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License to lose: why investors think Amazon can turn grocery into gold

Today was remarkable. The world's largest retailer bought the nation's largest high-end grocery chain for almost $14bn. This was surprising. Amazon is a company with two amazing (ha) businesses: the dominant online retailer and the dominant cloud infrastructure provider. Why on earth would it acquire a struggling retailer in a brutally competitive category? 

More fascinatingly, given that few anticipated the acquisition (a sign that, to outsiders, it wasn't particularly logical), why did financial markets react the way they did? A slew of public companies, ranging from Kroger to Walmart to United Natural Foods (a major Whole Foods Supplier) shed billions of dollars of market value, in total more than the value of Whole Foods. More shockingly, Amazon gained more than the value of Whole Foods on a day when markets were otherwise flat. It is important to remember that Amazon is paying cash for the acquisition: intrinsically the value of Amazon's stock should not have budged on the news. Investors voted with their dollars that Whole Foods is worth far more as part of Amazon than Jeff Bezos paid for it. 

There are lots of ways to explain this reactions, and all of them have some basis in truth. Amazon is a great operator with a long track record of success. Markets are blatantly exhuberant about the company's future prospects, with the stock market near all time highs and large cap internet companies firmly leading stocks higher.

That said, I think there's another factor at play: Amazon, through success and deft marketing, has a crucial competitive advantage shared by no other companies of its size: it has a license to lose money. 

For over two decades now, Jeff Bezos has compounded the company merrily along while stubbornly refusing to show material profits to Wall Street. By now, investors accept it readily: so long as Amazon continues to grow, the company will fetch a jaw dropping valuation regardless of the bottom line.  This is common practice for startups, but Amazon now ranks as the largest company in history not valued on earnings or cash flow. 

So how does this relate to Whole Foods? When platforms are shifting and market share is newly up for grabs, the company investing the most aggressively wins the bulk of it. The market trusts Amazon to execute on this strategy, as it has over and over. Grocery seems set to be the next major front, and investors approve. Not only do they expect Amazon to turn the category into a war zone, they expect it to triumph. Even more worrisome is the thought that winning might mean something different for Amazon than it does for traditional grocers: perhaps it views grocery as a customer acquisition vehicle with not intention of ever trying to make money in the category. Regardless of the ultimate plan, no one wants to bet on companies forced to defend their bottom lines against a leviathan with a license to lose as much as it takes to win. 

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