Amazon, and Wall Street's shortsighted stupidity

wall street sign stock exchange stock market manhattan financial district 000003381718
Credit: iStockphoto

Wall Street has no collective memory. Consider Amazon's infrastructure investments. Wall Street is drooling now, but not so long ago it thought they were a terrible idea.

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As I sit here reading all of the glowing financial pieces about Amazon this week, it's hard to not sit back and think, "How can Wall Street employ so many smart people and yet be so consistently stupid?"

As The New York Times link above illustrates, Amazon is doing remarkably well in e-commerce — with more than a little financial help from the cloud — and has invested so heavily in infrastructure for so long that it might actually have erected long-term barriers to entry.  That is something that investors in Walmart and Target have to face.

The reason I am saying that Wall Street acts stupidly is that it has no collective memory. Consider, for example, those infrastructure investments Wall Street is now drooling over. When Amazon was making those investments, these same Wall Street folk thought they were a terrible idea.  

And Amazon isn't dominating solely because of those infrastructure dollars. It is also willing to try wacky concepts that would otherwise never get a chance with a multibillion-dollar retailer and, in something that Wall Street should appreciate, shut them down very quickly when they don't work out.

Although I love the infrastructure investments, Amazon's software investments — analytics and one of the deepest CRM programs anyone has done anywhere — are what are truly fueling its growth. The infrastructure is merely supporting that growth.

The lesson that Wall Street has refused to learn and will probably miss again despite Amazon's current success is that in almost every situation, a business simply cannot cut and slash its way to profitability.

That is the path to the financial death circle. Sales are weak so the company lays off people in customer service. That makes hold times increase, which further frustrates customers and makes them even more likely to go elsewhere. Then product development teams get slashed and fewer new products come out and tech glitches in existing products take longer to get fixed. In effect, this slash process guarantees that low sales will drive even lower sales.

Remember this circle the next time Wall Street cheers and stocks soar when a company announces massive layoffs.

Yes, there are indeed isolated pockets of true waste and needless redundancy in most large enterprises. But those bureaucracy-enabled inefficiencies are few, and I've yet to see a company that has been able to eliminate those without also cutting back on personnel and other resources whose loss will hurt the company's competitive position.

We can and should applaud Amazon's current efforts, but let's also support the investments that enable such successes — and support them in other companies. Are such investments always appropriate? Of course not. But that is precisely where boards and Wall Street analysts need to weigh in, making sure that the investments do indeed have viable long-term prospects.

And that's the key word: long-term. What is really going on here is Wall Street's fanatic focus on quarterly figures. You can't run a huge global business when you need to be a winner every 12 weeks.

All analysts know that investments will depress profit numbers in the near term — when they are responsible for the stock price performance — and will deliver rewards, if any, way down the road, when covering that particular company will likely be some other analyst's job. As long as Wall Street can't look beyond the quarterly calendar, it will almost never be comfortable with the kind of investments that Amazon made.

Takeaway? Invest overseas. Or only go with privately held firms.

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