Key Lessons From Amazon's Shareholder Letters
Jeff Bezos’ Letters to Shareholders: How Bezos Scaled Amazon Into a Giant
From humble beginnings in Jeff Bezos’ garage to one of the most valuable companies on the planet, Amazon has enjoyed a wild ride since its founding days back in 1994. Bezos, who started and scaled Amazon into the behemoth of a company it is today, remained CEO until he stepped down in 2021. While he is no longer in the C-suite, the lessons Bezos learned from leading Amazon will live on forever through the shareholder letters he wrote between the IPO in 1997 to the last letter in 2020.?
Let’s dive into some of the key themes that investors and entrepreneurs can learn from.
Long-Term Thinking
When the dot-com bubble burst in 2000, technology companies were heavily punished as investors pulled money out of the stock market. The Internet boom in the years leading up to that moment had bid up stock prices to unsustainably high valuations for almost all companies that claimed to have a business model. While many of these companies turned out to be nothing but money-losing start-ups with no path to ever become profitable, Amazon managed to grow sales and customers accounts even as funding from capital markets dried up.?
However, Amazon was not immune to the stock price decimation that wiped out most e-commerce companies at the time. When Bezos wrote his 2000 Letter to Shareholders, Amazon stock was down more than 80% from its peak in 1999. The drawdown would extend to a brutal ~94% at the bottom in 2001. Nevertheless, Bezos’ focus was solely on the outlook of his business and not the stock price:
“So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, ‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.”
Bezos brings up his long-term approach time and time again. What is interesting, though, is that there is plenty of evidence that this is not just talk - it is truly how Amazon operated under his leadership. In its early stages, Amazon was losing money for several years in an effort to capture more customers and expand services. While it is not unusual for hyper growth companies to lose money, Amazon has gone through this stage more than once.??
The best example is Amazon Web Services (AWS), Amazon’s cloud platform that accounted for 66% of the company’s total operating income in the most recent fiscal year. AWS was started in the early 2000s as the company wanted to improve its infrastructure to handle the growing traffic across Amazon’s services. However, AWS did not turn a profit until 2015. For more than a decade, AWS was losing money while it was investing to take market share in the growing cloud computing market. In 2023, AWS reported a whooping ~$24 billion in operating income, and that number will likely continue to grow in the coming years. As Bezos described it in the 2008 letter, that is the playbook he instilled at Amazon:?
“Long-term thinking levers our existing abilities and lets us do new things we couldn’t otherwise contemplate. It supports the failure and iteration required for invention, and it frees us to pioneer in unexplored spaces.”
Taking Care of Customers Takes Care of Shareholders
Bezos has long been known for his customer obsession. In his first Letter to Shareholders, Bezos stated that customer growth and repeat customers are two of the most important metrics Amazon uses to measure their market leadership in what at the time was online bookselling. And impressively enough, Amazon customer accounts increased from 180,000 to 1,510,000 in 1997 alone - that gives you a sense of the hyper growth mode Amazon was in and that Bezos was doing something right from the beginning.?
Further, Bezos always emphasized that doing the right things for customers would pay off for shareholders in the long run. For example, Amazon launched a feature early on that reminded customers if they had already bought a particular item that they were now trying to buy again - in case they had forgotten. While that meant forgoing some sales in the short run, it was a great feature for customers. And as Bezos summed up in the 2002 letter, “What’s good for customers is good for shareholders.”
That also relates to pricing. Amazon intentionally sold products at lower price points than brick-and-mortar retailers to create more value for customers. The beauty of e-commerce is also that you can have a larger selection at lower costs as you scale. However, Amazon did not use this earn higher margins; instead, they lowered prices to drive repeat purchases and customer loyalty:??
“We are firm believers that the long-term interests of shareholders are tightly linked to the interests of our customers. If we do our jobs right, today’s customers will buy more tomorrow, we’ll add more customers in the process, and it will all add up to more cash flow and more long-term value for our shareholders.”?
This very much relates to what Warren Buffett said about investing with managers who view shareholders as partners. While it may sound counterintuitive to some to invest in companies that do not consider shareholders as the number one priority, Amazon has showed that prioritizing customers first can be immensely rewarding over a long enough time frame also for stockholders. Management who put too much emphasis on meeting quarterly expectations from Wall Street analysts often end up making decisions that harm the company in the long-run. Ironically, these companies often end up destroying shareholders’ capital by focusing too much on the stock price. That is in strong contrast to the mentality Bezos instilled at Amazon as he laid out in the ‘97 letter:
“We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”
Optionality
This is in many ways an overlooked lesson for investors in the story of Amazon and Bezos’ visionary leadership. In the 2013 letter, Bezos lists some of the initiatives Amazon has established in less than two decades of being a public company. What started as an online bookselling business has since branched into ventures such as Prime, Kindle, Prime Video, Fire TV, AWS, Whole Foods - and it includes failures like the Fire Phone and other investments.?
“After two decades of risk taking and teamwork, and with generous helpings of good fortune all along the way, we are now happily wed to what I believe are three such life partners: Marketplace, Prime, and AWS. Each of these offerings was a bold bet at first, and sensible people worried (often!) that they could not work.”
For some of these bets to work, a company needs to have the right combination of a solid business model and innovative management. Amazon’s business is great in that sense because it is capital efficient and cash-favored because they can collect cash from customers before spending much on equipment and inventory.?
As opposed to a physical retail store that has to spend money on real estate and filling up on inventory before opening up the store to customers, Amazon could focus on acquiring as many customers as possible in its early stages. More customers gave Amazon the opportunity to launch a series of new ventures and figure out what worked.
For example, Amazon Prime was launched as an experiment in 2005. Fast and free shipping was, to no surprise, a big hit among customers - and Amazon quickly discovered that Prime customers shopped more frequently and ordered more items than before. And it allowed Amazon to collect the annual fee in advance, which the company then used to invest in further adjacencies to benefit Prime customers. Over time, Amazon created this positive flywheel effect that benefitted customers (and eventually shareholders) through optionality and management’s willingness to experiment.
Conclusion
Jeff Bezos’ letters are full of lessons for investors and operators. As investors, we should make sure to properly assess the management team of a company before a potential investment:
If the answers are yes, you are likely partnering with a leadership team that has your best interests in mind. While Amazon’s success is a case of hindsight bias, Bezos’ letters should serve as a reminder that a company with a long runway for growth led by the right CEO can create immense shareholder value over time. Your job is to find those businesses, continuously monitor your investment, and stick with them until something changes.?
This Newsletter's Author
This newsletter was written by J?rgen Pettersen. You can find him on?Twitter/X.
Disclaimer:
Stock Unlock's newsletter is not a recommendation to buy or sell stocks. Stock Unlock does not provide financial advice, and we are writing this newsletter to help share ideas and teach you more about stock analysis. Please do not buy or sell stocks we discuss without doing your own research and/or consulting with a professional.
Let us know if you have any feedback?
In addition to providing education around investing fundamentals we are exploring adding value through sending our members stock ideas and analysis. Please let us know if you enjoy this type of newsletter or have any feedback.
Let us know what you think by emailing [email protected]
Our newsletter archive will dramatically improve your investing, and includes in-depth stock analysis, investing tips, and investment education. You can find our newsletter archive here! (https://stockunlock.com/content/newsletter)
And if you haven't yet, make sure to subscribe for FREE to get our future newsletters delivered straight to your inbox.