By Shawn Langlois, MarketWatch
SAN FRANCISCO (MarketWatch) — A lot of people made money on Amazon.com Inc. in 2011, but Jeff Bezos wasn’t one of them.
The founder and chief executive, who takes home a nominal salary of $81,840, holds more than 88 million shares. And while Amazon’s stock leapt nearly 40% from the beginning of the year to its 2011 high in October, it’s since come back to Earth, ending the year off about 4%.
Not that Bezos is worried.
True to form, Bezos, who turned 48 last week, whipped through the year on a series of bold initiatives and innovations that cemented Amazon’s superpower status at the pinnacle of the digital economy, alongside the likes of Apple, Google and Facebook, all of which are now major competitors for Bezos in one way or another.
And so, for his imagination, his long-term focus and his sheer optimism in the face of the most uncertain of economic times, Bezos has been named MarketWatch CEO of the Year.
His moves in 2011 gave millions of customers new and faster ways to consume books, music and more from Bezos and from all manner of other vendors in his galaxy. They gave thousands of workers new jobs. And they significantly added value to long-term investors, even as they gave nearsighted investors plenty of new jitters.
From his cloud drives to massive expansion of online-order-fulfillment centers to the wildly successful launch of the Kindle Fire tablet, Bezos spent 2011 rethinking and re-engineering Amazon’s relationship with customers. Time and again along the way, the company took on industry heavyweights, often beating them to the punch.
Bezos and Amazon “come up with better ideas [and have] executed them well, and now they’ve built a significant moat around what they’ve created,” says Jay Freedman, fund manager at Crystal Rock Capital Management, which counts Seattle-based Amazon among its top holdings. “Frankly, Amazon just keeps putting people out of business”
Short term sacrifices
To be sure, Amazon’s trials and tribulations aren’t for the fainthearted investor. The stock opened 2011 at $180 and built its way up to $246.71 in mid-October, before entering a prolonged slide to end the year lower, at $173.10.
Bonds with the investment community were frayed in the fall, when Amazon’s 44% jump in sales to $10.88 billion was overshadowed by its net income’s plunge to $63 million from $231 million in the comparable quarter of 2010. Making matters worse in the eyes of the bean counters, Amazon warned it might lose money in the fourth quarter while ratcheting up spending on the Fire and other projects.
Over the longer term, however, the stock has outperformed, and, even with the late-2011 pullback, Amazon has equaled Apple’s gains over the past five years. Indeed, for all the questions raised about making money in the here and now, the stock today commands an overweight rating, the highest possible, based on a FactSet Research survey of analysts who cover the $80 billion company.
“Bezos has demonstrated that he has incredible vision, and that he will invest huge dollars and huge resources if he believes in something,” says Eric Best, who worked under Bezos in the company’s early days. “I wouldn’t rule out anything from Amazon at this point.”
Clearly, Wall Street’s fascination with the short term hasn’t stopped Bezos from pushing boundaries, and that’s just fine with his ever-growing customer base.
“Bezos has earned the right to go wherever he wants to go, and the customers will follow,” Crystal Rock’s Freedman explains. “Amazon has spent massive amounts of money to get people their product quickly and relatively cheaply in order to further engender their loyalty.”
When Bezos was asked at the annual shareholder meeting last summer if Amazon.com should be considered a technology, infrastructure or e-commerce company, he answered simply, “Yes.”
He wasn’t joking, either. No signature guffaw.
Amazon’s steady buildout of diversified new products and ventures in 2011 has taken dead aim at such formidable incumbents as Apple Inc. , Google Inc. and Netflix Inc
To some, Amazon may seem to be at a disadvantage, considering the strengths of the competition. But to Best, who went on to found Mercent Corp., a company that helps merchants sell items via Amazon and eBay, Bezos is at his best when he takes on daunting, and risky, concepts.
“If you want to win market share in hypergrowth spaces like tablets, digital media and cloud computing, you have to be committed and make the right level of investment,” Best says. “Bezos has been consistent in demonstrating his willingness to do just that since the company started.”
Of course, Amazon won’t be putting Apple out of business any time soon. But it does pose the first credible threat to Apple’s dominance of the tablet market, which the iPad effectively created.
The Kindle Fire is a 7-inch tablet that sells for the relative bargain price of $199. The iPad starts at $499. The new Amazon device was launched in mid-November.
Amazon hasn’t released specific sales numbers, beyond a press release in December indicating sales were going well.
But Barclay’s analyst Anthony DiClemente just raised his fourth-quarter sales forecast for the Fire from 4.5 million to 5.5 million units and projected sales in 2012 of more than 18 million. That would be enough to give Amazon a commanding presence in the non-iPad tablet market.
Even at 5 million units, in the fourth quarter, Amazon’s share of the of the tablet market would be 25%, according to J.P. Morgan estimates.
The device, which industry insiders say sells at loss, is a gateway to Amazon’s burgeoning library of movies and television shows. Thousands of those are available, and unlimited, for Amazon Prime members, who get two-day shipping and bundled media content for $79 a year.
That’s the beauty of the Amazon that Bezos created. Using its significant leverage and vast product range, the company is able to absorb short-term losses and turn them into profits, and customer loyalty, over time.
Of course that strategy doesn’t come cheaply.
The number of full- and part-time employees at the company soared from 31,200 at the end of the third quarter in 2010 to 51,300 at the end of the third quarter in 2011. That surge came as the company moved to add 13 distribution centers world-wide to speed delivery of the goods demanded by its customers. Amazon has justified the buildup by noting that it hadn’t added any such facilities since the financial crisis of 2008.
“While investments in infrastructure and new products are heavy in the near term,” J.P. Morgan analyst Doug Anmuth says, “we believe they are appropriate for driving long-term growth and they widen Amazon’s competitive moat. Amazon is the best long-term growth story in the Internet space.”
Space race
Born in Albuquerque, N.M. and raised in Houston and Miami, Bezos graduated from Princeton University in 1986 and found employment on Wall Street, rising to vice president positions at Bankers Trust and D.E. Shaw before hatching the idea for an online bookstore and heading west. His Amazon salary may be a relative pittance, and he takes no stock awards, but the company spends $1.6 million on his personal security.
Not one to rest on his many successes, Bezos has also put himself deep into the space race alongside fellow star-chasing billionaires Richard Branson and Elon Musk. His Blue Origin spaceflight company won a $22 million contract from NASA to build systems capable of sending astronauts to the International Space Station.
Though details and progress reports are closely guarded, Blue Origin aims to give the public a chance to experience spaceflight — and, in fine Amazon fashion, to do so at relatively competitive prices.
After that, who knows? Shuttling common folk into outer space would be a tough act to follow, but, if Bezos’s track record is any indication, it would probably be just another steppingstone en route to his next venture.
“We are willing to invent. We are willing to think long term,” Bezos told shareholders last summer. “We start with the customer and work backward — and, very importantly, we’re willing to be misunderstood for long periods of time.”
Shawn Langlois is a reporter for MarketWatch in San Francisco.
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