
Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the World - srlake
http://www.slate.com/blogs/moneybox/2013/01/29/amazon_q4_profits_fall_45_percent.html
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logn
Thanks, Slate, for regurgitating what you heard a friend mention in a coffee
shop and looking on Google Finance for a few numbers to fill in.

The first lines from the Argus report show:

"...management's emphasis on keeping prices low and heavy infrastructure
investments...Most of the weakness appears to be in the International
division, as the company expands operations in economically weak markets such
as Europe and China."

(If you want to read Argus reports, many stock trading sites will give you
free access after opening an account.)

Edit: not sure why I'm being downvoted; afterall, I'm responding to an Article
which has this line: "That's because Amazon, as best I can tell, is a
charitable organization being run by elements of the investment community for
the benefit of consumers"

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k2enemy
> ...management's emphasis on keeping prices low and heavy infrastructure
> investments...

The article is talking about the decrease in net income and infrastructure
investments doesn't decrease net income. I've seen a lot of people suggest
that the low profit numbers over the years are because they are doing a lot of
investing in infrastructure that will pay off in the future. That might be
true, but investment isn't on the income statement and doesn't show up in net
income.

~~~
larrydag
If it increases Operating Expenses then it would have an impact on Net Income.
The actually money to invest in the assets may be in a different place on the
balance sheet though.

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rob08
Any investments made that are meant as long-term (i.e. >1year) is capitalized
on the balance sheet and is a use of cash in the cash flow statement.

Any short-term operating costs related to those investments are likely to be
expensed during the period in question and thus be recognized in the income
statement.

Opex may also be higher (and consequently lower profit) while heavy
investments are made because the company hires a lot of more staff which do
not start generate any revenue until a later period.

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Shenglong
Just to give some numbers to this, for anyone wondering:

In 2012, Amazon made $631 million profit on over $48 billion revenue - meaning
they converted a little over 1% into profit. Meanwhile, almost every other
comparable company had close to 20x that. Google made about $11 billion on $48
billion, and Apple made $41 billion on $156 billion. From a purely financial
perspective, it really is insane.

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btilly
it is only insane if you do not understand how Amazon makes money.

If a retailer wants to double its revenue, there are two basic options. Double
your margins. Or double your volume by cutting the time you hold inventory in
half. Amazon has aggressively gone for the second approach, and is glad to cut
its margin in half in return for tripling sales.

Your "comparable companies" are not in the consumer retail business. And if
they tried to maintain their margins while competing head on with brick and
mortar commodity retail stores, they'd go out of business.

~~~
martinced
_"If a retailer wants to double its revenue, there are two basic options.
Double your margins. Or double your volume by cutting the time you hold
inventory in half."_

So there's an unlimited amount of buyers willing to buy and every time you cut
the time you hold the inventory in half people shall buy twice as much?

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btilly
If you take shipments in fixed sized lots, every time you double your sales
rate, you've cut how long you have to hold each item in half.

Furthermore it gets better. Frequently if you have good credit, you can take a
shipment, sell it, and then pay later. This gives you float that you can use
for things like paying the overhead of keeping unpopular items in stock.
(Remember, Amazon makes substantial money both from having things that are
hard to find elsewhere, and by selling commodity items in bulk.)

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caublestone
Keep in mind that eCommerce is only ~15% of all commerce in the USA. If we
will be buying all the things we want/need online in the future, someone will
be the Wal-Mart.

The market and many believe that Amazon will be that company because they are
using all of their revenue now to aggressively ensure this.

<http://kpcb.com/insights/2012-internet-trends>

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cmwelsh
Amazon started in one business and is slowly dominating another one. They're
revolutionizing cloud computing using the infrastructure that allows them to
dominate the online shopping market.

I would say Amazon has two healthy futures as a company. Neither future looks
ready to be unseated, given the shopping/cloud landscape in Q1 2013.

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philip1209
I view Amazon like I view Square - the value doesn't come just from the
profit, but from their market dominance. Square is raising so much funding
without reaching a break-even point because international dominance in finance
is a highly lucrative position to be in. Likewise, Amazon is still making
money - just not much compared to the amount of merchandise they sell. The
value comes from the concept - Amazon is redoing supply chain, and with same-
day deliveries coming to the USA soon, the value is in Amazon gaining
marketshare such that they both increase sales and increase margins.

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DigitalTurk
Here's what I don't get. Amazon seems to be all about growth; in fact, their
stock price is so high that its investors seem to believe that Amazon intends
to expand enormously internationally and that it will crush all of its
competitors when it does.

However, to this casual observer it seems they haven't made grounds in new
markets in ages. And they're not at all a raging success in all of the markets
that they have entered.

I'll give two examples.

China. They absolutely botched this. Chinese people just don't shop there.
Worryingly, Amazon doesn't seem to know how to react. E.g. some time ago they
started using this new Z.cn branding, but now they're just inconsistently
using both the Amazon.cn and Z.cn names. (And of course they have a Chinese
name also.)

Europe. For some reason they have three different stores in Europe. Two of
those are in France and Germany. These stores charge in euro, which would be
convenient for other Europeans except that these stores don't have English
language front-ends. As such they only serve a limited market. The third store
is located in the UK. It charges in pounds, which makes it a hassle to shop
there. Moreover, they have weird restrictions on what they will and will not
ship internationally and you have to pay by credit card—which relatively few
Europeans have.

I recently read that Amazon is going to launch Amazon.nl in the near future.
I've been hearing those stories for ages now, though, so I don't know if it's
true. But suppose they did. Is it really a given that they will do well? In
the many years that Amazon didn't open a Dutch store, tons of web stores have
sprung up, and some of these have gained significant mindshare. I reckon it
will be very costly and time consuming for Amazon to beat these competitors.
Why is it that investors don't seem to be worried about this?

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martinced
You're right and it's still confusing me. I regularly enter "amazon.be" only
to realize my "thinko" and then I head "amazon.fr". It's mindboggling that
they didn't at least register and/or redirect the domains. Sure Belgium is a
small market, but their european strategy seems totally lame.

There's a need in Europe. I don't get why they don't fill it better. They're
great in the U.S. and amazing too in Japan. These are two gigantic markets of
course. What I don't get is why they don't see Europe --or at least the
eurozone-- as one single big market.

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xxpor
Disclosure: I have worked in Kindle, so I have insight into what's happening.

Think about Amazon's original market: books. In this case, it makes almost no
sense to have a eurozone market.

1\. Most countries speak different languages

2\. The laws around selling books are CRAZY in Europe. Each country has
different laws about how books are priced. FR and DE are fixed price (everyone
sells the book for the same price), IT I think is Reseller (normal model,
publishers sell to Amazon, Amazon sells to consumer), and UK is Commissionaire
(Tax included Agent model, Amazon gets commission for selling books to
consumers, but publisher sets price) and Reseller.

3\. Each country has different publishers for the marketplace, with different
requirements in terms of metadata etc.

~~~
DigitalTurk
> 1\. Most countries speak different languages

Yes, and in some countries people speak more than one language. It's worrisome
that Amazon is having such difficulties dealing with such a simple matter.

Additionally, there are a ton of English speakers in the eurozone and Amazon
is doing a bad job in serving them. Here's one more example: Amazon.co.uk
actually has a feature where you can pay in euros. However, it only works on
check-out. When browsing the website you cannot have it show prices in euros.
I'd shop a lot more often at Amazon.co.uk if they showed prices in euros!

> 2\. The laws around selling books are CRAZY in Europe. Each country has
> different laws about how books are priced. FR and DE are fixed price
> (everyone sells the book for the same price), IT I think is Reseller (normal
> model, publishers sell to Amazon, Amazon sells to consumer), and UK is
> Commissionaire (Tax included Agent model, Amazon gets commission for selling
> books to consumers, but publisher sets price) and Reseller.

But you only have to abide by the system in the country you're shipping from,
right? So what's the problem again?

> 3\. Each country has different publishers for the marketplace, with
> different requirements in terms of metadata etc.

I don't understand what you mean.

Are you talking about translations of books? Those, of course, are different
products from the original.

Also, some electric appliances are often sold under different brand names,
but, again, in such a case we're talking about different products.

Or were you referring to something else entirely?

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wittekm
Companies investing in themselves? Disgusting behavior.

~~~
pestaa
How so? When you have an LLC and you buy a laptop for work -- isn't that
investing money in yourself?

~~~
michael_h
I can't be certain, but he may have been employing sarcasm.

~~~
Evbn
Investing in sarcasm, even. Disgusting.

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mbesto
_"There is only one valid definition of business purpose: to create a
customer"_ \- Peter Drucker's _The Practice of Management_ [1]

Let's take shareholders (both internal/external) out of the equation for a
second... What do profits really actually do for companies? You take those
profits, reinvest them to create even more customers. Amazon does that, and
very aggressively, and for about 18 years and counting.

[1] -
[http://www.amazon.com/gp/product/0060878975/ref=as_li_ss_tl?...](http://www.amazon.com/gp/product/0060878975/ref=as_li_ss_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=0060878975&linkCode=as2&tag=whitneyhess-20)

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codex
Amazon will never make a real profit, for two reasons:

a) Amazon is in a fundamentally shitty business: retail. It's retail on the
Internet, but still retail. Amazon may successfully get into a real tech
business, but they've been fairly unsuccessful at this so far--and there
strategy continues to be to compete on price (AWS, Kindle etc.) which means no
profits.

The real reason, though is:

b) Bezos is so focused on the long term that all profits will be immediately
reinvested. Amazon is an ego thing for him and he wants it as big as possible
at the limit. So Amazon will continue to grow but never make a profit. It's
value is forever unmonetizable, even as it continues to own more physical
stuff (warehouses, etc.).

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ron_m
Just proof to me how screwed up Wall St is. Apple makes a profit and sells a
record number of iPhones and iPads and its stock gets hammered whereas Amazon
loses an amazing 45 percent and gets a slap on the wrist from Wall Street.

~~~
mdkess
That is not at all how any of this works.

First, expected growth is built in to the value of a stock at any time. If the
market expected Apple's sales to double, for example, and it happens, the
stock will not skyrocket when Apple announces "record results" - because that
doubling is build into the price of the stock. If instead their sales go up
1.5x - which is still healthy - the stock will fall, because it missed the
market's expectations. The price was set at the expectation that prices would
double.

So what happened with Apple? While I don't claim to be an investor (and don't
take any of this as advice), people cut price targets after it looked like
Apple's sales had plateaued. The general consensus seemed to be that from the
latest report, Apple's ability to beat earnings per share targets (ie. how
much money it makes for each share that it has issued) is diminished, so the
price has readjusted.

Amazon didn't lose 45%. Amazon's net income fell, from $147 million to $97
million. Net income is what most people refer to as profits. Amazon's revenue
is up 22% from last year to just shy of $50 billion, and it has a ton of
assets, around $32 billion. So how did profits fall? They spent more money
building data centers and warehouses - in the same way that Apple's profits
would fall if they spent more money building Apple Stores. It's an indication
that the business is healthy, not unhealthy. Operating margin (ie. your return
on sales, what portion of revenue turned into income) also increased, by quite
a bit from 20% to 24%, which is very healthy.

Apple and Amazon are both great companies, but to be clear, I'm not
recommending either of these stocks - if you're buying a single ticker, you're
gambling.

If you want to learn about this stuff, I'd recommend as an very readable
introduction the book A Random Walk Down Wall Street.

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lnanek2
Didn't we just have a whole thread on how Amazon is not even trying to make a
profit, but rather run razor thing margins to prevent any competition with
less efficient methods?

