Principally, I object to Amazon not making any money, or at least not making any accounting profits. Few people are dissuaded from investing in Amazon on these grounds, though.

Yesterday afternoon, Amazon announced it was going to build out 300-400 physical bookstores.

Paul Vigna of the Wall Street Journal tweeted: “So Amazon spends 20 years running bookstores out of business and now wants to open bookstores? That's playing the long game.”

I tweeted something else:

“So f------ dirty.”

Crass Capitalism

That might sound strange coming from someone who has certainly earned his free-market chops. But this is a new feature of shareholder capitalism, where a company that makes no money gets to grow and put other companies (which make money) out of business.

Let’s go back before the Internet and before computers. You have Bookstore Company A and Bookstore Company B. Let’s say they earn the same amount of revenue, approximately. Bookstore Company A has a smart operations research guy working for it who manages to make the business more efficient, from handling cash to inventory to distribution. Because of this, Bookstore Company A is able to lower its prices and yet still maintain its margins, and eventually put Bookstore Company B out of business.

That’s capitalism, the social Darwinism aspect of it that people seem to love. The smart fish gobble up the dumb fish.

Here’s the 2016 version of capitalism:

You have Bookstore Company C, a plain vanilla brick-and-mortar bookstore, and Bookstore Company D, an Internet bookstore. Since people love anything to do with the Internet, they give Bookstore Company D a higher valuation (or an infinite valuation). The cost of capital for Bookstore Company D drops to zero, and it can use its stock to finance acquisitions and grow at stupendous speed.

In the beginning, Bookstore Company D was actually less efficient than Bookstore Company C, but since Wall Street has given Bookstore Company D free capital and all kinds of time to expand (without ever turning a profit), it wins the race and puts Bookstore Company C out of business.

That’s messed up.

Call me old-fashioned, but shouldn’t you have profits first, then growth? Use the profits to finance growth?

But that’s not how it works anymore. Snapchat is worth $19 billion, and nobody knows what the point of it is. Uber is $65 billion and is breakeven at best. Maybe the poor taxi drivers have a point. They got sconed just like Waldenbooks did. Is Uber a better mousetrap? For sure. But Wall Street (and Silicon Valley) gave it thousands of miles of runway before it takes off (if it ever does).

The Big Idea

People are not stupid. The kids today all want to work at a startup. Why? Because the point of a startup is not to make money. Making money is hard. The point of the startup is to have a big idea that will attract all kinds of VC money so you get that thousand miles of runway and the ridiculous valuation you need for your stock.

That’s not business, people.

So here is the question: This feature of capitalism where you get the idea first and figure out the execution later (if ever), is this a good feature of capitalism or a bad feature of capitalism?

If Amazon were to become a self-sustaining business at a low-growth retailer valuation and the same cost of capital as everyone else, could it compete?

Which is another way of asking:

Could Amazon raise prices by 5% tomorrow and compete? Because that is what they’d have to do.

Sometime in the near future, Amazon will get that low-growth valuation. It might even happen as a result of this physical bookstore idea. If you’re a physical retailer, why get Internet retailer valuations?

I am one of these annoying purists who thinks that 20 years is too long to wait for an accounting profit. Periodically, the Street will go through these convulsions where Amazon fails to meet its ridiculously low expectations, but they will eventually come up with some new idea (look over there—drones! A magic wand!) and people have complete amnesia about wanting profits and go back to running up the stock.

Either it’s, as Paul Vigna describes, the longest of long games, or it’s an elaborate con. I honestly don’t know which.

The test of whether it is a con lies in Amazon’s supposed pricing power. If you believe that the company can someday raise prices and turn a profit, it is not a con. It is a real business and worth waiting for.

However, if you think that Amazon is uncompetitive in the event of a price hike and everything falls apart, well…

Don’t even think it. I would rather bounce a basketball through a minefield than short that stock again.

subscribers@mauldineconomics.com