Amazon.com Announces Third Quarter Sales Up 34% to $43.7B

Plenty of room to grow!

It used to be the case that Amazon was very rarely significantly undersold. Starting ~3 years ago, I started to find that Amazon was somewhat frequently undersold by enough that I was willing to wait for Ebay or Ali (or camelcamelcamel to email me an Amazon price drop).

I think Amazon's current positioning is more profitable for them and makes me happy as an investor in AMZN, but as a consumer, it makes me Google shop more often than before.

But I do also order larger quantities of things from China, when I can plan ahead. I go to Amazon when I can't plan ahead, and more frequently these days, to get a working reference implementation up and running before I start running around making a BOM for a prototype. It's amazing how much time and money that can save you.

Especially in the HN crowd, its easy to forget that e-commerce is still <9% of global retail. And while that number won't go to 100%, its expected to double in the next four years.

So given that number alone, we should expect a ~20% YoY increase in revenue from Amazon. 34% is still excellent, but makes a little bit more sense when you frame it in terms of overall sector growth.

25% is a fat margin: why would you say this is a low-margin space?

When a company makes a profit, it pays taxes on that income. The dividends are then either 1. distributed proportionally to the shareholders, or 2. reinvested into the company.

The general idea is that reinvestment will generate more profit in the long term. In this case, the company reinvests the income into operations and growth during the next fiscal period and onwards. This method of reinvestment, however, still requires some taxes to be paid on the income.

As an alternative, a company can fill their income statement each quarter with expenses that will ~match their income. This way, they're essentially reinvesting in their operations and growth just the same, however they don't have to pay the taxes if the expenses are generated in the same quarter. This method makes the company look unprofitable, but in reality is merely an accounting choice (and arguably, a good one).

A random article I found that explains some of the strategy: http://www.businessinsider.com/analysts-wrong-about-amazon-p...

Say you land a long term contract to provide a service for 5 years and you need to buy extra hardware to fulfill this service, you can choose to expense the hardware immediately in the first year while you let the earnings come in over the next 5 years. In the first year you would be taking a huge loss (on paper), and in the following four years you would see larger than average profits (on paper).

Alternatively, you could acknowledge the full value of the contract immediately. Or another alternative is to expense the hardware over time.

I'm not an accountant, but this analogy is my basic understanding of the flexibility that companies have.

In the words of an a16z partner[1]:

> So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex.

[1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

They're positioning themselves as a monopsony for the modern world, even expanding into groceries and now, evidently, pharmacies.

Imagine one company serving as an access point for so many of our goods, while wielding dubious control behind the scenes to extract profit and move vertically through the supply chain. It's easy to imagine a future where we simply buy the cheapest, reliable goods whenever in need, and end up with Amazon lightbulbs that power our Amazon TV stick, etc, etc, etc. It's scary to just see how many cities are bending over backwards to try to be the location of Amazon's HQ2.

Their move with the Echo has gained them another critical access point in the future: smart homes. In the same way we require mobile phones for our apps, we'll require a hub for our IoT devices, preferably voice-activated, and that will be the Echo.

It's hard to even sum up all of their advantages, but as someone who has competed with them in one industry before: it's a damn nightmare.

Which stock are people going to buy? _Everybody_ is going to buy Company A's stock and _nobody_ is going to buy Company B's stock. P/E doesn't matter because 1) no dividends and 2) it's not a proxy for relative risk (we established risk is identical between the two).

Amazon is special because it's potential for revenue growth is believed to be nearly unlimited. As long as they're not losing money, and as long as they have enough profits to continue growing revenue, people will keep investing. Once the specter of stagnant revenue growth appears, Amazon's stock will probably come crashing down.

Basically, investors chase revenue growth, not profits. Berkshire Hathaway works the same way. Buffet might be a value investor who buys companies that can grow profits, but the price of BRK.A tracks the revenue growth of the holding company, not its profits.

Conversely, Wal-Mart's revenue growth has completely stalled. In fact, the stock price plummeted the year that revenue decreased slightly.

This is how things look as far as I can tell. I'm not a financial professional, and even if I'm right I'm sure there's a far better way (more technical, more comprehensive) to explain this dynamic.