Amazon.com is arguably the greatest threat ever to traditional retailers like Twin Cities-based Target and Best Buy. The online retailing giant has forced competitors to step up their digital sales efforts and offer perks such as free shipping.
Profits, though, have typically been weak. Amazon's relatively small net income has long fueled questions about its growth strategy and how long it can keep up the pressure on the industry before investors start to sour.
Those questions, however, are fading. Observers say Wall Street continues to give Amazon a pass, mostly, on its profitability, betting that its strategy of pouring money back into the business and exploring more ways to make money digitally will bring investors big rewards down the road. That's why the market believes Amazon is worth more than Walmart, Target and Best Buy combined.
"Jeff Bezos has this magic wand with Wall Street," University of Minnesota business professor Ravi Bapna said of Amazon's founder and chief executive. "He's got a longer leash than anybody else to not make profits, to keep reinventing and building his platform."
Bezos has managed to convince Wall Street that big profits will come but that near-term sales growth is more important, Bapna said. Meanwhile, Amazon gets to keep building what might become the retail industry equivalent of the Death Star, able to vaporize entire entities.
Amazon, which is building a massive order fulfillment center in Shakopee, could not continue at paltry profit levels without Wall Street's patience and willingness to accept Bezos' assurances. Target, for example, typically reports billions in annual earnings but its share price has never topped $100. Amazon generally earns less than $1 billion, yet investors pay hundreds of dollars for a single share.
"That's truly the secret sauce of Amazon, the way Wall Street has been managed," Bapna said.
Skeptics say investors ought to be taking a deeper look at the company before placing big bets on its future.
"The value of the company in the public market is just not tied to reality, I think," said Timothy Green, a writer at the Motley Fool investment website who believes many analysts turn a blind eye to the full cost of Amazon's financing when judging its profitability.
Green and others, however, remain vastly outnumbered. Some 40 Wall Street analysts have had buy recommendations on Amazon's stock of late, according to Bloomberg News. The consensus of analysts is that the stock could rise by about a third to around $760.
They believe Amazon is different and that profits and other traditional measures of value simply don't apply to Amazon as they do to Target or Best Buy, for instance.
"Amazon makes a ton of money and they choose to reinvest in growth," said Wedbush Securities analyst Michael Pachter. Amazon's profits would soar if it weren't spending billions of dollars of the cash it takes in to create and expand side businesses, he said.
Amazon's performance has silenced any debate about its money-making ability, added R.J. Hottovy, retail analyst with the investment research firm Morningstar.
"For the longest time, the question had been can the company turn a profit," Hottovy said. "If you look at the building blocks that we've seen in the last year, whether it be Amazon Web Services, Prime memberships, third-party sales, this company is starting to build a case for solid profitability."
Hottovy estimates about 45 million Americans have Amazon Prime memberships, which get them expedited free shipping, free streaming videos, books, loans and other perks. And Hottovy says memberships tend to get consumers hooked on shopping with Amazon.
"Amazon is frankly the most disruptive player we've seen in the retail space in several decades, certainly since the advent of warehouse clubs in the early 90s," Hottovy said.
Some might think Amazon is an irrational retail competitor, offering consumers ridiculously low prices and costly perks like free shipping. But retail consultant Howard Davidowitz says "there is nothing crazy about Amazon. They are a gigantic powerhouse. And everyone is following and imitating them and trying to play in their ballpark and they can't."
While Amazon has reinvented retail, the company itself is much more than a retailer. Amazon Web Services, for instance, offers businesses a broad range of Web-based computing services, including storage. Such diversification makes Amazon an even more formidable competitor for traditional retailers, said Dale Nitschke, managing partner at Ovative Group and a former president of Target.com.
"They're a brilliantly run organization that has created so many more revenue streams than traditional retailers," he said. "They imagine themselves from a different perspective than retailers do."