Amazon's stock price tumbled temporarily on Thursday after the company reported a 28 percent decline in profits for the third quarter, compared to the same quarter last year. The company also forecast much lower profits in the fourth quarter of 2019 compared to the same quarter in 2018. 

Those results led analysts and expert observers to proclaim that the company had shot itself in the foot with its decision to move from free two-day shipping to free one-day shipping on Prime orders, a benefit it began rolling out in June. Amazon reported that one-day shipping had raised shipping costs even more than the $800 million the company forecast in the third quarter--and that the fourth quarter (which includes the holiday season) would see shipping costs increase by $1.5 billion over last year's fourth quarter because of it.

So perhaps it isn't surprising that Amazon's share price plunged by 10 percent after the announcement, while reporters wrote stories with headlines such as "Amazon is delivering your package faster, and that's tanking its profits." The prevailing expert viewpoint, at least on Thursday, was: Bad move, Amazon! One Forrester analyst said this of the company's new higher shipping costs: "For what? Is that necessary? Who needs Cheetos that fast?"

But I would venture to say that Amazon CEO Jeff Bezos (who was very briefly unseated as the world's wealthiest human when the share price fell) doesn't care much about these comments because he's been through this exact scenario many times. Investors don't seem to care that much either--after the initial plunge, Amazon's share price rebounded on Friday and ended the week down about 2 percent from where it started. Like Bezos, investors whose memory goes back more than three months know they've seen this movie before.

Was Amazon stock priced too high at $260?

Like, for example, in December of 2012, when Travis Hoium at the Motley Fool noted Amazon's slowing revenue and profit growth, argued that this whole Prime free shipping idea was too much of a drag on Amazon's profits, and concluded by declaring: "With income falling and competition only getting stronger and smarter, I think these questions are reason enough to stay away from Amazon's stock. In fact, I've shorted it myself."

At the time, Amazon stock was trading at around $260. Right now, despite last week's disappointing earnings announcement, it's at around $1,750 in after-hours trading.

If there's one thing smart observers and smart investors understand about Jeff Bezos it is that he's willing to ignore the short term and manage for the long term. He's always been happy to forego this quarter's profits in favor of world domination five or ten years from now. So far most of his bets have paid off, and I believe the bet on one-day Prime shipping will as well. 

As it happens, the Sunday before Amazon's earnings announcement, I had a one-year-old's birthday party to attend. I inquired what she (or her parents) might like, and her grandmother suggested a Target gift card. That seemed like a good plan--there was actually a Target on the way to the party--but out of idle curiosity on Saturday afternoon, I did a little online research about the best toys for one-year-olds. I immediately became obsessed with something called the Tobbles Neo which looked like a simple and wonderful thing for a baby to play with and unlike any other toy I'd ever seen. None of the big box stores within a 40-mile radius had one. But Amazon did, and it promised to deliver it the following day, even though it was a Sunday. And so I bought it.

I'll just note for the record that by offering one-day Prime shipping, Amazon gained a sale, and Target, one of its biggest competitors lost one. No, I didn't need overnight delivery of Cheetos, and strictly speaking I didn't exactly need the Tobbles Neo either. But I was quite pleasantly surprised that I could get one.

Love him or hate him, Jeff Bezos usually seems to know what he's doing, and I believe he very much knows what he's doing with one-day Prime shipping. And that betting against him is no smarter today than it was back in December 2012.

Published on: Oct 27, 2019
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