
Sales Are Colossal, Shares Are Soaring. All Amazon Is Missing Is a Profit - petethomas
http://www.nytimes.com/2013/10/22/technology/sales-are-colossal-shares-are-soaring-all-amazoncom-is-missing-is-a-profit.html
======
simonsarris
The missing profit is a blessing for Amazon.

 _None of the other titans are challenging Amazon._ They can't because
Amazon's Earnings Per Share are...

-0.23. Negative 0.23.

Investors often lump AMZN with GOOG and the like but GOOG's EPS is 33.59. TGT?
4.26. Walmart is 5.07. No other company with a market cap (100+Bn) as large as
AMZN is allowed to get away with negative EPS. The only one that comes _close_
is Vodafone, with a tiny positive EPS (0.13).

It's important to note that if any other company spent until their EPS was
negative, investors would _flip._ Amazon is playing with razor thin margins
while trying to scale up a platform to end all platforms that we might someday
use for everything without thinking about it. If successful, on that
day/year/eon dollar bills might as well be printed with Jeff Bezos' face on
them.

Amazon won't be using UPS and Fedex trucks on that day. They'll be using
Amazon trucks. You'll know that era when you see it, I think.

If you're Walmart or Target its hard to justify trying to do something similar
at this point, the stock could take a major dive from such a risk. They're at
the "Ask-questions" phase, and the questions are always "What's the profit?"
because these are publicly traded companies. Amazon has been playing it risky
since the get-go. Bezos is in for a very long gamble, and that frustrates the
hell out of some investors, but its lofty enough to still attract investment
dollars while in the "build-first" stage. Hopefully they can pull it off for a
few more years before the stock market shifts to asking questions.

So Amazon gets to play the long game that other companies are literally
disallowed from playing because investors that have seen profits want more.
Amazon gets to do something bold that would cause the mother of all stock
dives in any other 100+Bn company. They get a free pass because Bezos is
convincing and for Amazon its _sort-of-always-been-this-way._
Walmart/Target/Etc do not have either of those luxuries - the incredible (or
believable) visionary and being a company that's still in burn (build) mode.

~~~

All that said, an interesting question I think: What can we do to make more
companies like Amazon? And is there a way to allow the older giants (such as
Target) to ever be as ambitious again, without huge stock punishment?

~~~
S_A_P
I think you hit the nail on the head where Amazon needs to go. Logistics and
shipping are pretty much where that company _must_ go to continue its path. I
wouldnt be surprised if Amazon did try to venture into that arena by
acquisition/merger.

~~~
jb17
I think they already started going there, at least in the UK. All my latest
orders were delivered by 'Amazon Logistics'.

~~~
awjr
I've just integrated all of our 7,000+ products into Amazon and one of the
things Amazon is trying to do now is persuade us to use Fulfilled by Amazon
(FBA).

It's quite attractive to us as a retailer as they take all the negative
feedback, handle returns, etc etc. FBA makes us, as a retailer, look good and
saves us money (no shipping costs), while protecting our reputation.

From a logistics point of view it simplifies things immensely (we just need to
manage stocks in another warehouse).

Coding this should, however, be interesting :)

~~~
cm2012
I would love to chat with you (email in profile). We have 20,000 products in
FBA right now and I've been selling on Amazon for years with separate
companies. The only issue is that you can't ship international multichannel
yet, even if you get your products approved for Global Export.

------
hemancuso
The real story is that Amazon is investing every dollar that could be realized
as profit back into the company. Completely amazing given the scale. Imagine
instead of sitting on a gargantuan pile of cash Apple could figure out how to
efficiently invest $150B back into the company [and not through a buyback].
You can argue Amazon doesn't NEED to aggressively expand its warehousing
infrastructure if the goal was to turn profit. It doesn't NEED to build AWS or
the multitude of other smaller business lines, but it does.

A dream for many entrepreneurs is to start a fairly conservative line of
business that buys freedom and a stable stream of revenue [consulting, online
bookstore] and use the profits to fund a swing-for-the-fences idea. It's
absolutely amazing that Amazon keeps that model going decades later.

~~~
tixocloud
Apple does not see opportunity at the moment which is why it's holding the
huge amount of cash. And I do recall Steve Jobs giving advice about really
focusing on the few things that the company does that makes it so great which
would help explain it's huge cash reserves. The company is not trying to enter
many different markets all at once.

~~~
nl
_Apple does not see opportunity at the moment which is why it 's holding the
huge amount of cash._

Exactly - that's the OP's point.

Amazon has the vision to invest its cash in building entire new lines of
business, whereas Apple can't see any opportunities.

~~~
tixocloud
But it's not Apple's game to play in the things that Amazon plays. Amazon has
their own strategy and Apple has their own strategy. Building entire new lines
of business is risky and Apple probably does not think that the risk is worth
the reward at the end. There's also the question of whether Apple can do as
well as Amazon at what it does.

------
toyg
I think this sort of analysis misses three important elements:

1\. Control. Absolute control over a huge chunk of worldwide B2B and B2C
transactions is extremely valuable _per se_ , in political and commercial
terms. It's _power_ that can be leveraged in a number of ways which are not
necessarily reflected in the balance sheet. Bezos just bought the most
influential newspaper in US political circles; this guy knows a thing or two
about setting the agenda.

2\. There is corporate profit and personal profit. Amazon employees are
themselves turning quite a bit of personal profit. Does that make Amazon a No-
Profit ? That's debatable. As someone else mentioned, pure profit is easy to
tax, while "operating expenses" and share dealing can be shuffled around.

3\. Industrialism. Many XIX-century industrialists saw their companies as
agents of change as well as sources of profits. Amazon is pushing the envelop
in commercial infrastructure (fully-automated warehouses, software-enhanced
packaging, customer-seller variable relationships, etc etc) as well as
creating whole new markets (AWS). As long as they don't start bleeding money,
they're running a self-sustained engine of change, which is an achievement in
itself.

~~~
chalst
> corporate profit and personal profit

The Amazon's board have a fiduciary duty not to enrich themselves at the
expense of their shareholders. Amazon certainly is not a non-profit.

~~~
taybin
It's not unheard of for a board to enrich themselves. I believe a lot of the
salaries for boards and executives is nothing more than a looting of the
company at the shareholders' and host country's expense.

~~~
chalst
Salaries for the board is a special case, since it usually needs to be agreed
by the shareholders at the AGM. This case isn't really covered by fiduciary
duty, since it is not a case of the board acting as agents of the shareholders
(it would be different if the pay committee actually falsified their report).

------
InclinedPlane
Amazon's losses are less than 1% of their revenue. Their net income loss is
about 0.06% of their revenues, and less than 1% of their cash on hand, in
fact.

Amazon isn't losing money, it's operating at break-even to maximize growth.
That should be obvious to anyone paying attention. They're growing AWS like
crazy. They're expanding into new markets and services. And they're expanding
into different countries. They're turning into a remarkably diversified
company with both high-volume/low-margin and high-margin businesses.

If Amazon were a value stock distributing their profits in the form of
dividends then their lack of profit would be a big deal, but it's a growth
stock, and their tradeoff of profit in favor of growth is actually welcomed by
the market, as evidenced by the stock price.

------
netcan
There is an argument (I'm not really sure how strong an argument) that this
isn't Amazon management's problem, it's investors' problem.

Amazon have a strategy which they believe is for the long term good of the
company. Sell cheap, grow market share, get more repeat/prime customers,
expand (by investing) into new areas. They've been doing that for a good while
now. They're profitable. They don't rely on They're growing. It's articulated
and consistent. Investors who believe in it, are welcome to buy stock. Those
who don't can sell (at a nice, high price)Evidently many do believe.

HN likes to bring up fiduciary duty in these cases, but I don't think that
extends as far as some comments suggest. Management can't deceive or steal or
funnel money to friends. The board has a responsibility to get rid of
incompetent managers. None of that is going on here. When it comes to the
strategy of the company and decisions like growing market share vs maximizing
profits, I think investors vote with their position more than anything else.
Another way of looking at it is that "investor" is not a set thing. Different
investors have different philosophies and strategies. The ones that like
Amazon's strategy are the ones that own the shares in Amazon.

------
existencebox
I see two sides to this. First; the closing paragraph of the article, clearly
intended to convince you amazon is out to get you once they've wiped out all
the other competition. That's all fine and dandy, and isn't I don't think
directly controverted by evidence; but in the same statement, I think it is
far from affirmed.

The second side, then, is what I see this all as evidence of. Disclaimer, I
know fuck all about the subtleties of running large businesses, but when you
step back and look at the what they're doing at a high level, expanding
facilities, exploring new markets, new products, during what is as the article
stated an investment boom time and where maintaining a certain level of
revenue might be a "somewhat safe bet", it makes sense to me that you would
use this time to make more bets. Risk becomes more acceptable when you're not
living dollar to dollar; the box of nails anecdote, simple as it is, spoke
buckets to me. (maybe I'm overreading.) At the risk of showing extreme
naivete, I would LOVE to for once believe that a company is simply using all
of its financial resources to continually try to provide optimal and novel
services. Shipping goes up in price; that's how the market works when you add
more services without anyone funding em, the cash has to come from somewhere.
I guess my hope is that the shipping is only raising due to their trying to
provide new services, and that there will still be sufficient competition that
amazon hasn't killed off to prevent this from going out of hand; and that it
was just as I said above, a way to fund growth and try to balance for changing
economic times, and not a sign of the impinging amazon monopolypse.

Oops, suddenly essay, and now I'm late for work...

~~~
Spooky23
It's not some grand conspiracy, but if you lack competitive pressure, all of
the sudden price competitiveness and service become less important.

I grew up in a rural area. When Wal-Mart came at first, it was amazing. Clean
stores, low prices, excellent service. They managed to put Ames, Jamesway and
a few other marginal discount chains out of business. The convenience of
driving to Wal-Mart and buying anything is more convenient that the closer
speciality retailer, and thathelped kill of the specialty small retailers
(hardware stores, etc). They mortally wounded K-Mart. They did this with
ruthless efficiency and great service.

Now, Wal-Mart owns the rural market. Guess what? The lines are like DMV, the
stores are filthy and poorly merchandised (in the grocery section, they don't
even unpack boxes), and the prices are often not so good. I hope that Amazon
doesn't go that way, but history suggests otherwise.

~~~
marincounty
It seems like an enevitably? Almost a Law? I once heard a Restuant
Entrepreneur state that every resturant should fire their staff every 6 months
--it got rid of any theft, an dead attitudes--supposedly?

I think the only company I haven't seen go down this route is UPS? Their
workers seem pretty happy?

~~~
Spooky23
It sucks that people get rewarded in the marketplace for being assholes like
that. Theft is a part of the background noise in a cash business like a bar or
restaurant -- a business owner is delusional if they think theft goes away
when one set of people do.

My grandfather owned bars for many years. I remember him saying that he got
more worried about bartenders who "weren't" stealing from him (either money,
booze or pilferage) -- he assumed that if he didn't know about it, the guy was
too smart and could do real damage.

UPS treats their people well and works them hard, and they have a strong
union. The net result is that they make money, and they have a motivated
workforce that performs and gets treated relatively fairly.

------
riggins
Amazon is an inventory turnover business. This is the fundamental point that's
usually not understood.

I'll explain by analogy.

Assume 2 businesses with the following assumptions

Store A: -sells jewelry -capital cost of store is $100K -inventory is $100K (1
turn per year) -annual revenue is $100K -net income margin is 5% -annual net
income $5k

Store B: -sells pens -capital cost of store is $100K -inventory is the same
$100K (they sell a lot of pens) -annual revenue is $500K (5 turns per year)
-net income margin is 2.5% -annual net income is $12.5K

if you think Store B, the lower margin, higher turnover business, is the
better investment, then you get the Amazon investment thesis.

~~~
jacques_chester
Amazon goes even beyond this; for a lot of products they have a negative
operating cycle. They can sell an item, hold the cash, and only pay for it
later. Usually companies must internalise the risk and cost of buying stock
before they can sell it.

------
nikcub
The chart in the sidebar says it all:

[http://imgur.com/edKyuSE.png](http://imgur.com/edKyuSE.png)

as long as Amazon are able to generate that type of return on investment at
that scale then they should continue to reinvest all their money back into
their businesses.

The alternative is to bank the money, miss out on the next AWS or Kindle, give
nearly half of it to the tax man, leave 60%+ of it offshore waiting for the
next repatriation tax holiday, and only then get a return back which you will
then invest in another stock that isn't returning as well or just buy more
Amazon stock!

Google, Microsoft, Apple et al _wish_ they could invest their cash as well -
instead they have to listen to hedge fund managers lobby them for
buybacks/dividends etc. because they believe they can invest the money better
than Google, Microsoft, Apple can.

Given the option, i'd re-up with Bezos every year, his ability to innovate,
invest and return is staggering and proven.

I really think of Amazon as an investment vehicle (like Berkshire) for web
commerce with a strong umbrella brand.

------
onedev
I think Prime is amazing. It's driven me to purchase things that I otherwise
normally wouldn't have; that says a lot because I'm not usually one to buy a
lot of "stuff".

It's incredibly convenient, I often buy stuff from mobile and it'll be on my
doorstep in two days. It's literally magic and I love it.

I can't even begin to comprehend the levels of logistical wizardry it takes to
make all of that happen.

I'm inclined to think Amazon knows exactly what they're doing here.

~~~
dingaling
> I think Prime is amazing.

It was until Amazon created the concept of 'Add-on Items', which they have
retrospectively applied to thousands of items.

These items cannot be bought on their own, even if you wanted to pay for
shipping. Not even by Prime members.

~~~
jonknee
It's the equivalent of the stuff next to the checkout of a retailer--it
doesn't make sense to ship a $1-5 item on its own. I made an Amazon order
yesterday and noticed an add-on item in my cart that I had saved from a
previous session, I kept it on the order ("added on" you could say) and now
I'll get the nail clippers I had been meaning to purchase as well as what I
had originally bought. Happy Prime customer here.

------
IBM
The stock is tremendously overvalued, no value investor would ever buy AMZN.
The assumptions needed to justify its current price are absurd. The bull case
of "they'll put their competitors out of business and then raise prices" is
one of the most shallow analyses of a company I've heard and just highlights
that person's lack of business insight. The quote from Horace Dediu is
correct, AMZN isn't going to be able to raise margins without costing it
revenue growth, they're stuck as a low-cost retailer or they risk their
customers going elsewhere.

EDIT: I anticipate people getting hung-up on "value investor" because clearly
AMZN is a "growth" company! Growth is always a function in assessing value,
and sophisticated value investors know this. The popular convention of
labeling something 'growth stock' or 'value stock' does the greater investing
public a disservice.

------
7Figures2Commas
> “This isn’t supposed to happen,” said William H. Janeway, an economist and
> venture capitalist. “It violates mainstream finance theory. Very few
> companies have been valued this way outside a systemic bubble.”

> No one is asserting that Amazon is a flat-out bubble, but there is an
> increasingly noisy debate about when it will — or even whether it can —
> deliver the sort of bottom-line profits that investors normally demand from
> a company expected to post $75 billion in revenue this year.

Netflix started the year at under $100/share. It's up to nearly $340/share
today. Tesla started the year in the $30s. Its high this year was just under
$195/share. Pandora entered 2013 at under $10/share. It's above $26/share
today.

You can make strong arguments that many tech companies deserve premium
valuations. But this market has and is being driven by the Fed so debating
fundamentals right now is sort of like talking about a fly on an elephant.

------
bedhead
This story line is so incredibly hackneyed. It's boring. You either believe
that Amazon is a giant non-profit, some kind of cosmic joke that Bezos is
playing on the world, or you believe that Amazon is one of the most unique and
brilliant companies ever and that maaaaaaybe their true profitability
shouldn't be judged by our ever-increasing myopic standards.

------
pinaceae
sales is kind of easy if you don't care about profit. also kills off
competition, which in turn makes sales easier.

but what happens once profits are needed? or is amazon the largest NPO on
earth?

~~~
frank_boyd
Correct.

1\. Give away profit, to increase market share

2\. Repeat

3\. Enjoy your new monopoly

4\. With competition gone and customers additionally locked in via your
technology platform: Set your prices as you wish

~~~
_red
5\. Watch competitors instantly spring up.

*Note: there is no such thing as a non-government enforced monopoly. Marketshare != Monopoly

~~~
beagle3
Counterexamples:

Microsoft (desktop OS), standard oil.

~~~
brianlweiner
It's not such a slam dunk case.

"Some economic historians have observed that Standard Oil was in the process
of losing its monopoly at the time of its breakup in 1911. Although Standard
had 90 percent of American refining capacity in 1880, by 1911 that had shrunk
to between 60 and 65 percent, due to the expansion in capacity by
competitors.[41] Numerous regional competitors (such as Pure Oil in the East,
Texaco and Gulf Oil in the Gulf Coast, Cities Service and Sun in the
Midcontinent, Union in California, and Shell overseas) had organized
themselves into competitive vertically integrated oil companies, the industry
structure pioneered years earlier by Standard itself. In addition, demand for
petroleum products was increasing more rapidly than the ability of Standard to
expand. The result was that although in 1911 Standard still controlled most
production in the older US regions of the Appalachian Basin (78 percent share,
down from 92 percent in 1880), Lima-Indiana (90 percent, down from 95 percent
in 1906), and the Illinois Basin (83 percent, down from 100 percent in 1906),
its share was much lower in the rapidly expanding new regions that would
dominate US oil production in the 20th century. In 1911 Standard controlled
only 44 percent of production in the Midcontinent, 29 percent in California,
and 10 percent on the Gulf Coast.[42]"

[http://en.wikipedia.org/wiki/Standard_Oil#Monopoly_charges_a...](http://en.wikipedia.org/wiki/Standard_Oil#Monopoly_charges_and_anti-
trust_legislation)

There's also no great evidence that Standard Oil raised prices once they had
established such large market share.
[http://research.stlouisfed.org/fred2/graph/?id=M04182US000NY...](http://research.stlouisfed.org/fred2/graph/?id=M04182US000NYM264NNBR)

~~~
beagle3
I don't have time to research the numbers right now, but from your quote it
sounds like 1870 to 1900 it did enjoy some 80% control. That's long enough to
be considered a monopoly for most purposes.

------
smackfu
It's way easier to run a company if investors aren't expecting a profit. They
don't complain about how you spend your cash, or that your operating margins
have ticked up or down a percent this quarter, or that you missed your profit
number in the latest results. Setting that profit expectation is the tricky
bit, so why would Amazon give it up now?

------
blt
Doesn't this same story get posted every few months? Bezos stated that Amazon
is re-investing revenue instead of trying to make profit.

