Andrew Jassy Amazon’s Next Bob Nardelli?

So this morning Amazon turfed numbers and guidance.  The company missed on both revenues and profits for Q3.  The company explained that the fourth quarter looked even worse.

The horrific news for acolytes of Amazon’s stock is the company will have to pay its workers a living wage more.  These increased labor costs will be incurred in an effort to support the wholly unsustainable customer service made famous by founder Jeff Bezos.  As the days of employees depending on food stamps ends, so does the company’s days of booking GAAP compliant non-cash profits.

We find this doubly concerning for owners of Amazon stock.  We have written both in the professional and academic spheres, about how Amazon’s use of stock based compensation and lease accounting has created misleading free cash flow numbers despite being GAAP compliant.

We wonder what the world will think of a $1.7 trillion dollar retailer that burned -$8.8bn in cash after making good on the principal repayments of finance leases and financing obligations.  Even more remarkable, if you deduct the stock based compensation from the statement of cash-flows (as we believe will become inevitable), the firm burned nearly -$20bn.

Bob Nardelli: The Brightest Future for Andrew Jassy?

When Jeff Bezos, Chairman and Chief Executive Officer of Amazon stepped down and handed the reins to Andrew Jassy, former head of Amazon Web Services we thought the timing phenomenal.  For Mr. Bezos.

Andrew Jassy’s transitioning to the executive of all-things-Amazon strikes us as incredibly similar to Bob Nardelli’s taking the helm of Home Depot in December of 2000.  We do not say this to disparage either man.  Quite the contrary.

Our research, ranking tools, methodologies and beliefs all stem from the field of Behavioral Finance.  To simplify that into one dumb phrase we will explain it as follows.  Market mispricings happen constantly because the prices are set by human beings who are emotional and prone to manic highs and lows.

In Bob Nardelli’s case, he took over Home Depot at a point when expectations were running high.  December 2000 as luck would have it.  According to Bloomberg, Home Depot’s fully diluted market cap was $130 billion.  The stock traded at 46x earnings and 3.4x sales.

From December of 2000 to January 3rd of 2007 when Nardelli officially stepped down, here is what Bob Nardelli, a legend from General Electric, achieved during his time at Home Depot.  He grew sales by over 100% and grew earnings per share by 179%.

You’d think that was pretty good right??   I mean clocking an 11% CAGR in sales and a 16% CAGR in EPS is no small thing.  Yet Nardelli was named “Worst American CEOs of All Time” by Conde Nast and was effectively ousted by the Board.  A withering article from Wharton delved into Mr. Nardelli’s many failures as CEO.

Early in the article they note “Wharton faculty members and other experts say Nardelli, a talented former executive at General Electric who came within a hair’s breadth of replacing Jack Welch as head of the giant conglomerate, brought the wrong toolbox to the job after he was recruited for Home Depot’s top spot in December 2000.”[1]   The article is loaded with various explanations for why Nardelli failed.

Don’t cry for him.  He walked away with a $210 million compensation package. Here’s what happened to Home Depot’s revenues, earnings and stock price over Nardelli’s tenure.

Home Depot Revenues Earnings and Multiples

So what happened?  Nardelli served as the CEO during a period in which a stock priced for tremendous growth fell….despite Nardelli delivering tremendous growth.  At some point, even for the best companies with the best managements, the multiple you pay for the stock matters. 

The new Amazon CEO Andy Jassy will have his work cut out for him.  The expectations baked into Amazon’s stock price make Nardelli’s task look easy.  Amazon trades at 67x trailing earnings – a 50% premium to Home Depot when Nardelli took over.  The company just announced they will not make any money in their critical Q4.  The market cap is at an astounding $1.7 trillion.

We wish the CEO of Amazon well.  But as has been our case, we have highlighted companies like Wasabi, that have run punchy ads noting they are “10x faster and 80% cheaper than AWS” while promising to “never buy a grocery store.”  Cloud computing has been the source of virtually all of Amazon’s profits.  Like it or not, Andrew Jassy is betting that AWS will not become the next “Radio On the Internet” as portrayed in this hilarious bit from Silicon Valley.

For the sake of the high hopes of the many retirement accounts that hold massive stakes in the world’s most expensive loss-making retailer via index funds, we cannot wish Amazon ill.  But as we have discussed, the history of innovation is unkind to incumbents.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about SBC finance 

[1] Home Unimprovement: Was Nardelli’s Tenure at Home Depot a Blueprint for Failure

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October 29, 2021 |

Categories: Raucous Rants

October 29, 2021

Categories: Raucous Rants

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