
Amazon's Profit Plunges 73% - cwan
http://online.wsj.com/article/SB10001424052970204644504576653520195533138.html?mod=WSJ_hp_LEFTTopStories
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mikeryan
Profit's are such a volatile metric. Amazon's been spending like crazy in the
last few months on producing new Kindle products - most of which are being
sold as a loss leader in an effort to push book sales.

Note that Amazon's overall Revenues are up 44%

Less sensational, more nuts and bolts article
[http://www.marketwatch.com/story/amazoncom-announces-
third-q...](http://www.marketwatch.com/story/amazoncom-announces-third-
quarter-sales-up-44-to-1088-billion-introduced-four-new-kindle-devices-for-
the-holidays-2011-10-25)

~~~
secretasiandan
That's not an article, that's a press release.

Source is Business Wire

<https://en.wikipedia.org/wiki/Business_Wire>

"Business Wire is a company that disseminates full-text news releases from
thousands of companies and organizations worldwide to news media, financial
markets, disclosure systems, investors, information web sites, databases and
other audiences"

Does the press have an incentive to talk about the plunge in profits? Yes

Does the company itself have an incentive to spin things by touting increased
revenues? Yes

~~~
bostonpete
I don't think you needed to provide that link/quote. It's got "PRESS RELEASE"
printed right there at the top of the article.

~~~
eliasmacpherson
saves me from clicking the link.

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pg
I wonder if analysts have learned yet not to dismiss apparently crazy moves by
Jeff Bezos.

~~~
nobody3141
Crazy moves like "heavy spending on warehouses, data centers and digital-
content offerings"

An online store buying stock and building infrastructure !!!!! Crazy , they
should be borrowing money and paying themselves bonuses before going bust -
that's what Wall St wants

~~~
chugger
How about the $50 Amazon is losing per Kindle Fire sold?

~~~
brc
A tried and true strategy. That has worked for (in no particular order) :
ATM's, Printers, Razors, Mobile Phones, Gaming Platforms and probably even
cars in some cases.

If Sony had cottoned onto this strategy, Beta would have been the worldwide
video standard and they would have been paid back massively in royalties.

Shifting hardware at a loss to lock in consumers is the oldest trick in the
book. Nowhere is it more important than when introducing a new technology and
a new way of working. I can see that in 10 years time a Kindle will be almost
free.

~~~
chugger
Its a tried and true strategy if there wasnt a better strategy. Amazon doesnt
need to create their own hardware. They are doing just fine selling Ebooks via
their iPad and android apps. Low overhead, more profit. Selling their own
hardware does not provide any value add to the customers, all it does it
reduce their margins and profit. People already buy ebooks via their apps.

People are talking like this is a good move by bezos. It's not.

~~~
brc
You obviously don't have a Kindle. I would never try and read an ebook on an
iPad after having a Kindle. It is chalk and cheese.

Once you setup your account on your Kindle, it is 1-click purchasing to get
yourself a new book.

Sure, you might shop around for an ebook, but most people aren't going to.
They'll just search on the Kindle, click the 'yes I want it' button, and
you're finished. Total platform lock-in. Tech people might get sniffy but to
the average person it's like going from vinyl to iPod.

There are two Kindles in this household. Since their arrival, the yearly book
spend has probably tripled. Previously most reading was re-reading older books
and taking trips to book exchanges.

All this is possible with other platforms, yes, but the Kindle is just the
physical part of an entire delivery system. The margins on ebooks has to be
better than print by an order of magnitude, even though the price is lower.

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nestlequ1k
Seems Amazon is taking the long view, and reinvesting their revenues. The
opportunity for them is huge. Wall street doesnt care and would rather see
quarterly profits. Good buying opportunity if you're interested in watching
them take over everything in the next 5 years.

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beedogs
God, investors are idiotic. Amazon spends money to upgrade its infrastructure,
_stock price plunges 12 percent_. Rational!

~~~
jrockway
They should do more for less, like magically store all 8 billion items they
have in stock in the back of my car or something. Warehouses housing wares.
How extravagant. Where's the innovation.

(And to answer my sarcastic comment, the innovation is "order from your
suppliers and have them ship directly to the customer, then you don't need
warehouses". But the reason people pay Amazon's prices is because the item
shows up at their house the same day they buy it, which means that 1990s mail-
order model doesn't work anymore. Investors shouldn't be allowed to invest
until they've purchased at least one product from Amazon.)

~~~
awj
> Investors shouldn't be allowed to invest until they've purchased at least
> one product from Amazon.

Seriously. My wife gets Amazon Prime for free through school. Within the first
month I was looking for the best opportunity to buy stock. The service is
quite literally amazing, and handing it out free to students is just damn
genius. That's just one small thing on top of all the other things they do
really well at.

~~~
Game_Ender
I will second this. The free student prime has moved purchase of Amazon Prime
from the "it seems cool but not worth category" to "must have" for me. You get
things that you would normally have to run all over town to get with minimal
effort. It's a huge time saver.

~~~
vidarh
I've found myself ordering tiny stuff like a single pack of caffeine pills
(we're talking 24 pills here, not exactly bulk buying) rather than walking 10
minutes to the nearest pharmacy... It's scary.

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kijin
> Amazon also said it ended the third quarter with 51,300 employees, up from
> 31,200 in the same quarter last year.

Amazon creates 20,000 jobs, and Wall Street responds with a 12% drop in stock
price.

~~~
larrik
And they are still hiring! They've been bombarding me with emails to interview
with them, for some reason.

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dkokelley
To restate the obvious, this is a case of reinvesting in the company's future
growth. Net profits (distributable to shareholders) are diminished when a
company reinvests, so yes, "profits" are down. However, a more meaningful
metric is net sales - cost of goods sold. Amazon had to make a choice of what
to do with their _meaningful_ profits (what's sold - what it cost to create,
sell, and support it). They could give it to shareholders, reinvest it in
future growth, hand out bonuses, or burn it. All of those activities (except
dividends) will lower their net profit on the income statement. The market is
a fickle beast. Amazon will do fine, but given the company's history, I pity
those who bet against it.

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polymatter
Spending on day-to-day expenses is termed revenue expenditure. This shows up
in the income statement and affects profits. Spending on future investment is
termed capital expenditure. This is not shown on the income statement and does
not affect profits. (It's on the balance sheet instead)

Eg. Buying a new warehouse does not decrease profits (but it will of course
affect your cash). Blue-sky R&D is also recorded as an asset (and depreciated
as normal).

At least, that's what I was taught as a trainee accountant. Though I've learnt
in practice that things are reclassified for tax purposes. Lower profits mean
lower tax after all.

~~~
gujk
But depreciation is an expense, yes? So Amazon gets to average their
investments for a 7-year rolling window or whatever, not postpone them
indefinitely. Unless there is a way to claim that the software/IP has some
resale value remotely approaching its cost to build?

~~~
polymatter
true, depreciation is an expense but one that accountants can fiddle with. I
am only a trainee accountant and UK accounts are different from US accounts in
ways I am not familiar, so don't take this as legal advice or anything.

For start though, the deprecation policy itself can be changed. So as long as
there is a note in the accounts giving some justification, I can say "I am not
depreciating these assets". This is a crude way to manipulate depreciation and
generally any competent auditor would flag it.

Buying a new warehouse for example you generally wouldn't depreciate at all
(usually holding it at cost and revaluing it every so often). So apportion all
costs relating to buying the warehouse (including cost of machinery in the
warehouse, connecting it to your IT network, legal and admin work) as a one
line item Fixed Asset: Warehouse, and you just avoided all depreciation. (It
will still be shown on the accounts, but doesn't touch the income statement.)

Or you can decide to put it as a 5-year rolling investment as you put it and
you're charging 20% depreciation.

Or you can decide that this investment is not a one-off thing and is part of
the core business (perhaps you're buying warehouses all the time). So then you
can charge the whole lost as an expense.

I suppose my point (back to the topic) is that Amazon's profits have gone down
largely because of how Amazon's accountants have decided the best way of
presenting their investment costs in their accounts. It makes sense to reduce
book profits as that reduces your taxes. (Generally true, though I know in UK
corporation tax calculations we don't take into account depreciation for the
very reason that its manipulatable). A profit dive is especially fine if you
have continued impressive revenue growth to point to and can claim that these
investments are clearly worth it. Nobody is going to claim that Amazon is in
serious trouble.

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chuinard
Interesting but no one likes a paywall.

~~~
pash
Here's a link that takes you to the full article:

[http://www.google.com/url?sa=t&rct=j&q=Amazon%2527s%...](http://www.google.com/url?sa=t&rct=j&q=Amazon%2527s%2BProfit%2BPlunges%2B73%2525%2B&source=newssearch&cd=1&ved=0CCgQqQIwAA&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052970204644504576653520195533138.html&ei=xTKnTrvxMaSQiAKxh8WYDQ&usg=AFQjCNH5wgPxj4cgt3X9dgMXsRmVICo6mw&sig2=_WzDGtne-
sWNTzt49k9O0A)

~~~
chuinard
Thanks, never knew that.

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kellyreid
Their Q4 earnings don't matter because they are transitioning to a much
different business model... quarter-to-quarter analysts don't take that into
account.

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mark_l_watson
Uh, they had a bad quarter but they were still profitable.

It seems to me that Bezos is making long term investments.

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topbanana
Company Invests in its Future, Investors Furious

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0x12
If your stock drops 12% when your profits drop 73% you're doing just fine.

Anybody that thinks differently should short this stock. We'll talk in 24
months ;)

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away
Isn't the plunge in stocks due to the fact that the Kindle Fire has a very low
profit margin? I don't think this article is correct with what the cause-and-
effect is.

