Where Bezos Leads, Amazon Shareholders Blindly Follow

Investors think Jeff Bezos has the magic touch. Few companies other than Amazon could announce a $14 billion takeover of a mature firm, give no details of why they are buying the very business model they're trying to disrupt, and have their market value rise by more than the takeover price.

Since Amazon said last week it would buy upscale grocery chain Whole Foods Market, multiple theories have circulated about what it is up to. Some think it is about convenience shopping. Some that it is about customer data. Some suggest logistics, the grocery supply chain, or an extra distribution channel for the company's growing range of own-brand electronics. Still others think Amazon hasn't really got a strategy yet. What all seem to agree on is that Amazon will make it work, and other grocers should be cowering in the their freezer cases.

Amazon doesn't inspire the near-religious fervor found among Apple's true believers, but the online-shopping-to-movie-studio conglomerate does depend on faith, hope and charity. Faith in Mr. Bezos's inventiveness provides the essential underpinning for Amazon shares, while investors hope that he doesn't really think of the company as a charity to finance wacky new ideas.

Amazon -- like Google and Facebook -- has a successful core business, pays little heed to shareholders and plows its spare cash back into expansion and research and development rather than dividends. In the 20 years since it listed it's made a total of $5.7 billion in net income, more than half of that in the past two years. It's spent $64 billion on R&D in the same period, including $4.8 billion in the first quarter alone.

Mr. Bezos set out his principles in 1997. "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions," he told shareholders.

Investors have bought in to the idea that by not maximizing profit in the short term, Amazon can maximize profit in the long term -- even if, 20 years later, the long term still hasn't arrived. At most listed companies, the exact opposite is true, with management under constant pressure to boost dividends and buybacks.

"It's become easier to invest as a private company than as a public company," says James Anderson, a partner at Edinburgh-based Baillie Gifford & Co. whose biggest holding is Amazon. "There's a small number of companies that appears permitted to do this, and it's very difficult for most other public companies."

Holding shares in Amazon requires the belief that Mr. Bezos will find enough good investments to offset the mistakes -- such as cash Amazon put into Pets.com, the epitome of badly-thought-through dot-com bubble catastrophes. So far, just one of his successes would cover a lot of mistakes, with Amazon Web Services alone making almost 90% of operating profit in the first quarter.

Investors also need to believe that eventually Mr. Bezos will start paying out some of the cash. The value of a company ultimately comes from future dividends -- and Amazon has yet to pay a cent.

The long-term danger is that instead of paying dividends, the cash is wasted. History is littered with examples of chief executives indulged by shareholders who become so enamored of their own brilliance that they fritter away shareholder money on wasteful expansion.

So far, the founders of the big tech stocks have mostly made good decisions, and while they aren't exactly humble, hubris isn't apparent either. But their secrecy -- on display again with the lack of explanation of the Whole Foods deal -- shows a degree of contempt for investors.

The short-term danger doesn't involve Amazon, but its shareholders. Investors seem to have suspended disbelief. However brilliant Mr. Bezos, it's extraordinary that he is able to launch a big takeover without offering any strategic or financial rationale. The same glass-half-full attitude was behind shareholder acceptance of nonvoting shares in the Snap IPO. When doubt returns, as it always does, Amazon shares will suffer.

In many ways Amazon is an exemplar for investors. In most companies shareholders should encourage more R&D spending, worry less about quarterly targets, and tell managers to focus on the business, not the share price. In Amazon's case, the willingness to accept no explanation at all for a $13.7 billion purchase suggests faith has run too far.

Write to James Mackintosh at James.Mackintosh@wsj.com

(END) Dow Jones Newswires

June 22, 2017 12:27 ET (16:27 GMT)