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The missing profit is a blessing for Amazon.
None of the other titans are challenging Amazon. They can't because Amazon's Earnings Per Share are...
-0.23. Negative 0.23.
Investors often lump AMZN with GOOG and the like but GOOG's EPS is 33.59. TGT? 4.26. Walmart is 5.07. No other company with a market cap (100+Bn) as large as AMZN is allowed to get away with negative EPS. The only one that comes close is Vodafone, with a tiny positive EPS (0.13).
It's important to note that if any other company spent until their EPS was negative, investors would flip. Amazon is playing with razor thin margins while trying to scale up a platform to end all platforms that we might someday use for everything without thinking about it. If successful, on that day/year/eon dollar bills might as well be printed with Jeff Bezos' face on them.
Amazon won't be using UPS and Fedex trucks on that day. They'll be using Amazon trucks. You'll know that era when you see it, I think.
If you're Walmart or Target its hard to justify trying to do something similar at this point, the stock could take a major dive from such a risk. They're at the "Ask-questions" phase, and the questions are always "What's the profit?" because these are publicly traded companies. Amazon has been playing it risky since the get-go. Bezos is in for a very long gamble, and that frustrates the hell out of some investors, but its lofty enough to still attract investment dollars while in the "build-first" stage. Hopefully they can pull it off for a few more years before the stock market shifts to asking questions.
So Amazon gets to play the long game that other companies are literally disallowed from playing because investors that have seen profits want more. Amazon gets to do something bold that would cause the mother of all stock dives in any other 100+Bn company. They get a free pass because Bezos is convincing and for Amazon its sort-of-always-been-this-way. Walmart/Target/Etc do not have either of those luxuries - the incredible (or believable) visionary and being a company that's still in burn (build) mode.
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All that said, an interesting question I think: What can we do to make more companies like Amazon? And is there a way to allow the older giants (such as Target) to ever be as ambitious again, without huge stock punishment?
This is a bit of a naive analysis. Amazon's margins aren't "razor thin". They're thin in some places but huge in others. AWS, for example, has a 50% gross profit margin, and their gross margins on digital goods (mp3s, ebooks) are also high. These aren't small potatoes, these are multi-billion dollar businesses in their own right.
As for shipping, amazon already has a delivery service (amazon fresh) but I don't think they have a strong desire to completely own delivery, they have very cozy relationships with all of the major shipping companies. If you knew how much money amazon actually pays for shipping you'd be astounded, they're very good at using their volume as negotiating leverage.
Logistics is at the core of amazon's business though, and it's a big reason why they are succeeding where others are not. If you order through amazon you can expect most items to be en route in less than 24 hours. That takes a lot of work especially considering the sheer quantity of stuff they offer.
Aside from that, they aren't just trying to do one thing, they are trying to diversify the company, so that it will rest on multiple multi-billion dollar divisions over the next decade (retail, AWS et al, ebooks, mp3/VOD, etc.)
> They're thin in some places but huge in others. AWS, for example, has a 50% gross profit margin, and their gross margins on digital goods (mp3s, ebooks) are also high.
How do you know this? I don't think they have ever released this information in their financial reports. Are you going by analysts' estimates?
In the UK, a lot of deliveries for Amazon is done by Amazon Logistics. They're not doing end-to-end deliveries, but have set up a bunch of "small" (50,000 square feet) warehouses to act as depots, and hired smaller local courier companies to do the final deliveries, apparently.
So their cozy relationship with the big shipping companies might not remain so cozy.
I think that's a great point that they can get away with it because they've been doing it for so long. It's built into the core of the company. In the boom days, while Pets.com was betting on sock puppets and others were making ludicrous Super Bowl half-time ad buys, Amazon was building warehouses. And they still are. The seem to understand that infrastructure, over all other things, is what will let them win in the long run, no matter how unsexy it seems.
Their own logistics / delivery component would be a gargantuan undertaking, even for them. They seem to understand what businesses they can get into and do very well in (cloud computing, generic branding (Amazon Basics), eBooks), and which ones to steer clear of. I suppose they could launch this in urban areas, but that would be shortsighted in an area that they are particularly smart, so I wouldn't count on anything past a pilot program.
Regarding what could be done to make more Amazons... You can't. Walmart is the closest competitor (although they are a bigger company, but let's see about that in 15 years). If there is one company on Earth that can beat Amazon at efficiency (warehouses, shipping, and general business ops), it's these guys. They've made an empire around it. But it seems their only strength here is their storefronts, so it seems like their online strategy would be to go the "pick up in store" route, which is a giant hassle for most. So as Amazon finds ways to improve selection and reduce costs, Walmart will go the way of Borders, and a lot of other brick and mortar stores that came before it, albeit very very slowly. Unless one of the big box retailers is willing to say "screw this storefront crap, we're totally up-ending our business model", there is absolutely no one.
I think you hit the nail on the head where Amazon needs to go. Logistics and shipping are pretty much where that company must go to continue its path. I wouldnt be surprised if Amazon did try to venture into that arena by acquisition/merger.
I think they already started going there, at least in the UK. All my latest orders were delivered by 'Amazon Logistics'.
My guess is 3rd party logistics. If you follow amazon, you see 3pl logistics's share of the company revenue growing. And they ordered a place at 2015 in an important supply chain convention.
They will probably be announcing some sort of global supply chain and fulfillment service.
And the building blocks look interesting: robots, amazon level customer service and fulfillment, better supplier financing(enabled by sales data), global handling services(customs ,etc), offering better IT tools(for example demand prediction, A/B testing globally), Advertising deals on the amazon platform, etc. Almost like telling the manufacturer: you just build stuff, we'll do the rest for you.
If this guess is true, seeing all this packaged would be very interesting.
Makes sense Amazon would start a logistics service for other businesses to use. And maybe storage too.
AWS and MechTurk both came from Amazon realising it could commoditise and spin off what it was using internally as separate products. A kind of reverse dogfooding.
Here where I live, AMZ has partnered with some terrible delivery companies, and a lot of buyers are complaining about the awful shipping experience and are starting to look elsewhere. So I suppose that's correct, they need to handle that themselves.
To make more companies like Amazon, I think you answered your own question: They get a free pass because Bezos is convincing and for Amazon its sort-of-always-been-this-way.
You're right in thinking that would only really work for new companies (with strong leaders), but if the stock punishment is an issue, then these two happenings will allow older giants to be this ambitious too: 1) Amazon succeeds wildly & shareholder demand these older giants copy that success 2) These older giants' stock starts to tank and must scramble to try something new.
There are certainly more, but this is what I can think of from the top of my head.
If you're working at an Amazon fulfillment centre, you might not want more Amazons.
Yeah, having other companies compete for your labor would probably be terrible for you, wouldn't it.
Can you explain why that is?
> If successful, on that day/year/eon dollar bills might as well be printed with Jeff Bezos' face on them.
I see this sentiment all the time--that Amazon is simply still in its growth phase, and once it's "big enough" it will pivot and reap huge profits. I don't see any reason to believe that is true. I can't remember Bezos every saying anything like that, for instance.
With negative EPS and stratospheric market share, doesn't it stand to reason that everyone involved in AMZN believes it to be in a growth phase?
There's no pivot required.
Once they're "big enough" they simply won't need to spend as much as they're currently spending on infrastructure and growth, and the profit (re)materializes without any business change at all.
The real story is that Amazon is investing every dollar that could be realized as profit back into the company. Completely amazing given the scale. Imagine instead of sitting on a gargantuan pile of cash Apple could figure out how to efficiently invest $150B back into the company [and not through a buyback]. You can argue Amazon doesn't NEED to aggressively expand its warehousing infrastructure if the goal was to turn profit. It doesn't NEED to build AWS or the multitude of other smaller business lines, but it does.
A dream for many entrepreneurs is to start a fairly conservative line of business that buys freedom and a stable stream of revenue [consulting, online bookstore] and use the profits to fund a swing-for-the-fences idea. It's absolutely amazing that Amazon keeps that model going decades later.
There was an interesting article on Seeking Alpha a few months ago comparing Wal-Mart with Amazon at the same stage of growth (i.e. comparable level of overall revenue and revenue growth). He compared Wal-Mart in 1990-92 and Amazon in 2010-12:
http://seekingalpha.com/article/1547622-is-amazon-com-the-ne...
He noted that Wal-Mart had about the same levels of CapEx spending (~4%), yet it was also highly profitable by that point. Amazon isn't spending any more on CapEx than Wal-Mart was at the same stage of growth.
So Amazon isn't on some unique path in the business world by choosing to divert its profits to CapEx spending. Its level of CapEx spending is comparable to Wal-Mart at the same stage of growth. It simply has such low margins that it has no profits leftover after its CapEx spending.
Apple does not see opportunity at the moment which is why it's holding the huge amount of cash. And I do recall Steve Jobs giving advice about really focusing on the few things that the company does that makes it so great which would help explain it's huge cash reserves. The company is not trying to enter many different markets all at once.
I think this sort of analysis misses three important elements:
1. Control. Absolute control over a huge chunk of worldwide B2B and B2C transactions is extremely valuable per se, in political and commercial terms. It's power that can be leveraged in a number of ways which are not necessarily reflected in the balance sheet. Bezos just bought the most influential newspaper in US political circles; this guy knows a thing or two about setting the agenda.
2. There is corporate profit and personal profit. Amazon employees are themselves turning quite a bit of personal profit. Does that make Amazon a No-Profit ? That's debatable. As someone else mentioned, pure profit is easy to tax, while "operating expenses" and share dealing can be shuffled around.
3. Industrialism. Many XIX-century industrialists saw their companies as agents of change as well as sources of profits. Amazon is pushing the envelop in commercial infrastructure (fully-automated warehouses, software-enhanced packaging, customer-seller variable relationships, etc etc) as well as creating whole new markets (AWS). As long as they don't start bleeding money, they're running a self-sustained engine of change, which is an achievement in itself.
You're right on with #2 there. Amazon has a carefully orchestrated spending machine that gobbles up all the available free cash flow (that would normally be profits) for the sake of expanding old business lines like the Prime video library or creating new ones like Amazon Supply. Or in many cases, by buying up market share like when Amazon picked up w00t. Or buying up their primary robot supplier, Kiva, so that they're the first ones to get all the cool new warehouse equipment and ensuring that their competitors are a generation behind.
If you think about it, self-financing out of profits is a smart way to go about this empire building. If it was financed on bonds or loans they'd be under pressure to "turn a profit" on the investments and they'd have to pay some nominal interest rate. Selling more shares to raise the money would dilute everyone and if part of the plan is to enrich people through share price appreciation, that's not the way to do it. Plus it's easier for share prices to continue to go up on hopes and dreams of a wildly profitable future than based on actual earnings. Once you get into that you have to balance growth against reported profits.
> If you think about it, self-financing out of profits is a smart way to go about this empire building.
Just a nitpick: they're financing out of surplus cashflow. Profit is what's left after everything else (including investment expenditure) has been subtracted from revenues.
It's always worth studying both the income and cashflow statements. They can tell you very different stories about a business. People are particularly fond of getting stuck on looking at the bottom line of the income statement, when most of the useful information is sprinkled around the rest of the accounting statements.
> corporate profit and personal profit
The Amazon's board have a fiduciary duty not to enrich themselves at the expense of their shareholders. Amazon certainly is not a non-profit.
People keep saying this. All it really prevents against is the most blatant kind of theft from the company; it doesn't stop senior management awarding themselves salaries that are huge compared to any other worker.
It's not unheard of for a board to enrich themselves. I believe a lot of the salaries for boards and executives is nothing more than a looting of the company at the shareholders' and host country's expense.
As much as I love my hometown paper, the Washington Post has never been the most influential newspaper in U.S. political circles except for a few brief years around Watergate. The NY Times and WSJ are far more influential today. And all newspapers pale before the power of 24 hour news channels.
The Washington Post is a damaged paper and damaged brand, which is why the Grahams sold it and why Bezos could afford to pay cash for it.
Amazon's losses are less than 1% of their revenue. Their net income loss is about 0.06% of their revenues, and less than 1% of their cash on hand, in fact.
Amazon isn't losing money, it's operating at break-even to maximize growth. That should be obvious to anyone paying attention. They're growing AWS like crazy. They're expanding into new markets and services. And they're expanding into different countries. They're turning into a remarkably diversified company with both high-volume/low-margin and high-margin businesses.
If Amazon were a value stock distributing their profits in the form of dividends then their lack of profit would be a big deal, but it's a growth stock, and their tradeoff of profit in favor of growth is actually welcomed by the market, as evidenced by the stock price.
There is an argument (I'm not really sure how strong an argument) that this isn't Amazon management's problem, it's investors' problem.
Amazon have a strategy which they believe is for the long term good of the company. Sell cheap, grow market share, get more repeat/prime customers, expand (by investing) into new areas. They've been doing that for a good while now. They're profitable. They don't rely on They're growing. It's articulated and consistent. Investors who believe in it, are welcome to buy stock. Those who don't can sell (at a nice, high price)Evidently many do believe.
HN likes to bring up fiduciary duty in these cases, but I don't think that extends as far as some comments suggest. Management can't deceive or steal or funnel money to friends. The board has a responsibility to get rid of incompetent managers. None of that is going on here. When it comes to the strategy of the company and decisions like growing market share vs maximizing profits, I think investors vote with their position more than anything else. Another way of looking at it is that "investor" is not a set thing. Different investors have different philosophies and strategies. The ones that like Amazon's strategy are the ones that own the shares in Amazon.
I see two sides to this. First; the closing paragraph of the article, clearly intended to convince you amazon is out to get you once they've wiped out all the other competition. That's all fine and dandy, and isn't I don't think directly controverted by evidence; but in the same statement, I think it is far from affirmed.
The second side, then, is what I see this all as evidence of. Disclaimer, I know fuck all about the subtleties of running large businesses, but when you step back and look at the what they're doing at a high level, expanding facilities, exploring new markets, new products, during what is as the article stated an investment boom time and where maintaining a certain level of revenue might be a "somewhat safe bet", it makes sense to me that you would use this time to make more bets. Risk becomes more acceptable when you're not living dollar to dollar; the box of nails anecdote, simple as it is, spoke buckets to me. (maybe I'm overreading.) At the risk of showing extreme naivete, I would LOVE to for once believe that a company is simply using all of its financial resources to continually try to provide optimal and novel services. Shipping goes up in price; that's how the market works when you add more services without anyone funding em, the cash has to come from somewhere. I guess my hope is that the shipping is only raising due to their trying to provide new services, and that there will still be sufficient competition that amazon hasn't killed off to prevent this from going out of hand; and that it was just as I said above, a way to fund growth and try to balance for changing economic times, and not a sign of the impinging amazon monopolypse.
Oops, suddenly essay, and now I'm late for work...
It's not some grand conspiracy, but if you lack competitive pressure, all of the sudden price competitiveness and service become less important.
I grew up in a rural area. When Wal-Mart came at first, it was amazing. Clean stores, low prices, excellent service. They managed to put Ames, Jamesway and a few other marginal discount chains out of business. The convenience of driving to Wal-Mart and buying anything is more convenient that the closer speciality retailer, and thathelped kill of the specialty small retailers (hardware stores, etc). They mortally wounded K-Mart. They did this with ruthless efficiency and great service.
Now, Wal-Mart owns the rural market. Guess what? The lines are like DMV, the stores are filthy and poorly merchandised (in the grocery section, they don't even unpack boxes), and the prices are often not so good. I hope that Amazon doesn't go that way, but history suggests otherwise.
Amazon is an inventory turnover business. This is the fundamental point that's usually not understood.
I'll explain by analogy.
Assume 2 businesses with the following assumptions
Store A: -sells jewelry -capital cost of store is $100K -inventory is $100K (1 turn per year) -annual revenue is $100K -net income margin is 5% -annual net income $5k
Store B: -sells pens -capital cost of store is $100K -inventory is the same $100K (they sell a lot of pens) -annual revenue is $500K (5 turns per year) -net income margin is 2.5% -annual net income is $12.5K
if you think Store B, the lower margin, higher turnover business, is the better investment, then you get the Amazon investment thesis.
Amazon goes even beyond this; for a lot of products they have a negative operating cycle. They can sell an item, hold the cash, and only pay for it later. Usually companies must internalise the risk and cost of buying stock before they can sell it.
The chart in the sidebar says it all:
as long as Amazon are able to generate that type of return on investment at that scale then they should continue to reinvest all their money back into their businesses.
The alternative is to bank the money, miss out on the next AWS or Kindle, give nearly half of it to the tax man, leave 60%+ of it offshore waiting for the next repatriation tax holiday, and only then get a return back which you will then invest in another stock that isn't returning as well or just buy more Amazon stock!
Google, Microsoft, Apple et al wish they could invest their cash as well - instead they have to listen to hedge fund managers lobby them for buybacks/dividends etc. because they believe they can invest the money better than Google, Microsoft, Apple can.
Given the option, i'd re-up with Bezos every year, his ability to innovate, invest and return is staggering and proven.
I really think of Amazon as an investment vehicle (like Berkshire) for web commerce with a strong umbrella brand.
I think Prime is amazing. It's driven me to purchase things that I otherwise normally wouldn't have; that says a lot because I'm not usually one to buy a lot of "stuff".
It's incredibly convenient, I often buy stuff from mobile and it'll be on my doorstep in two days. It's literally magic and I love it.
I can't even begin to comprehend the levels of logistical wizardry it takes to make all of that happen.
I'm inclined to think Amazon knows exactly what they're doing here.
> I think Prime is amazing.
It was until Amazon created the concept of 'Add-on Items', which they have retrospectively applied to thousands of items.
These items cannot be bought on their own, even if you wanted to pay for shipping. Not even by Prime members.
Where do you live? Just wait until you live in one of the few magical cities in the US where under the right circumstances you can order something on amazon and have it show up at your house the same day, for no extra charge.
The stock is tremendously overvalued, no value investor would ever buy AMZN. The assumptions needed to justify its current price are absurd. The bull case of "they'll put their competitors out of business and then raise prices" is one of the most shallow analyses of a company I've heard and just highlights that person's lack of business insight. The quote from Horace Dediu is correct, AMZN isn't going to be able to raise margins without costing it revenue growth, they're stuck as a low-cost retailer or they risk their customers going elsewhere.
EDIT: I anticipate people getting hung-up on "value investor" because clearly AMZN is a "growth" company! Growth is always a function in assessing value, and sophisticated value investors know this. The popular convention of labeling something 'growth stock' or 'value stock' does the greater investing public a disservice.
> “This isn’t supposed to happen,” said William H. Janeway, an economist and venture capitalist. “It violates mainstream finance theory. Very few companies have been valued this way outside a systemic bubble.”
> No one is asserting that Amazon is a flat-out bubble, but there is an increasingly noisy debate about when it will — or even whether it can — deliver the sort of bottom-line profits that investors normally demand from a company expected to post $75 billion in revenue this year.
Netflix started the year at under $100/share. It's up to nearly $340/share today. Tesla started the year in the $30s. Its high this year was just under $195/share. Pandora entered 2013 at under $10/share. It's above $26/share today.
You can make strong arguments that many tech companies deserve premium valuations. But this market has and is being driven by the Fed so debating fundamentals right now is sort of like talking about a fly on an elephant.
This story line is so incredibly hackneyed. It's boring. You either believe that Amazon is a giant non-profit, some kind of cosmic joke that Bezos is playing on the world, or you believe that Amazon is one of the most unique and brilliant companies ever and that maaaaaaybe their true profitability shouldn't be judged by our ever-increasing myopic standards.
sales is kind of easy if you don't care about profit. also kills off competition, which in turn makes sales easier.
but what happens once profits are needed? or is amazon the largest NPO on earth?
Since amazon invests all it's got in expansions and new offerings, It's really hard to talk about how much profit they make. And it's part of their advantage to keep this secret.
Profit is taxable, whereas share price rise incurs taxes that are easier to avoid.
Correct.
1. Give away profit, to increase market share
2. Repeat
3. Enjoy your new monopoly
4. With competition gone and customers additionally locked in via your technology platform: Set your prices as you wish
It's way easier to run a company if investors aren't expecting a profit. They don't complain about how you spend your cash, or that your operating margins have ticked up or down a percent this quarter, or that you missed your profit number in the latest results. Setting that profit expectation is the tricky bit, so why would Amazon give it up now?
Doesn't this same story get posted every few months? Bezos stated that Amazon is re-investing revenue instead of trying to make profit.