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The Real Estate Philosopher


Amazon's Travails a Long-Awaited Boost for Retail?

Jul 6, 2022

On June 29, 2017 – almost exactly five years ago – I wrote an article about how to beat Amazon – if you are a retailer.  
 
My thesis was then – and is now – that Amazon was a distortion of the retail landscape brought on by Wall Street, giving it a free pass on not having to make money. Amazon was making essentially zilch – i.e., zero dollars – when one subtracted stock-based compensation – but still had a $450B market cap at that time. Its base online retail business model as the Everything Store had never made money and possibly never would. I also mentioned that I thought the Whole Foods acquisition would be a major disaster for Amazon. 
 
I called the whole shebang – i.e., Wall Street propping up a money-losing company for over 25 years – the Amazon Retail Distortion.
 
In the end, I asserted that at some point, the emperor would indeed be shown to have no clothes and when that happened:

The stock would drop to about 10% of its then-current value of $450B.
Amazon would have to make money like everyone else.
Retailers still alive would finally be able to have profit margins again.

So, I urged retailers to figure out how to survive until the Amazon Retail Distortion finally ended. And in separate articles, I gave some ideas.  

My thesis didn't look that good over the years, as Amazon stock soared and soared and soared. But now, five years later, it is starting to look like I might have been right after all; to wit, I have the following thoughts:

I am pretty sure that Amazon is still making money only on its cloud business.
Its $15B of profit last year is undercut by – get this – about $12B of stock-based compensation, which is around 35% more than the year before.
Articles mention over-expansion and troubles in Whole Foods.
Wall Street is looking harder at tech companies having actually to make money.
Amazon's stock is down from a high of $186 to $110.
Yet its PE ratio is still 53. If you take out the stock-based compensation, I think the PE ratio balloons to close to 400, which is kind of high, isn't it?           

So if you consider stock-based compensation, you have a company earning close to nothing at all but is still worth over $1T – yes, that is Trillion.
 
By the way – I hate people who predict things, and when they are right, crow proudly, and when they are wrong, just shut up – and I don't want to be one of those people. I have to admit that if I am proved right five years after my prediction, my prediction was worth very little, and I can hardly take a victory lap.
 
However, either way, I still think that, essentially, Amazon has become close to a public utility designed to destroy retailers. But I think the game just might be about up. 
 
Does this mean Amazon will go bankrupt and disappear? No – I doubt that a lot – but its days of just using its monopoly power and low-cost model are likely numbered. I think they will have to make money now, just like everyone else.
 
So why am I writing about all of this?
 
For the simple reason that I will stick my neck out to say that it is time to be looking really seriously at retail investing. That includes:

Shopping centers
Malls
Buildings with retail components
Mixed-use development sites that have retailers in them

If I am right that the Amazon Retail Distortion is finally going to come to an end, then retail as an asset class is likely undervalued in a general sense.
 
Bolstering this suggestion is the fact that the media – and just about every article one reads – is trashing retail as an asset class, which I think makes investment predictions in this space overly negative. With the overall concept of buying low and selling high, retail provides a fertile ground for the former (buying low). Of course, your investment acumen, diligence, and underwriting will prove out the latter (selling high).
 
However – a word of obvious caution remains. Retailers who are just middlemen between product producers and people who walk by their shops are doomed and probably already out of business. See my article on this – also in 2017. Of course, I would avoid those types of retail investments. 
 
I end by predicting Amazon will be pressured to make money, thereby raising prices (a lot). That will end the Amazon Retail Distortion and equalize the playing field in the retail landscapes. And among the wreckage, astute investors will find some solid ways to create upside.
 
Bruce Stachenfeld, aka The Real Estate Philosopher™

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As the Chairman of Duval & Stachenfeld – a law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the Chairman of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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