THE INC. LIFE
Jeff Bezos Is About to Lose Half His Net Worth. Amazon Needs to Do Something Monumental to Win It Back
BY Peter Cohan - 05 Feb 2019
Repealing the law of large numbers is the key to doubling Amazon’s stock price.
PHOTO CREDIT: Getty Images
With a net worth of $134.5 billion as of Friday, Amazon founder and CEO Jeff Bezos is the world's richest person. But due to his pending divorce from his wife, MacKenzie, his net worth could soon be cut in half -- to $67 billion.
If that's not enough of a headache, Amazon's stock has lost 21 percent of its value since it peaked in August 2018 at $2,050 a share. That drop has cost Bezos about $28.2 billion.
Amazon's growth is slowing. On Friday, Amazon shares plunged 5.4 percent in the wake of a lower-than-expected growth forecast and a surge in expected operating expense to help Amazon build new businesses. To be sure, there was good news in Amazon's report -- its revenues and profits for the December-ending quarter were better than expected.
I'd guess that Bezos could earn back the $67 billion loss of net worth if Amazon's revenue growth rate accelerates to 30 percent. Here are three things he'll need to do to make that happen:
1. Executing Disciplined Growth Strategy
All companies, whether giants like Amazon or startups, must invest in new growth opportunities. That's because every product goes through life cycles. Initially sales are slow, then product sales spike rapidly, and ultimately slow down and decline.
In order for companies to keep growing, they must invest in new growth opportunities that are on the upswing before the original ones mature.
Investors have forgiven Amazon's limited profitability because it was good at tappiing into new growth opportunities. Indeed Amazon was able to grow very quickly -- at a five-year average rate of 23.8 percent, far faster than its latest 14 percent growth forecast.
If Amazon boosted its revenue growth to, say, 30 percent, investors would be pleasantly surprised. To do that in 2019, the company -- with roughly $220 billion in revenue over the last 12 months -- will need to add about $66 billion to its revenues.
That's roughly as much revenue as PepsiCo generated last year. Doing so would demonstrate that Amazon has repealed the law of large numbers -- as a company gets big, it becomes impossible to sustain high growth.
2. Targeting Large Markets
This leads to the question of where to find such markets. This is a concern for companies of all sizes. It's probably difficult for your startup to gain more than 10 percent of a market. So, you need to target markets that are at least $1 billion to gain the additional revenues you need.
Companies like Amazon must target much larger markets that are growing rapidly. For example, Amazon is currently going after the $505 billion U.S. e-commerce market, the $176 billion 2018 cloud services market, and the $100 billion market for digital advertising. (Those statistics are from Statista, Gartner, and the IAB Internet Advertising Revenue report, respectively.)
My prediction: Given Amazon's dominant market share in e-commerce and cloud services, it will probably keep growing -- but not enough to boost its top-line growth rate. It won't gain enough market share in digital advertising to make a difference, especially because Facebook and Google are such effective competitors.
3. Gaining Market Share
Merely saying you want to tap into a new market is not enough to gain market share. Instead, you need to offer customers a better deal. You need to learn how they compare competing vendors and make yourself seem like the most attractive option.
Amazon has done that brilliantly in many industries. As I wrote in my book Disciplined Growth Strategies, Amazon's lower prices, wider selection, and faster delivery have helped it gain share in consumer retailing. It now controls 49.1 percent of all e-commerce, according to eMarketer.
It's dominating another market, cloud services, where AWS has 40 percent of all industry revenue, according to Synergy Research. What's more, Amazon -- which lags Facebook and Google in digital advertising -- has been proving itself an able insurgent with 4.1 percent share, according to eMarketer.
But all this wouldn't be enough to boost Amazon's growth rate to 30 percent. For that, it needs to gain a big share of another huge market. And in order to capture that share, it might need to develop new capabilities.
A case in point is the $453 billion prescription drug business which is growing at a 2.4 percent rate, according to IBISWorld. Will its $1 billion acquisition of PillPack and other moves be enough for Amazon to take that market share from Walgreens (33 percent share) and CVS (29 percent)? Or will Amazon need to develop new skills to win there?
To regain the lost half of his net worth, Bezos will need to answer such questions in the affirmative. The way he responds to this challenge could be a model for all companies -- large and small.