Bezos Is the Rich King of a Slippery Hill

Jeff Bezos is the world’s richest person. But he shouldn’t get too comfortable on the throne just yet.

Bezos rode a post-earnings rally in Amazon.com Inc.’s shares on Friday to take the top spot in the Bloomberg Billionaires Index. It wasn’t the first time. Bezos was king for a brief moment on July 27, but Amazon shares slid before the market closed and Bezos ended the day in second place.

The top spot on the Forbes 400 — an annual list of the richest Americans  — has been held by just two people for the last 25 years: Bill Gates and Warren Buffett. Gates made his first appearance at No. 1 in 1992. Buffett made his first appearance a year later.

What might have seemed like a budding rivalry between two titans in 1993 turned out to be a rout. Gates has topped the list every year except 2008, when Berkshire Hathaway Inc.’s stock held up better than Microsoft Corporation’s during the financial crisis. Microsoft shares tumbled 45 percent that year, while Berkshire’s A shares were down 32 percent.

Against that backdrop, Bezos’s coronation is a big deal. Amazon’s stock surged 13.2 percent on Friday, topping out at $1,100.95 and boosting Bezos’s net worth to $93.8 billion — a comfortable $5.1 billion better than Gates.

But Bezos’s second trip to the top in just three months may be a preview of things to come. Compared with  Microsoft and Berkshire, Amazon’s business is gut-wrenchingly volatile. Since fiscal year 1995 — the longest period for which numbers are available for all three companies — the standard deviation of Microsoft’s and Berkshire’s annual revenue growth has been 13 percent and 26 percent, respectively. Amazon’s has been 657 percent.

The difference in earnings volatility is smaller but still enormous. The standard deviation of Microsoft’s and Berkshire’s annual earnings growth since 1995 has been 30 percent and 110 percent, respectively, according to GAAP, or net income reported under U.S. accounting rules. Amazon’s has been 576 percent.

As goes the business, so goes the stock. The monthly standard deviation of Microsoft and Berkshire A shares has been 32 percent and 20 percent, respectively, since June 1997, while the volatility of Amazon shares has been 63 percent.

There are good reasons Amazon has been more volatile than Microsoft and Berkshire. The most obvious is that Amazon is younger. When Amazon was founded in 1994, Microsoft and Berkshire were already established.

A second is Bezos’s penchant for risky adventures. The latest example came in June when Bezos purchased Whole Foods,  its biggest acquisition ever in a famously low-margin industry. Gates, by comparison, was never much of a shopper, and Buffett hunts for highly profitable companies.

And a third reason for Amazon’s volatility is leverage. Microsoft’s and Berkshire’s average debt-to-equity ratio since 1995 has been 13 percent and 25 percent, respectively, while Amazon’s has been 159 percent.

Amazon has compensated investors for the wild ride. Its stock has returned 38.1 percent annually from June 1997 through Friday, including dividends, while Microsoft and Berkshire A shares have returned 10.8 percent and 9.6 percent, respectively.

If Amazon keeps this up, Bezos will eventually be impossible to catch. But the next time Amazon’s results fall short of their lofty expectations, Mr. Market is likely to take Bezos’s throne yet again.

Source: Bloomberg Gadfly, https://bloom.bg/2xAKhgF

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