Amazon’s strong position in that market. Retail is certainly moving more and more into an online space, but the current price of Amazon stock may be unsustainable.
One problem for investors is the massive ratio of price to earnings that Amazon has become straddled with. The company’s P/E ratio appears to be at ridiculous levels. It stands at 3783 today, according to Y-charts. That ratio implies a huge amount of growth in the company’s earnings going forward. By comparison, the most valuable company in the world, Apple Inc. (NASDAQ:AAPL), has a P/E of less than 12.
Bezos’ strategy, according to a recent businessweek.com piece, is based in the idea that the online economy has far to go, what’s important right now is getting in control of as much of it as possible. Amazon isn’t trying to make money right now, it’s trying to ensure that its future will be prosperous.
This philosophy means that the company should spend and continue spending, while cutting its prices to attract customers. This leaves the firm making much less money than it could, but it creates brand loyalty and opens up new businesses to invest in.
In recent years Amazon has become a key player in the ereader and ebook industry, the video and music streaming industry, the cloud storage industry and the tablet industry, while retaining its online commerce share. The company is still looking to expand, so that when the internet reaches maturity, the company would own as much of it as possible.
It’s an interesting philosophy that seems more like that of a frontiersman than anything else. It appears that the Amazon.com, Inc. (NASDAQ:AMZN) CEO seems to see himself more like a cowboy in the West than anything else. To competitors, he’s not John Wayne, he’s the villain, greedily taking as much as he can get his hands on.
Investors have gotten behind the idea, particularly in 2012. Amazon.com, Inc. (NASDAQ:AMZN) revealed that it makes little or nothing on the sales of its tablets and ereaders, investors didn’t seem to mind too much. Jeff Bezos doesn’t care about profit margins, and, for some traders at least, that makes him a valuable commodity for one of tech’s most valuable companies.