Imagine living in a city where your fourth largest employer suddenly found its stock price had collapsed 70 percent?
Are you thinking Chrysler and Detroit?
Certainly, the rust belt is full of examples of too much concentration in a single company and industry. But I’m actually referring to Amazon in Seattle.
The City of Seattle is struggling through an unprecedented infrastructure crisis, exasperated by a stalled tunnel project, foreign-national single-family housing purchases, and unexpectedly strong employment growth.
For the first time, Amazon let the world know that it now has around 24,000 employees in Washington state, and in three months, Amazon grew worldwide employment 18,000 to over 183,000.
Amazon hired all these employees while at the same time making no money over the last twelve months and just $92 million in profit for the second quarter.
I’m more than happy to debate the merits of GAAP versus non-GAAP financial metrics, but I’d rather talk about bubbles and financial risk management; and do so from the City of Seattle’s standpoint.
Regarding non-GAAP metrics, let me simply say that low margins, recurring capital expenditures, and dilutive non-cash stock awards are all real economic headwinds to growth stock valuations. Eventually, these headwinds will impact the stock price; especially when the Fed begins tightening liquidity.
It’s up to everyone, especially the citizens in Seattle to properly gauge the risk a large money-losing company may represent for the community. Mountain View, California just made a similar risk decision with Google, limiting the search giant’s desire to grow and dominate the city. And Google is profitable! Seattle should do the same with Amazon.
Amazon is moving forward on plans to develop enough commercial office space to house as many as 70,000 employees, and occupying as much as 25 percent of all downtown office space in Seattle.
It’s an unprecedented concentration for any major city. Is it a blessing, or is it a curse?
Well it’s both, because the billions of dollars in current dollar infrastructure investments, which the City of Seattle, King County and State of Washington will spend, will need a solid future tax base to pay for those expenditures.
It’s appropriate, and I would say incumbent on government, to manage risks where feasible due to employment concentration.
So what would Amazon do to suddenly become profitable? Increase prices? Dramatically shift to higher margin activities? Reduce expenses? Layoff employees?
I think Amazon will lower expenses primarily through layoffs.
So let’s just take a look at an analysis for what employment rationalization at Amazon might look like, so that Amazon might turn a profit:
It’s up to the reader to pick the appropriate PE multiple and stable stock price, but remember Microsoft and Google have multiples around 30, and Apple and Walmart are around 15.
Because of its losses, Amazon doesn’t even have a PE multiple. The most difficult assumption is the average compensation plus benefits per full time equivalent (FTE) rationalized.
Amazon doesn’t share detailed full-time equivalent employee information, and the assumption really depends on who at Amazon would be considered expendable.
My assumption is that it’s more the Seattle technology worker who’s expendable than the line fulfillment worker, although both would be impacted.
If you’re really interested in valuing Amazon, then there are also some really good “Sum of the Part’s” analyses out there which also have trouble getting to Amazon’s value based only upon revenues. Remember, expense reductions no matter how necessary will inevitably also impact revenue growth.
Seattle just went through half a decade’s worth of tough times due to WaMu shutting down. Over and over again, it’s not difficult to look back in the rear view mirror and see where there were warning signs about excess.
WaMu, Lehman, WorldCom, and Enron are all cases in point. Market excesses absolutely occur and the market from time to time doesn’t see it coming until it’s too late.
That’s why diversification is rule number one in investing, and it should also be rule number one for urban development.
For Seattle, Amazon is both a blessing and curse, and the many vibrant technology companies growing in Seattle deserve not to be crowded out.
Amazon will eventually become profitable, and it’s reasonable to assume that rationalizing 30,000 employees or so will be the direction Amazon will be forced to take.
Apply an economic impact factor to that lost employment base of 1.5 to 2.5 times, and Seattle will see significant employment impacts.
Seattle needs to make historic infrastructure investments, and then support those investments through a growing diversified employment base.
Amazon represents too much employment risk to Seattle for the city to continue to support its growth, at least until Amazon learns how to be profitable.
John Spaid is an accomplished financial and accounting executive with nearly 30 years of professional experience in executive management, public company finance, accounting, mergers & acquisitions, information technology and leadership.