Amazon

Amazon is one of the wonderful companies you can study timelessly. There's also something new happening in the jungle.

Years ago, when I was in college, I studied Warren Buffett and the Berkshire business model. At first, this seemed like a good deal. It taught me a lot about investing. Specifically value investing. Mastering the fundamentals was important early on. It taught me about cash flows, balance sheets and how to think about investments overtime. My biggest takeaways were the valuation process and how to discount ideas.

But the reality is the Benjamin Graham way of investing is out-of-date and boring. Equity valuations are no longer cheap. There has been an abundant amount of cash in the markets. And combined with technology, there is a new wave of technology stocks and valuation methodologies.

Amazon's capital record

Jeff Bezos has proved you can build better businesses that can compound capital overtime. Now it's not fair to compare Berkshire vs Amazon from inception. They are two different business models. But it is important to understand how they deploy capital. Because of Amazon's ecommerce business model, they are able to invest heavily into high returning projects. It also helps that they have a negative working capital business model.

But the magical part is Amazon has been increase returns overtime. Yes, compounding returns has resulted in a bigger network effects. Which in lies the difference between the Amazon and Berkshire business models. Warren is constantly looking for new, higher returning businesses to invest in. Even though Berkshire is a primarily insurance business, he needs to invest premiums into more diverse businesses.

Which Berkshire to go horizontal into new business niches. Huge learning curve every time you need to expand. The only relation the Berkshire holdings have is the free cash flow gets routed back to the parent company. Not much else is in common. It's a very decentralized.

However, Amazon has a similar approach but focused on a singular acquisition channel (Amazon.com).

Bezos' laser focus on the 'customer' has given Amazon the network effects necessary to compound capital. This allowed Amazon to build fulfillment centers and computing servers. Risky but targeting one customer is an excellent way to drive revenue expansion. Buffett did not have the tenacity to do this. Most people do not. It's risky and probably hasn't paid off as well for most business owners. Berkshire's business model is a more secure way to compound capital over a long period of time.

Amazon's expansion plan

Amazon's push into retail caught everyone off guard years ago. But looking back it has become a natural expansion of their online business model. And you know the company would never do it in a typical fashion.

First it was with Amazon Books which I don't think does too well. However the acquisition of Whole Foods and development of Amazon Go stores has been amazing. The entire hands-free checkout process is a fantastic experience. I recommend everyone try it.

But now Amazon is doubling down on healthcare. They have launched Amazon Pharmacy, RxPass, Amazon Clinic and One Medical. The telehealth platform and hospital network integrations are a big deal. More to come on this soon.