“One day, Amazon will fail. Amazon will go bankrupt.”
That might sound like a haphazard prediction at first. After all, Amazon (AMZN) is the fourth-largest company in the U.S. today. It’s valued at more than $1 trillion.
The story gets more interesting when you learn who uttered those words…
Amazon founder and former CEO Jeff Bezos.
Now, don’t panic if you own AMZN shares. Bezos didn’t specify when the company would go bankrupt. He just predicted that it would happen “one day.”
And Bezos was acting more like a motivational speaker than a business forecaster…
In short, he was answering a question at an all-hands meeting in November 2018. The question focused on lessons from prominent retail failures such as Sears.
Bezos reminded employees that no company is too big to fail. And he urged them to “delay that day for as long as possible.”
Still, as investors, we should take Bezos’ failure prediction to heart…
The simple reality is that even if legendary growth stocks like Amazon don’t die anytime soon, they will fail. And we don’t need to wait years or decades for it to happen.
For us, it’s not about bankruptcy and liquidation in the distant future. It’s about seeing and adapting to the beginning of a path in that direction…
Think of it in terms of a life cycle…
Everyone grows quickly in the beginning. The pace of growth levels out as time passes. It eventually peaks. And then, the same thing happens in reverse until death.
Businesses act the same way. And Bezos’ comments in 2018 remind us that the second half of the cycle is inevitable. At some point, every company will stop growing as quickly.
But investors always forget this lesson. Instead, they panic when a company’s growth is questioned. And in turn, the stock plunges. It happened a few different times recently…
On February 3, social media giant Meta Platforms (META) dropped 26% on news of Facebook membership declines. On April 20, streaming powerhouse Netflix (NFLX) crashed 35% after disclosing a bigger-than-expected membership loss.
And then, on April 29, Amazon’s stock slid 14% after the company said its growth couldn’t maintain the lockdown-boosted level from the COVID-19 pandemic. Even worse, Amazon indicated that e-commerce growth is cooling in general.
These companies didn’t do anything wrong. They’re just doing what nature demands.
They’re aging.
Humans don’t grow between ages 19 and 20 the way they did between ages 1 and 2. And businesses that rise to “blue chip” status don’t grow the way they did as startups.
Maybe Meta Platforms, Netflix, and Amazon just passed their respective peaks. And now, they’re taking the first steps on the long, inevitable path toward their ultimate deaths.
Or perhaps they’re still rising but at a much slower pace than before. Perhaps they’re just getting closer to the peak. In the end, for investors hoping for long-term growth, though…
That’s still a massive danger.
Fortunately, we can look for signs of aging. And we can prepare for the inevitable…
Using a data-driven model like our Power Gauge system is critical. It can help us find (and avoid) peaking or declining businesses whose reputations haven’t caught up to reality.
On the flip side, it can signal when it’s OK to own past-their-peak businesses. After all, reputation and reality do line up from time to time. That creates buying opportunities.
In the end, our takeaway is simple…
Follow the data, not the reputation. If a company is starting to “age out”… be careful.
Good investing,
Marc Gerstein
