What if Amazon is the trigger for the next tech wreck?

AmazonbooksWith the levels of hype around the US retailer and predictions that “Amazon will decimate retail as we know it”, it is worth considering the opposite alternative as well – at least in the interest of balanced contemplation. Let’s be clear however. There are no signs at all right now that Amazon is in any way facing economic collapse or imminent failure, but what if….

The current frenzy around Amazon is based on the theory that top-line growth – as distinct from trading profit growth – will at some point make Amazon the undisputed heavy weight champion at retail and that at that point in time they will be able to transition market dominance into high yielding profit.

It has taken Amazon twenty years in the United States to achieve a market share of nearly 4 per cent of all retail sales. While its growth is strong – 24 per cent year on year – Walmart’s online growth is tracking at 69 per cent. And Walmart makes a huge profit. It also declares dividends. Investors are massively backing a future payoff for Amazon. In most other markets around the world Amazon at present has less than 2 per cent market share of all retail sales and its margins are thin.

The usual rules of investment do not apply to Amazon. Something that seems to only apply to technology stocks today, as it did between 1997 and 2001 when we saw technology stocks climb to valuation levels, which had nothing to do with traditional EBIT multiples. The “belief” in Amazon is about a future that may or may not eventuate.

So what if it doesn’t? And what if the over-arching investment cycle turns and investors – who could previously justify their support of Amazon based on re-valuing the stock and using dividends from other holdings in their portfolios to pay returns to investors – get desperate about the need to drive greater dividend streams to pay returns to investors and earn their bonuses?

When patience runs thin and the luxury of taking the ‘big gamble’ is removed, the market turns. The biggest bet on applied technology in the ‘age of disruption’ is Amazon. Therefore it could very well be the trigger that sets off the next ‘tech wreck’ – a correction many analysts are saying is overdue.

From a book re-seller with grand ambition to its present day position as a major player, Amazon has made great progress and changed the way many retailers and suppliers do business. However it isn’t the only heavy weight contender and it has yet to deliver real returns to shareholders. Hype – as most seasoned analysts and investors will tell you – is a distraction smart people can do without. Salesmen love it. Canny businessmen don’t.

Study Amazon. Learn from it. Improve your own game because the only thing that matters is the real competitive context and how customers react to it. But don’t get swayed by hype and the wall of noise that is modern media coverage. Amazon could one day deliver. Or it could be the next trigger for a tech wreck.

Only time will tell and in the meantime you have to build your customer franchise and make the profits that you can re-invest into your business growth. Because – unlike Amazon – no one will give you cheap investment capital on a promise.

Peter James Ryan is head of Red Communication and can be contacted on (02) 9481 7215 or at [email protected].

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