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Comment by austincheney | Hacker News Reader

> It’s the third-most-valuable company on Earth, with smaller annual profits than Southwest Airlines Co., which as of this writing ranks 426th.

Would somebody mind explaining this to those of us who are not investors? Is this saying Amazon's stock is super inflated by investment speculation?

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Investors are credibly speculating that Amazon will continue to have very high revenue growth rates.

Southwest last year grew revenue 4%

Amazon grew revenue 38% (!!)

If you believe that pattern will continue for a very long time, it makes sense to give Amazon an enormous valuation.

As a practical example, if you discount the future by 10%, Amazon is growing discounted yearly revenue by 28%; Southwest by -6%.

Now stocks follow (the sum of) discounted future profits, not current. If Amazon's revenue increase continued indefinitely, while holding fixed profits, Amazon would be worth an infinite amount, while Southwest's value is actually bounded. Of course Amazon certainly will slow revenue growth at some point - but it isn't too hard to see why it could very well be worth an order of magnitude more than Southwest.

I thought Southwest was managing an outsize profit margin for the airline industry for many years on arbitrage bets on the price of fuel and finally ran out of steam in the last couple of years, so it's not a good yardstick.

Yes all about growth. Google is similar as now over $800b market cap and growing at over 22% and accelerating but also much more profitable than Amazon.

It could mean that, but in Amazon's case it means they are reinvesting all of their earnings back into new internal investments, which leads to small annual profits.

In that case is the high value still justified speaking strictly in terms of revenue alone?

Also not an investor, but intuitively reinvesting revenue to grow future revenues seems more valuable than being profitable without taking steps to (substantially) grow revenues. Can anyone to speak whether this intuition is reasonable or not?

Exactly. Profits lead to dividends, but also to taxes. As an investor, it is preferable to reinvest and keep growing the business. The trick is that mature companies have a very difficult time achieving double digit growth. Amazon (still) doesn't have that problem.

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