
Amazon’s Shrinking Profit Sets Off a Seismic Shock to Its Shares - joshwa
http://www.nytimes.com/2014/04/26/business/amazons-shrinking-profit-sets-off-a-seismic-shock-to-its-shares.html?hp
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tvladeck
The stock is down from when it was up, but it's still up from when it was
down!!

In all seriousness, 8-10% is a big move, but definitely not "seismic",
especially after an earnings release. Apple went up that much yesterday. Today
YELP fell 8% and TWTR fell over 7%.

~~~
r00fus
It's not the move per-se, just that AMZN has previously been impervious to (or
even benefited from) unprofitable quarters and missed wall st. estimates.

Unless there's another reason for this sell-off, it means perhaps Amazon's
teflon-coating when it comes to it's profit-aversion might be wearing a bit
thin.

That's a shift.

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spacehome
Earnings don't miss estimates; estimates miss earnings.

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wpietri
Possibly the most ignored fact in finance and management.

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adwf
The funny thing for me is that everyone has always said that Amazon's share
price is justified because eventually "they'll turn on the profit tap" and up
their margins once the market is captive.

Yet, how do you tell when Amazon are about to do that? I would've thought
they'd do it when revenue growth starts slowing. ie. When the strategy of
spending money to make money starts being less effective, as there is steadily
harder gains to be got from it. _That 's_ when I'd turn on the tap.

So just as Amazon are about to do this (potentially anyway), that's when
people sell? I'd say this is by far the best time to buy...

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maratd
> Yet, how do you tell when Amazon are about to do that?

Amazon will never do that, because it can't. It's in retail. Retail is and
always will be a low margin business.

Is there an example of a large retailer that doesn't manufacture its own goods
that has profits in the double digits?

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jasontsui
“We believe in the long term, but the long term also has to come,” says Bezos,
explaining that periodically Amazon wants to “check in” with its ability to
make money. Thus, in 2007, Amazon more than doubled its profit, to $476
million, on a 38% increase in sales to almost $15 billion.

[http://management.fortune.cnn.com/2012/11/16/jeff-bezos-
amaz...](http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/)

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3pt14159
Seismic is 40 or 50% loss. Catastrophic is 70 or 80%. Complete sell off is
90%.

8% is one major mutual fund that needs its stocks to have certain ratios and
profit margins had to do a sell off and technical traders went with the
falling knife.

~~~
encoderer
Amazon has lost 30% of its value between the last 2 earnings reports.

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everettForth
As a general rule, I think that stock fluxuation news should stay off of HN.
However, in this case, we're currently looking at a 9.88% decrease in AMZN.
That's roughly a $14Billion change in the company that nearly every startup
uses as some kind of hosting provider. To put it in perspective, that's very
close to the size of the Whatsapp deal. I think this is relevant to startups
in this special case.

~~~
heroh
>that's very close to the size of the Whatsapp deal.

it's very close the MarketCap of LinkedIn \-- more reason why $19 billion for
an App that generates $20million in revenue is/was ridiculous.

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frade33
As a Sales Director, I would often tell my guys, a six-month old can capture
the market., if you would eliminate your profit. But that is not what you are
hired for. or in our local phrase 'neither we will play nor we let any'. I
love Amazon as a consumer, but as a sales person myself I know, what they are.
They offer 40% wholesale margin to a retail customer for books. How many
wholesalers and retailers they brought to death? but the even more tragic part
is, they didn't earn any money themselves. They obviously succeeded in
capturing the entire market, but so could my six month old too.

My experience tells me which is no brainer, death (exit) of such a company is
only matter of time, and when such a vendor dies, rest of the market lives on
as they were living before this episode.

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bequanna
>but the even more tragic part is, they didn't earn any money themselves.

I don't really follow your logic. The point isn't to 'earn money' now. It is
to build the economies of scale, over time, so that no one else can hope to
compete with them on price in the future. That is when the money will really
be earned.

As for Amazon not being profitable, it is a illusion. From what I understand,
they have pretty high plowback. If mgmt observes great opportunities for
investment, shouldn't they do that instead of paying out dividends?

>My experience tells me which is no brainer, death (exit) of such a company is
only matter of time, and when such a vendor dies, rest of the market lives on
as they were living before this episode.

Maybe if they were competing on price alone for a single product. This isn't
one CRM product vs another. They are competitive on EVERY product. Few online
retailers can compete with them on pricing/shipping/experience.

~~~
pdq
> I don't really follow your logic. The point isn't to 'earn money' now. It is
> to build the economies of scale, over time, so that no one else can hope to
> compete with them on price in the future. That is when the money will really
> be earned.

Amazon has had this mythical idiom of "when the market want us to give them
profits, we will turn on the spigots". In other words, they can just scale
back their future investments, and the money will start rolling in.

However, they have been running losses in general for 20 years. For a few
quarters in their history, they made some small profits, but in general, even
with all the dramatic scaling and efficiencies, they still regularly run
losses. Investors have stuck with them for this long, but unless they really
can start raking in the profits, I don't see how their stock can sustain such
a high price.

If you look at the financials and business model, Amazon is basically the
Walmart of the internet. They are in a low margin business, with high capital
costs. However, their stock is still priced as if they are a software company
with high gross margins (ie software costs zero to produce each additional
copy). Walmart understands the model and is able to produce nice profits, and
Amazon either has to follow or hopefully the market will finally figure them
out and price them accordingly.

~~~
bequanna
> Walmart understands the model and is able to produce nice profits, and
> Amazon either has to follow or hopefully the market will finally figure them
> out and price them accordingly.

Apples and oranges. Check AMZN revenue growth in the past 5 years vs. WMT. WMT
is (somewhat) mature, AMZN doubles revenue roughly every 2.5 years.

Why show a profit if you don't have to? Management is obviously finding pretty
good, revenue-growing investments.

~~~
pdq
Amazon is mature as well; maybe not as mature, but 20 years is an old company.
And Walmart has been making profits for decades, while their revenue has grown
dramatically, and while they have been building extremely expensive stores and
warehouses and supply chains.

> Why show a profit if you don't have to? Management is obviously finding
> pretty good, revenue-growing investments.

This is the nonsensical mentality that has blown up Amazon's stock price for
more than the past decade. In the short term, absolutely, ramp up revenue and
take losses getting there. In the long run, businesses exist to make the
shareholders money.

~~~
bequanna
>but 20 years is an old company

Umm, Google is a ~16 year old company. In 4 years, will they be an 'old
company'? Please...

>This is the nonsensical mentality

This is how huge, borderline monopoly business are built. I am not sure you
grasp their strategy. It sounds like you may be more comfortable investing in
a stable, dividend paying, old line business that you understand.

~~~
pdq
Google made more profits last year than Amazon has made in its history. They
have scaled well and are in a high margin business, and Amazon is not. It's
just that simple.

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hiddencost
One implication of this that I think is worth mentioning: if Amazon's stock
price falls too much, if I remember correctly, their compensation plan has
them grant additional RSUs to employees to make up the difference.

~~~
ryanobjc
As a former AMZN'er I find that hard to believe.

The company is cheap - it's in the bones. There is no way the company would
ever agree to give more of it's loot over to employees if it wasn't forced to
via regulation.

Now, Google's "GSU" programme does have an adjustment that is based on
company, personal and stock performance via a magical formula that only
HR/management knows.

~~~
hiddencost
See my response to the other responder for further specification.

I'm an extremely questionable source. Amazon's "Frugal" was certainly
everywhere, which is why I remember being surprised by seeing those terms in
the performance bonuses.

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smackfu
I don't think the analysts have any idea how to predict what AMZN is going to
do.

~~~
MichaelGG
You could have ended your sentence after predict.

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petersouth
Maybe Amazon is just a massive float machine for Bezos. Sorta like insurance
companies for Buffet.

~~~
DonGateley
My thought too except I can't see what he is doing or might do with the float
except fund promotion to leverage growth.

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fletchowns
So revenue is growing but they have an operating loss because of a lot of
investments. Isn't this a good thing that should cause people to want to buy
more Amazon stock?

~~~
tdees40
Investments get booked as assets, so they have no impact on profits. This
mistake gets made frequently with respect to Amazon.

~~~
eigenvalue
Many assets have a useful life and must be depreciated, which certainly does
reduce accounting profits.

~~~
tdees40
Sure, but I don't think that's what most people are thinking about here.

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ghshephard
If we're going to be talking about "Seismic Stock moves" as being 8%, then
AAPL, on the same day, had an 8.5% bump (525 to 570). Do we consider that a
Seismic Shock as well?

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midas007
Seems like a bump in the road, but it's something Bezos has to stay on top of
to not be too long term to lose investor interest.

FedEx/UPS + Amazon merger would still be a good move and lock up last-mile
distribution that only WalMart would be able to touch, but then WM would have
to pay a premium for whichever chair would be left.

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wpietri
Nah. They're building their own distribution network. FedEx is great at being
FedEx, but Amazon wants to be able to do same-day delivery with multiple time-
slots per day. They also want local warehouses, which minimizes wasteful
shipping.

~~~
midas007
Amazon is missing the entire last-mile delivery pipeline apart from some
shared boxes and jokes about quadcopter delivery.

Also, Google Express is way ahead given the number of trucks and cars going
about from Costco and other local merchants, which is coming at Amazon from
the other side.

Building it would effectively be starting from scratch and competing with
FedEx, UPS, DHL and everyone else. And if it doesn't work, they'll be stuck
with capital tied up in it.

Further, it's going to take a long time and a LOT of capital, and it still
might not work AND still not be any better/cheaper, whereas FedEx is a known
quantity that works. FedEx has a lot more experience than just delivery: it
does lot of logistics and emergency logistics outsourcing for a lot of
companies... and it would still be viable revenue if Amazon controlled them.

~~~
wpietri
I take it your city doesn't have Amazon Fresh vans all over the place yet?

~~~
midas007
Mountain View (for obvious reasons I guess): Google Express.

But really, what difference is there over just extracting the functionality of
local courier into a stand-alone global service with an web presence, API,
support, backoffice fleet management/dispatching and so forth? All FedEx and
UPS have to do to compete with this is send drivers into stores.

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drpre
I'm guessing that the lowered income projection is due in part to Amazon
dropping its cloud prices. Surprised the article didn't mention that.

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chris_mahan
And if amazon starts hemorrhaging cash like mad, will people scramble to get
off AWS?

