By Greg Ip
When Amazon.com Inc. announced Friday it was buying Whole Foods, the stock market got a taste of something long missing: volatility.
The turmoil, however, was confined to retail. While the two companies' stocks rose sharply and their competitors' tanked, the rest of the market remained placid. Indeed, months of historically low market volatility has begun to look like dangerous complacency.
Yet there is another, potentially more troubling explanation: stagnation. Muted markets may be the inevitable product of steady, sluggish growth, low and predictable interest rates, declining business startups and failures, and decreased competition. In other words, the problem is, there aren't enough Amazons disrupting the stock market and the economy.
Since Jeffrey Bezos founded Amazon in 1994, he has put expansion and innovation ahead of profit. In its early years, free cash flow -- cash from operations minus capital spending -- hovered around zero. Mr. Bezos approaches new products like a venture capitalist. Many will flop (like the Fire smartphone), but some will be home runs (such as Amazon Web Services, its cloud computing arm).
Amazon launched Prime, which offers free delivery in exchange for an annual fee, in 2005. John Blackledge, an analyst at Cowen & Co., notes Amazon has repeatedly innovated in ways that make Prime even more valuable to subscribers: the Kindle e-book reader lending library, streaming video and music, discounted access to FreeTime, which offers children's books, games and media content, and Amazon Family, which offers discounts on baby products. Innovation is also exceptionally rapid. Mr. Blackledge says Prime Now, which offers same-day delivery, launched in New York in less than four months after conception without so much as a focus group.
Amazon is now profitable, yet cash retention remains secondary to retaining customers. Asked by an analyst in April whether Alexa, a voice-activated assistant, was boosting sales, the company's finance chief, Brian Olsavsky responded: "The monetization, as you might call it, is...not our primary issue right now. It's about building great products and delighting customers."
If Amazon is one extreme in how companies invest, General Electric Co. is the other. It has long been fastidious about capital and cash deployment. On its last quarterly earnings call, the company meticulously laid out profit growth by product and business segment, the sources of margin improvement, cost savings anticipated from specific restructuring moves -- even how five uncollected aviation accounts were affecting profit.
Chief executive Jack Welch perfected this approach in the 1990s, and it continued under his successor, Jeffrey Immelt. Last week, Mr. Immelt said he would retire, after 16 years struggling to restore growth. In part, that reflected how financial engineering had inflated profits under Mr. Welch. Yet Mr. Immelt 's investment decisions too often chased the conventional wisdom on Wall Street and in Washington. Thus, GE Capital bulked up on residential mortgages and commercial real estate in the run-up to the financial crisis. From 2010 to 2013, the company announced many acquisitions in oil and gas services, only to see the price of oil crash, taking orders with it.
Growth is hard for any company that dominates its markets as much as GE does. GE's size also attracts debilitating political scrutiny. Its proposed acquisition of Honeywell was derailed by European antitrust regulators just before Mr. Immelt took over. It took 18 months for Mr. Immelt's purchase of Alstom's power business to clear regulatory barriers. GE Capital after the financial crisis became the poster child of dangerous, unregulated finance. In response to new regulations and pressure from Wall Street, Mr. Immelt largely dismantled the business.
Investors still want GE to return cash to shareholders, and it has obliged, spending $79 billion on share buybacks and dividends between 2012 and 2016 compared with $50 billion of capital expenditures. Indeed, for two years, cash flow of U.S. corporations has exceeded capital spending. Much of the difference has gone into buying back stock.
Yet while good for shareholders in the short run, this is no recipe for growth in the long run. GE's cash flow is shrinking despite the company's focus on preserving it, while Amazon's is growing despite that company's readiness to spend it.
Amazon is clearly not a template for most companies. Defying conventional wisdom usually fails, which is why for every successful long shot like Amazon there are hundreds if not thousands of failed startups. Amazon has come near death more than once, and may again. Moreover, the larger it gets, the more it will bump against the constraints of size, such as antitrust concerns. As for GE, a history of reinvention suggests it is more likely to be around in 125 years than is Amazon. Given investors' tendency to go to extremes, now may be a bad time to buy Amazon shares, or sell GE's.
Yet the country as a whole badly needs some rules-defying risk-taking. For business, that means a bit more Amazon in the boardroom and a bit less GE.
Write to Greg Ip at firstname.lastname@example.org