
Amazon's heavy investing eats into bottom line, shares drop - aditya_samaddar
http://in.reuters.com/article/2014/07/24/amazon-results-idINKBN0FT2ON20140724
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rayiner
There's a very old case, Dodge v. Ford Motor Co., in which the Dodge brothers
sued Ford for plowing all the profits from the company back into new factories
and increased production, instead of issuing dividends.[1] Henry Ford said:
"My ambition is to employ still more men, to spread the benefits of this
industrial system to the greatest possible number, to help them build up their
lives and their homes. To do this we are putting the greatest share of our
profits back in the business." Ford lost the case. The court held that the
purpose of a corporation was to maximize shareholder value, not to employ the
most people.[2]

Amazon reminds me a bit of Ford back in the day. Profitability is nice for the
shareholders, but at the end of the day, the net benefit they create to the
economy, just by employing all those people and spending all that money on
development, isn't really a function of their profitability.

[1]
[http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company#Fac...](http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company#Facts).
A fact often glossed over is that the Dodge brothers wanted Ford to pay
dividends because they were investing money in launching a competing car
company.

[2] Although that's unlikely to be good law today.

~~~
revscat
> Although that's unlikely to be good law today.

Can you explain further here? It seems to me that maximizing shareholder value
is, at least today, the exclusive purpose for which corporations exist. The
law seems to require this.

~~~
ChadMoran
In what timeframe? Every quarter? Amazon is in it for the long haul and will
likely make shareholders a lot of money in the end.

~~~
adventured
They've already made shareholders a lot of money. Future returns have been
pulled forward substantially. The stock should have been sold by now, the
returns to be had on the stock are in the past.

Even being generous and giving Amazon a future 20 pe ratio, at the recent
highs, would require roughly $9 billion in profit. Once again being generous
and assuming they can ever reach a 5% net income margin, they need $180+
billion in sales. Let's recalculate for a 15 pe ratio and 3.5% net income
margin: $342 billion in sales (that's the Walmart scenario).

The stock has nowhere to go for a decade from the recent $400x levels. The
party is over.

~~~
brwnll
I'm confused why you would tie Amazon's future, an eCommerce company who also
has a strong cloud (AWS) and digital media division and a growing hardware
division (Kindle, Fire) to a brick and mortar retailer such as WalMart.

Even discarding all other revenue streams, you want to compare the company to
a retailer growing sales at 1% y/y (WalMart), while they grow sales at 22%?
All this while only being in 12 international markets and citing a lack of
non-English content as holding them back in the high margin area of digital
content.

Your evaluation seems entirely misguided and ham-handed to be honest.

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jdbernard
It saddens me that people are bothered about this. It highlights the continued
disconnect between the interests of the companies traded on the market and
those of the investors at large.

Bezos has been completely transparent about his philosophy regarding long-term
and short-term profitability. This is not out of character for Amazon. Rather
the opposite: the day I hear Amazon cutting long-term projects to boost short-
term profitability is the day I would sell my Amazon stock. This is the way
Amazon has operated for most of its history. They've already built up enough
of a track record for us to trust that they know what they're doing. It is
stupid to expect them to behave like other companies when we have seen them
operate in this manner for some 20 years successfully. Maximizing short-term
profitability is not a high priority for Amazon, and it never has been. Why is
the market surprised then when they re-invest in growth? Because the market
can be stupid.

~~~
tptacek
It shouldn't sadden you, because Amazon is a pretty extreme case of this
behavior. They've been unprofitable for a very, very long time, _and_ they
command a very high multiple of earnings. Matt Yglesias has suggested that
they're less a business than a charity run by Wall Street. At some point, they
need to demonstrate that the land they're grabbing can be both defended and
put to productive use.

Amazon's performance in the public market is more or less than only
communication channel that exists to prompt Amazon to shift from Alexander the
Great mode to Qing Dynasty mode.

~~~
jdbernard
The land they have _is_ being put to productive use. Unless I am very misled,
they have many revenue streams that are profitable. No one is successfully
invading their space, so I would argue they are defending their territory
quite adequately. Alexander only stopped because his troops wouldn't keep
going. Why should Amazon stop?

Also, I liked Eugene Wei's response[1] to the comments of Yglesias and others.

[1]: [http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-
prof...](http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-profitless-
business-model-narrative)

~~~
tptacek
Nobody is successfully invading their space because those spaces are, to
painfully stretch the analogy, still under martial law: Amazon is aggressively
subsidizing them with sweet terms for customers.

~~~
jdbernard
But that's working. And unless I'm mistaken (which is quite possible) those
spaces under martial law are profitable. If people were pointing out that
Amazon wasn't generating revenue, that would be a different story.

~~~
tptacek
I'm not saying it's not working. I'm making descriptive statements, not
normative ones.

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girmad
Trading at 2x Sales still seems a little high. They bought Zappos for 1x Sales
and Zappos was profitable. Now the cloud services will have different
multiples, but from my understanding that's not where most profits can be
forecasted in the next 10 years.

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outside1234
It will be interesting to see if this is the inflection point where Amazon is
held to the same standard as other companies (finally).

~~~
wdewind
This is probably the 10th time this has happened in Amazon's history. I am
invested and not worried at all, FWIW.

~~~
OrwellianChild
Can I ask what you expect to occur that will produce the upside or dividend on
your investment and what kind of time frame you're operating on?

~~~
wdewind
Sure I think that's a reasonable question.

On a basic level I expect that Amazon will continue to grow, and that in the
future the value of the stock will be increased and that I'll be able to sell
it. I think an Amazon that was paying dividends could be great, or not, but it
doesn't sound like a business that I understand so I wouldn't invest in that
because I don't think I could evaluate it. I'm investing in Amazon because I
believe in Jeff Bezo's thesis and like what he's doing. It's also a
significant but not life changing amount of money invested, so I'm comfortable
having my own investment ideas here instead of playing safe with mutual funds,
which is what I usually do.

But more importantly: why do I expect Amazon will continue to grow? Because
they have an extremely large e-commerce business that is providing a base for
them to expand into other markets, and because they have demonstrated ability
to do so. AWS, Fire, Prime, content etc., are all built on an extremely solid
e-commerce foundation. AWS is huge, and is expected to be more and more of
Amazon's total business (7% in 2015), and I am betting that they will continue
to make new business lines like AWS.

My time frame is very long, I'm young and don't need the money anytime soon.

