
Why is Amazon all of a sudden not re-investing all its profits? - marcelweiss
https://earlymoves.com/2016/04/29/why-is-amazon-all-of-a-sudden-not-re-investing-all-its-profits/
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ChuckMcM
Frankly I'm surprised this hasn't happened sooner. So much money is sloshing
through Amazon these days, keeping it balanced to the point where you don't
let it accumulate (generating profit) or flow to fast (generating loss) has
got to be scary complex. At every large company I've worked at there are
things on the balance sheet that are "tunable" by management which helps with
this. It was a running joke inside Network Appliance that we always beat
expectations by $.01 cent per share. Of course until you didn't and that
usually meant that what ever mechanisms you used for tuning your cash flow
didn't have enough dynamic range to cover the change that quarter.

Amazon then, being a services, merchandising, payment processor conglomeration
then has to be crazy hard to manage cashflow in any meaningful way.

~~~
pbreit
Bezos is in it for the long haul. He's probably the most impressive business
person there is right now. Buffett and Musk are impressive in different ways.

~~~
sixQuarks
Sorry, but Bezos and Buffet are not even in the same league as Elon Musk.

~~~
ncallaway
Who, then, would you say is in Mr. Musk's league?

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sixQuarks
Musk is in a league of his own. This is based on my own research and
comparison. I believe I've watched every interview he's given, read his
biography, read the in-depth profile on waitbutwhy.com, and followed his
companies fairly closely. I've done the same with Bezos, since the day Amazon
went public. While I highly respect Bezos, I believe if you did the same, you
would come to the same conclusion.

~~~
ncallaway
I guess we just have a fundamental disagreement over the definition of the
term "league".

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mcherm
Summary:

Because they're "proving" they can make a profit when they want to in
preparation for spending a decade investing 100% of profits into building a
world-wide logistics system.

(I think it's an interesting theory, but the author provided little evidence.)

~~~
ravivyas
I don't think any company will wait a few quarters to invest in something. And
if they did that and win, well, they have invented a time machine.

~~~
nostrademons
Most big projects require a research & planning phase where a small team tries
to learn everything possible about the domain, works out exactly what the
opportunities are, and runs a few small trials to verify their assumptions.
This is not capital intensive, and it's a good time to build up capital &
goodwill for the rollout.

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andr
I find it very interesting to know what Amazon's competitive advantage would
be from having their own logistics business.

1) Shipping is the definition of a commoditized business. Unlike AWS, for
example, they will not be pioneering a new business model or technology.

2) What they pay right now to FedEx, UPS, USPS, DHL, OnTrac, etc. should be
very close to zero margin, given their position to negotiate those companies
against each other in real time. Surely, the margin should be comparable to
the cost of capital.

3) Amazon seems to represent less than 10% of packages in the US [1]. Given
that they have to cover more or less the same area as other shipping companies
have, they will not have the economies of scale of other firms, so their cost
per shipment may end up higher.

[https://www.quora.com/Shipping-What-percentage-of-UPS-
shipme...](https://www.quora.com/Shipping-What-percentage-of-UPS-shipments-
are-Amazon-boxes-packages)

~~~
SEMW
> Shipping is the definition of a commoditized business. Unlike AWS, for
> example, they will not be pioneering a new business model or technology.

I'm guessing it's the one-hour-delivery thing - last year they started testing
one hour delivery for popular products in a couple of pilot cities.[0]

Presumably they can't do one hour delivery with a traditional model of
centralised-warehouse -> shipping company -> shipping company's regional hub
-> customer; they need an Amazon warehouse near that city, with products
dispatched from there to the customer directly, or it takes too much time.
Building a warehouse and dispatch operation near every major city won't be
cheap.

[0] [http://www.bbc.co.uk/newsbeat/article/33332018/amazon-
launch...](http://www.bbc.co.uk/newsbeat/article/33332018/amazon-launches-one-
hour-delivery-service-prime-now-in-parts-of-london)

~~~
hkmurakami
Related, I don't think certain niches of shipping are truly commoditized.

Have some high impact document that needs to be shipped somewhere within 24
hours and be guaranteed to get there safely? I can't imagine trusting anyone
but FedEx for that.

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rdli
Amazon's fundamental source of competitive advantage is rarely talked about,
but I think this is a great example of what that is -- they have built a
company that succeeds in very low margin businesses.

So they started in online retail with < 10% gross margin. With AWS with its
~40% GM they have INCREASED the GM of the company. Contrast this with
Microsoft and Google which sell software at 80%+ GM. When they do Azure or
GCE, they have to decrease their GM. This is hard! FedEx runs around 60% GM.
So just think about what this will do for Amazon ...

~~~
bsder
> So they started in online retail with < 10% gross margin.

They succeeded there because they didn't pay sales tax so they had a 5-10%
advantage over brick and mortar.

Now that that advantage is gone, they are finding that retail isn't so nice
anymore.

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20years
I will probably get down voted but I think it's because we are in for a big
downturn this year. Amazon is preparing for that and they will garner more
market trust because they can show profits. When the bust happens, people are
going to be very careful on what stocks they invest in and will most likely
lean towards safer, profitable companies.

~~~
nedwin
Are you saying Amazon have built a tool to time the market?

~~~
RandomBacon
If Target can figure out that someone is pregnant based off of buying
unscented lotion, mineral supplements, and cotton balls, then Amazon could
easily gauge the financial health of its consumers. Perhaps they noticed a
trend leading up to the last recession, and its occurring again. Whether or
not it's true, it's certainly not outside the realm of possibility.

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sharemywin
I think they calculated wrong and forgot to spend all the money. They
mentioned that Cloud Services was unusually more profitable this quarter.

~~~
rhino369
Another thing to consider is how the money is spent changes how much profit is
made.

If Amazon reinvests into assets, that money isn't considered a loss. So it
doesn't reduce profits. So when Amazon buys a video library those IPs are
assets.

You only deduct spending that are expenses.

As Amazons business changes it might be harder to hide their profits in
expenses.

~~~
brashrat
investments in assets result in depreciations which are expenses that reduce
profits; you don't write off the asset as a loss all in one year, but it all
gets written off across a series of years.

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clavalle
Because that was the plan all along?

At some point Amazon is going to get a return for all of its investment. The
entire market is now dancing to Amazon's tune. Why not now?

~~~
cylinder
They don't seem ready to me. Seems like a temporary blip due to their
investment schedules. They clearly have ambitions to build out a logistics
infrastructure, and they haven't even setup in some obvious markets yet
(Australia). Lots more growth to pursue.

~~~
sitkack
30 million people over those distances? I wouldn't roll out in Au until
driverless delivery.

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tardo99
I think it's because of the bubble. No sense investing in innovation when
you're chasing billions invested by VC firms. Better to bank profits for a
couple years and then come back in.

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martincmartin
This happened once before, during early 2000s tech bubble burst, as was
immortalized in the web comic The Joy of Tech:

[http://www.geekculture.com/joyoftech/joyarchives/288.html](http://www.geekculture.com/joyoftech/joyarchives/288.html)

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fweespee_ch
[http://www.nytimes.com/2014/04/26/business/amazons-
shrinking...](http://www.nytimes.com/2014/04/26/business/amazons-shrinking-
profit-sets-off-a-seismic-shock-to-its-shares.html?_r=0)

I think a couple years ago they got tired of their stock tanking every time
they reported a lower profit than previous quarters.

~~~
koluft
What are they going to doing they can't sustain these profits in future
quarters?

~~~
fweespee_ch
Massive capex.

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nahual
AWS, prime, and content have much higher margins than _objects_, so a small
unexpected increase in sales creates a disproportionate amount of profit.

~~~
coredog64
I was joking with colleague last night that Amazon's unexpected profits were
largely due to us not turning off on-demand i2.2xl development instances
overnight.

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mangeletti
My theory: Bezos/Amazon is preparing for a potentially dangerous financial
situation in the market, and taking a little cash out for a rainy day is a
good idea.

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hinkley
Amazon bought 3 city blocks in Downtown Seattle a few years ago. Two of those
are done or nearly done, the thirds one houses a scrotum-shaped building
(three connected spheres, what's going on here?) that's still under
construction.

Technically that counts as reinvesting profits, but its the old "Are we an X
company or a real estate company?" issue that happens so often.

Personally I think it's the last chance for Bezos to roll around in his piles
of cash before he has to start giving some back to his investors.

~~~
gamegoblin
This is what those three connected spheres are:

[http://www.theverge.com/2013/10/24/5023454/amazon-giant-
biod...](http://www.theverge.com/2013/10/24/5023454/amazon-giant-biodome-
design-board-approval)

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hkmurakami
I wonder how much talent retention comes into play here, since Amazon has a
very high ratio towards RSUs in the total comp package if I remember
correctly.

When $AMZN girates or tanks, at least some part of their workforce would be
tempted to leave. Though maybe that's the exact segment they wouldn't mind see
leaving anyways?

~~~
Nacraile
> Though maybe that's the exact segment they wouldn't mind see leaving
> anyways?

Generally the people who leave voluntarily are the people you don't want to
see leave. Good talent is likely to have little difficulty finding better
opportunities. Mediocre to bad employees are going to have a hard time finding
another job, so they stick around.

This is based on my personal observations as an Amazon employee, and not just
hand-waving, by the way.

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harryh
I don't accept the premise. It still has a PE of 530.

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mandeepj
I think all of us who aspire to be entrepreneurs can learn something from the
events happened after Amazon's stock crash during last quarterly earnings.
Stock price dropped to about $482. Amazon quickly announced stock buyback
program and stock is up again. It was around $612 before latest quarterly
earnings report. And, it is now at $659. Keep an eye on Amazon's amazing stock
management skills

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bashtoni
My theory is they simply can't find enough things to spend on, but can't
afford to lower AWS pricing without being swamped with more demand than they
can handle.

I don't think Amazon are preparing for period of capital investment - making
profits and then taking them away is surely worse than consistently making
very little as far as the stock market is concerned.

This is not the sort of problem many businesses come up against.

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k2enemy
Maybe they didn't stop re-investing all their profits. Whether Amazon keeps
and re-invests all of its profit (as retained earnings) or returns it all to
shareholders, the reported net income number doesn't change.

It seems like you would have to look at their balance sheet to answer this,
not just their income statement.

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Animats
Maybe the stockholders are getting restless. At some point, they have to pay
dividends. Amazon is too big to be bought out.

Much of Amazon's expansion is in physical facilities. Those are hard assets
which can legitimately be financed with debt at low interest rates.

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dekhn
Because we transitioned to the next step of the Bezos Singularity State
Machine.

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golergka
Do they really need to show that the switch is working? Shouldn't it be
obvious from their financials?

~~~
mabbo
People got spooked. The stock tumbled. Time to flip the switch back to
'profit' for a quarter or two, then once everyone understands that the switch
exists, put it back to 'invest' where it belongs.

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perseusprime11
Because many of their business have become self sustaining businesses like
AWS.

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kin
Could Bezos somehow take these profits and invest it in Blue Origin?

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digdogsmigsmog
How can you all of a sudden not redo something?

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bitemix
I bet they go big on transportation.

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slantaclaus
Investors are demanding it.

