
Profitless Prosperity - _pius
http://www.avc.com/a_vc/2013/10/they-dont-make-any-money.html
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7Figures2Commas
> Amazon is not the only company that is plowing back all of its incremental
> profits into growing its business. This is very common for enterprise
> software companies as well. Salesforce has made or lost a small amount of
> money every year for the past four years but it has grown its revenue from
> $1.3bn to over $3bn in those four years. And its market value has gone from
> $12bn to $32bn in the same time frame. Workday hasn't made any profits in
> the last four years, in fact the net losses have been increasing. But the
> stock has doubled in the past year and the Company is now worth almost
> $14bn.

It's amazing to me that folks in the Silicon Valley/VC world continue to look
at the performance of publicly-traded tech companies and for some reason never
seem to consider that, as deserving of premium valuations as some of these
companies may be, much of the crazy price action of the past several years has
been driven by the Fed.

You can't seriously look at the charts of companies like Netflix and Tesla and
believe that this is the result of DCF analysis.

> If you believe, as Amazon management does, that the future growth is going
> to be there for Amazon, then you ignore the current P&L and think about what
> a future P&L might look like.

> If you think that Salesforce and Workday can continue to grow their revenues
> at or near their current growth rates, then you ignore the current P&L and
> think about what a future P&L might look like.

How about this: if the Fed balance sheet continues to go up and to the right,
ignore fundamentals, pick momentum stocks and think about what their future
charts might look like. It doesn't take a lot of imagination: up and to the
right.

Of course, when the fun ends, "profitless prosperity" will indeed be
profitless for the folks who didn't cash out in time.

~~~
pbreit
I think you need to explain, or at least mention, how the Fed's behavior is
significantly responsible for the charts of companies like Neflix and Tesla.
I'm not sure I see why/how this is the case.

~~~
adventured
Tesla and Netflix, as two examples, are high risk, high valuation, low
fundamental stocks, with a classic technology bent (tech companies often get
the benefit of a high valuation because it's believed by investors that they
produce very outsized profit results eventually).

When money is cheap, it pursues high risk investments for outsized returns.
Institutional investors in fact push for such, in a race to keep up with the
returns their peers are seeing during periods of very large stock market
gains. Investment funds pursue ever higher risk investments for higher
returns, in a competition for capital. For the most part, all money and all
investments compete in a global market place. Very few investors have the will
power to sit on the sidelines while others are making fortunes riding bubbles
(eg the late 1990s, 2004 > 2007).

The Fed's policies are specifically aimed at making money cheap right now (and
they've succeeded; see corporations issuing debt at almost zero cost, such as
AAPL and MSFT). Whether we're talking the cost of a mortgage, or the POMO
shots boosting the stock market, or the indirect asset bubble effect from
money chasing risk to compensate for the lack of interest yielded from cash,
and on and on it goes.

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cs702
Bezos could turn Amazon into a money-making machine overnight.

All it would take is raising prices across the board _by just a little bit_.
Amazon has more than $70 billion in annual sales, so a 1% average increase in
prices would bring in more than $700 million in annual pretax profits. A 10%
average increase would bring in over $7 billion more a year.

In fact, if Bezos were to ask his executives to go through Amazon's entire
portfolio of products and services to figure out how, when, and where they
could raise prices the most to maximize present profits, the company would
quickly become one of the world's most profitable businesses. Customers --
particularly Amazon Prime members who've gotten used to clicking a button and
ordering for free delivery almost everything they need -- will not suddenly
change their buying habits if, say, the price of light bulbs on Amazon.com
goes from $0.79 to $0.89 per unit.

So I agree with Wilson: Amazon's lack of profits today could be a very good
thing. It all depends on WHY Bezos is holding back from taking all those easy
profits already available to the company.

~~~
millstone
$7 billion in profit would be about $15 per share, yielding a P/E around 24.
That's on the high end, but not absurd, so I think your analysis is a good
justification for the valuation.

A key question is whether that 10% price increase would be absorbed by
customers with no change in sales. There's an argument it goes the other way:
customers trade the immediacy of brick-and-mortar for Amazon's low prices. But
if the online prices are no better, then Amazon provides no benefit, and a 10%
price increase could result in a much larger drop in sales. This played out in
my own household: we used to buy diapers exclusively through Amazon, but
completely stopped following their diaper price increase.

~~~
ketralnis
> But if the online prices are no better, then Amazon provides no benefit

Speaking only for myself, the vast selection and stock is a huge factor for
why I often prefer to buy things from Amazon.

For instance, there's a particular mustard that I like that is hard to find in
stores nearby. I don't like it enough to justify going from store to store to
find it, but I do like it enough to buy it from Amazon for the same price that
I would pay by doing that, and just wait a day or two. Often stores are out of
stock of the things that I want. Amazon tells me that without leaving the
house. I live in a city where a trip to a store that isn't in walking distance
can be a couple of hours or more to haul myself around on transit, but Amazon
delivers to my office. I imagine that there are people in more rural areas
that if the local store just doesn't have what you're after, you're out of
luck. And so on.

My point is, there are plenty of reasons besides price to give up immediacy

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drinkzima
I'd love to see an analysis of the risk embedded in the future profits that
everyone talks about. What these analyses completely ignore is that Amazon's
future cash flows are risky, while the current cashflows at the dying business
are not.

There are countless examples of giant companies that haven't realized the
enormous future cashflows embedded in their stock prices. It is obvious that
Amazon generates lots and lots of revenue, no one disagrees with that. What
remains an open question is will they be able to ease off of massive
infrastructure investment and actually harness the future profitability that
everyone seems certain of at this point.

These straw man arguments that profit-less companies have huge market caps so
they _will_ turn hugely profitable ignores the actual argument of whether they
can actually achieve that. Can profit does not equal will profit.

~~~
gfodor
Yup. It really boils down to human nature. Which is sexier, a stock whose cash
flows and business are well understood, or a stock like Amazon whose
"potential" could possibly take over the world? It's hard to let your
imagination run wild about the potential upside of an investment in a boring
blue chip that is in the business of making regular profits, but whose
margins, market, competition, and overall arc of the business are well
established. But in an environment where the stock market is at an all time
high, people are ready to believe that Amazon is just a few knobs being turned
away from world domination.

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nonchalance
This all makes sense under QE and other easy money programs (which have a
general tendency of inflating P/E multiples) but what happens if/when the
programs stop? If 1999-2000 is any indication, those companies could easily
see a 90% haircut and still be overvalued under traditional analyses (AMZN P/E
is currently 1286.56, for example)

~~~
adventured
Well the stronger companies will survive and thrive, with their competitors
destroyed. Amazon benefited from that survival effect coming out of the dotcom
bubble and crash.

These Fed driven asset bubble waves are a huge wealth give-away to the biggest
companies. They tend to be able to ride out the ups and downs, while their
smaller competitors who get caught up in it as well, do not tend to survive
the extreme down-turn (take Sun Microsystems for example: they modified their
business to ride the exaggerated dotcom boom, their stock was worth $200+
billion at the peak, and their sales grew massively, and then it all imploded
and nearly destroy Sun on the way down, and some would argue it did in fact;
meanwhile Microsoft rode it all out just fine).

Lesson being, some companies get caught up in the exuberance, and they roughly
speaking get destroyed, while their competitors thrive in the post-bubble
period when the stock market & private markets aren't willing to fund
competition any longer.

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adventured
"Workday hasn't made any profits in the last four years, in fact the net
losses have been increasing. But the stock has doubled in the past year and
the Company is now worth almost $14bn."

I can hardly believe how much this sounds like the same voodoo justifications
I was reading in 1998. Saying it's deja vu wouldn't do it justice.

Arguing for making long term investments, has nothing to do with whether $14
billion for a company that has never made money (has lost a ton of money) and
only has $273m in sales - is a reasonable valuation. 51 times sales?

Well what you don't do, is buy Amazon in 1999 for $85 / share, you wait for
the inevitable crash and buy it for $6 or $8. And you don't buy Amazon for
$363 after a parabolic run, you buy it for $40 or $50 after the 2008 crash.

Workday and all the others will follow this pattern, some will live, some will
die. If you think a company has long term value to offer, you buy it cheap
when a lot less people want it; you don't buy it when everybody wants it
during an epic stock market run; and you don't assume a bubble valuation has
any correlation to its future prosperity (or lack thereof). The last two
bubbles should have demonstrated that in spectacular fashion.

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001sky
_The lesson here is that you can 't just value a company by taking its current
performance into account. You really need to have a view towards its future
performance. And you need to understand why the company is not currently
profitable._

Just co-incidently, TWTR is going through its IPO. This is just a little nudge
to remeber that profits don't matter, and you should just go buy some stock.
=D

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curiouslurker
How about Twitter, which Fred is an investor in? How sure are the future
profits?

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postitnotecode
While this analysis, and the many others moving their way up HNews make sense,
I can't help but wonder if Amazon has started to back itself into a corner. If
I as an investor find value because I think they'll keep plowing money back in
future R&D, what should I think whenever they do start transitioning to
booking profit? Wouldn't I then be worried that taking the profit is a sign
that Amazon no longer has grandiose plans or visions for the future and
instead is starting a (very) long coast towards decline?

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bobx11
I'm in love with the idea of a profitless company for the reason that this
company passes on all the value to employees and contractors providing the
services instead of extracting that value their employees create for the
benefit of shareholders.

~~~
PilateDeGuerre
>passes on all the value to employees and contractors...instead of extracting
that value their employees create

I was surprised to read your analysis of the situation. I must say that you're
just flatly wrong.

Amazon is not a good place to work if you value your life outside of its value
for your employer. Everyone from warehouse employees to the knowledge workers
are sweated for everything they are worth. Recall that Amazon runs their
warehouses like prisons and they have the lawsuits to show for it[1].

[1] [http://www.mcall.com/news/breaking/mc-amazon-integrity-
wage-...](http://www.mcall.com/news/breaking/mc-amazon-integrity-wage-
lawsuit-20131007,0,2581276.story)

