Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the World | Hacker News Reader

Amazon Profits Fall 45 Percent, Still the Most Amazing Company in the World

slate.com

88 pointssrlake85 comments

Thanks, Slate, for regurgitating what you heard a friend mention in a coffee shop and looking on Google Finance for a few numbers to fill in.

The first lines from the Argus report show:

"...management's emphasis on keeping prices low and heavy infrastructure investments...Most of the weakness appears to be in the International division, as the company expands operations in economically weak markets such as Europe and China."

(If you want to read Argus reports, many stock trading sites will give you free access after opening an account.)

Edit: not sure why I'm being downvoted; afterall, I'm responding to an Article which has this line: "That's because Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers"

> ...management's emphasis on keeping prices low and heavy infrastructure investments...

The article is talking about the decrease in net income and infrastructure investments doesn't decrease net income. I've seen a lot of people suggest that the low profit numbers over the years are because they are doing a lot of investing in infrastructure that will pay off in the future. That might be true, but investment isn't on the income statement and doesn't show up in net income.

If it increases Operating Expenses then it would have an impact on Net Income. The actually money to invest in the assets may be in a different place on the balance sheet though.

Any investments made that are meant as long-term (i.e. >1year) is capitalized on the balance sheet and is a use of cash in the cash flow statement.

Any short-term operating costs related to those investments are likely to be expensed during the period in question and thus be recognized in the income statement.

Opex may also be higher (and consequently lower profit) while heavy investments are made because the company hires a lot of more staff which do not start generate any revenue until a later period.

That line is obviously a joke. What is your issue with it?

Just to give some numbers to this, for anyone wondering:

In 2012, Amazon made $631 million profit on over $48 billion revenue - meaning they converted a little over 1% into profit. Meanwhile, almost every other comparable company had close to 20x that. Google made about $11 billion on $48 billion, and Apple made $41 billion on $156 billion. From a purely financial perspective, it really is insane.

You really can't compare profit margins between a retailer and a software company. Amazon books the full price of the products it sells as revenue, but must pay most of that to its suppliers, whereas the marginal cost of most of Google's products is very near 0.

Fair enough, but even then, AMZN is doing worse than Wal-Mart.

I was surprised to read that Wal-Mart has had some fairly large failures in some markets - notably Germany where they gave up and lost £3 billion.

Is there any country where Amazon has tried and failed to compete?

Walmart has to compete with whatever local stores are in your area. Amazon has to compete with every other website that sells things on the 'net.

Plus I'm under the impression that Amazon is investing more into growth at the moment than Walmart is.

Prime is really a killer feature. I'll find myself ordering things I never would have dreamed of buying online, or possibly at all (because I didn't know it existed). And this from someone who balked when Amazon first started selling things besides books!. Living in a small town might be a factor in this, however.

If you look at 3Q numbers, AMZN had 27% revenue growth, while Walmart had 4%. That's a huge difference.

(Walmart didn't announce 4Q numbers yet.)

You're missing the point here. Google's main business, selling ads, and Amazon's current main business, online retail, are two completely different markets. You're essentially comparing apples to oranges. The margins are lower in the space that Amazon is competing in, it doesn't make sense to compare two completely different companies.

Sure the margins are lower in online retail, but even then Amazon is performing abysmally, and the trend in almost all their numbers is downwards. The only reason they are still around in the first place, is sheer size. Smaller retailers would never survive on the profit margins Amazon is producing.

The thing that sticks out most from their earnings release is that the trend is clearly downward. The profit margins and net cash flow are sinking, while operating costs, number of employees, etc are rising. Added to that, their market cap/stock valuation is truly insane, which IMO is a ticking time bomb.

What this all means is that Amazon is going to get in a shitload of trouble somewhere down the road. Remember that they only made about $5 billion in profit over their complete lifetime, of which only about $1.5 billion is left after deducting losses, so in terms of cash Amazon is more or less on life support of their investors. All it takes is some relatively minor event (more focused competition, lower consumer spending, some kind of bad media attention) and their stock will tank, and the whole constellation could go down like a house of cards.

No matter how much you like Amazon and its services, it's hardly an example of a solid business if you ask me.

All it takes is some relatively minor event (more focused competition, lower consumer spending, some kind of bad media attention) and their stock will tank, and the whole constellation could go down like a house of cards.

So if all it will take is a relatively minor event, why hasn't it already happened yet for a company that has been around over 15 years?

I'd say 'because the market still has confidence in Amazon', which is reflected by their market cap. While market cap has no relation whatsoever to the profitability of a company, it does allow Amazon to keep investing in expanding into all the directions they are expanding in. At current valuations, they only have to add ~5M shares (on a current total of ~450M outstanding) to raise around ~$1B. This is not a free ride though, they _will_ have to be able to jack up their profits somewhere in the future, otherwise the stock will sink and they will have a hard time to keep up their strategy of expansion.

I'm quite surprised they have been able to keep up this game for so long myself, but it's not totally crazy. Online shopping is has been growing like crazy for since Amazon started, the market today is probably at least a 100 times larger than ~10 years ago. Some day though, growth will start to level off, and looking at Amazon's earnings releases over the last 2 years or so, it seems like we're almost there. It's going to be very interesting to see what happens to Amazon when they cannot keep growing any bigger.

I guess I don't see your implied meaning of "relatively minor." If the market has had confidence in amazon for so many years, then wouldn't any event that causes them to lose confidence be considered the opposite of minor?

Stock price has 0 effect on the sustainability of Amazon as a business.

What your missing is they don't pre pay for there inventory. So while revenue vs profit might make it seem like they would quickly get into trouble a 10% drop in retail sales with far less issues than a software company operating on 1% margins.

They might not pre-pay for the inventory, but they still have fixed costs, and they are rising, they have over 50k employees now. They _need_ to sell at huge volumes with the profit margins they are taking, otherwise they will bleed money. Some day, the fairy tale of 3000+ P/E and years of making next to no profits or even losses will be over and the stock will tank. Amazon will have a huge problem attracting funding to cover their fixed costs, they will have to fire lots and lots of employees at the expense of service and marketshare, and basically show us what the .com bubble 2.0 looks like.

This prediction is insightful, but still just a prediction. However, if you state it like it's going to happen tomorrow, it is also spreading FUD.

1% margins are about normal for grocery stores... just to put this perspective in perspective :)

Amazon's Price/Earnings ratio is a quite staggering 3897.

Wal-Mart's PE ratio is 14.38. Safeway's is 9.25, Apple's is 10.35.

Yet their Enterprise Value/Revenue is ~2 and Google's is ~4 and Walmart's ~2/3 (.6). Ent Value is sort of the total investment/borrowing/valuation minus cash. So Amazon does more in sales vs their company's leverage compared to Google and worse compared to Walmart.

EV/EBITDA is ~53 vs. Walmart's ~8 vs. Google's ~13. EBITDA is basically earnings but more complex ("earnings before interest, tax, depreciation, and amortization").

From what I've read there's concern Amazon is overvalued, but not what the Slate article portrays as them being some charity case, being invested in by people with ulterior motives to keep consumer prices low (I have no idea if that was even a sarcastic point or not. It's a terrible article).

It's pretty clearly a sarcastic point. The main thrust of the article is that Amazon appears to be given special treatment by Wall Street analysts and the investment community - everyone is banking on them being able to produce massive profits as a result of their relentless focus on growth at any cost. They can produce a loss for the quarter and have their share price rise significantly - other companies don't have the same luxury.

Every growing company has the luxury.

At a Price/Earnings of 3,160.71, that is a lot of luxury.

Which tells you how meaningful the P/E ratio is when analyzed independently.

At some point it needs to come down though, one way or another. Not many are going to invest in a company which is guaranteed to have a P/E of > 200 indefinitely. This would mean a very low return on investment.

From a practical point of view, who cares? Unless they are selling their stock to raise revenue it matters not (to them) if people are willing to "invest in" their company.

Now their investors may care, and there may be board fights and so on, but if Bezos can control that then he has some leeway to build the company he wants. It's pretty impressive, really.

And it's very intriguing what's going on in Cambridge (MA). A lot of hiring and work and what-not yet nobody seems to know what they are doing.

Investors can't care. If they cared, the stock price would drop and take P/E with it. It fixes itself

That's not the correct way to analyze P/E. Looking at that number in a vacuum is nigh on meaningless. P/E is best analyzed as a relative measure within a given market (in this case, online retailers w/ no brick and mortar presence).

That said, there are exceptions to every rule. I'm not aware of any other companies that currently exhibit such a high P/E.

What am I getting wrong, exactly? If a company is going to be a good long-term investment based on fundamentals, it needs to have a sensible P/E ratio. There are exceptions for companies that are growing or have a high probability of having higher earnings in the future. And of course a stock can make very big price movements with no change in fundamentals.

But in a long perspective, there needs to be a small ratio between what you paid for the stock and what the company earns if it is going to be a good investment. FYI I am heavily invested in Tesla Motors, which currently has an undefined/negative P/E ratio.

I don't disagree on seeking a sensible P/E ratio. I'm stating that in order to determine what qualifies as a sensible P/E ratio, you need to look at the industry/market the company operates in.

Amazon is a category killer just like Wal-Mart is and if their PE ratio is 14.38, then Amazon's P/E ratio should be in that area as well. In order to avoid being placed in that category, you have to do some disruptive things. It's similar to what most web based companies do, they try to shoot for the stars and keep that momentum going. I think that explains the high P/E.

The numbers were silly three months ago too, but AMZN was a much better investment since then than AAPL.

Aside from the other things that have been pointed out, IMO Amazon is still trying to grow aggressively. Most "comparable" companies have settled in to a market and an operating model. Even Google simply seems to "explore" new territory, instead of pursuing it.

From a glass half full perspective. You can argue that Amazon is keeping profits in check so they can continue to offer their customers the best prices and services. But that's if you live in a world where bears fart butterflies.

Actually you could rather say that Amazon is reinvesting its profits to strengthen its position and reap the benefits in the future.

How far into the future? They've been saying that for 17 years.

Except now they have profits and they had losses in the late 90s.

They are still expanding to new countries. Last year, for instance, they opened amazon.es and amazon.com.br which are significant markets.

I don't see what's the point in comparing revenue to profit ratios in wildly different sectors.

>I don't see what's the point in comparing revenue to profit ratios in wildly different sectors.

That's fair, I don't buy the comparisons of Amazon with Google, Microsoft, etc either. It's also true that P/E ration can be misleading, for example even a healthy company might book a loss, or small profit from time to time for all sorts of reasons.

The problem with Amazon is that their current share price is around $250. For that to make sense, you need to believe that their earnings will rise so that this becomes a good deal. To achieve a P/E ratio of say 20 (still too high for a retailer), their earnings would need to go up about 150x. How are Amazon going to become hundreds of times more profitable than they are now?

Is amazon.es for latin america? AFAIK .es is España, and although it's ≈45MM, it's hardly a massive market WRT latin america.

No, it looks like it's targeted to Spain (which would make sense as far as logistics beacause they already have sites for France, Germany, Italy, and the UK).

Latin America is not a single market for retail. Spain is the biggest single Spanish-speaking market for consumer products, although Mexico is growing fast.

significant != massive

So, their plan is to obliterate all other retailers (I guess online and otherwise) and then to jack up prices?

From a normative perspective that honestly seems quite evil. I guess then I can be happy it hasn’t happened yet.

So, their plan is to obliterate all other retailers (I guess online and otherwise) and then to jack up prices?

Probably not. Historically, this has rarely worked. Once they jack up their prices, it isn't that hard for competitors to sprout up.

Amazon will have to follow the walmart model - obliterate all other retailers and keep prices low forever.

I think wall-mart , did,in some areas, jack up the prices after killing their main street competitors.

The trend is actually towards becoming a platform through Amazon Marketplace. This may be bad for the market in general, but can hardly be considered obliteration.

Also, keeping your profit margins thinner even when you don't have to gives you extra insulation from competitors.

That'slleaving money on the table. Keeping margins high gives you room and bank to go lower when needed.

it is only insane if you do not understand how Amazon makes money.

If a retailer wants to double its revenue, there are two basic options. Double your margins. Or double your volume by cutting the time you hold inventory in half. Amazon has aggressively gone for the second approach, and is glad to cut its margin in half in return for tripling sales.

Your "comparable companies" are not in the consumer retail business. And if they tried to maintain their margins while competing head on with brick and mortar commodity retail stores, they'd go out of business.

Apple has also gone for the first option:

* Kindle books (especially self-published ones) should have better margins than real books. Kindle grew 70% YoY while real books only grew 5%.

* A growing chunk of their revenue is from AWS, and software-as-a-service certainly has higher margins than mail order.

What happens when states more rigorously enforce sales tax collection? Margin-be-gone?

Amazon would collect the sales tax from the consumer and remit it to the state. It has no effect on margin.

other than the increased cost may deter some customers

"If a retailer wants to double its revenue, there are two basic options. Double your margins. Or double your volume by cutting the time you hold inventory in half."

So there's an unlimited amount of buyers willing to buy and every time you cut the time you hold the inventory in half people shall buy twice as much?

If you take shipments in fixed sized lots, every time you double your sales rate, you've cut how long you have to hold each item in half.

Furthermore it gets better. Frequently if you have good credit, you can take a shipment, sell it, and then pay later. This gives you float that you can use for things like paying the overhead of keeping unpopular items in stock. (Remember, Amazon makes substantial money both from having things that are hard to find elsewhere, and by selling commodity items in bulk.)

I think they cut the time inventory is held in half by charging less and not making as much per sale, but making it up by moving more inventory.

I just want to point out that it's not 1% of ten million dollars, it's not 1% of a Billion dollars, it's 1% of FIFTY BILLION DOLLARS!

Amazon is investing in growth right now. That's why their profits are so low. Normally, one might think that a company of Amazon's age and size ought to be through the growth stage by now, and in fact it is TRUE: Amazon has finished dominating the book industry, and really has no more room to grow.

Except that they found new markets and moved beyond books. Now they are a universal retailer of anything that can be sold on the internet. But that market (although not fully saturated yet) still isn't big enough for them, so they've also moved into making tablets for the masses. And into running server farms for the entire world. As long as they keep knocking over new markets at this rate, they don't need to show much profit.

[DISCLOSURE: I do not own Amazon stock, primarily because I think it is overpriced. So I suppose I don't completely disagree with the parent post.]

Just FYI, the $631 million number is for 2011, not 2012.

http://finance.yahoo.com/q/is?s=AMZN&annual

2012 appears that it's going to be a net loss, because of their horrible Q3 numbers.

http://finance.yahoo.com/q/is?s=AMZN

If I were an investor in Amazon, I would definitely be worried at this point. Even though revenue is up sharply, Amazon doesn't appear to be making a consistent profit at all-their net income was down 50% from 2010 in 2011, even though they had a ~33% increase in revenue.

If I'm not mistaken, they do have 5 billion in cash and cash equivalents. ( I don't know where that came from, equity or net income in the previous years ? ) So they can keep this going for 18 more years. And then they can start selling their offices.

But isn't spending on infrastructure improvements cut into the reported profits?

Considering how much Amazon is spending to consistently update their infrastructure, I wouldn't be surprised.

Keep in mind that eCommerce is only ~15% of all commerce in the USA. If we will be buying all the things we want/need online in the future, someone will be the Wal-Mart.

The market and many believe that Amazon will be that company because they are using all of their revenue now to aggressively ensure this.

http://kpcb.com/insights/2012-internet-trends

Amazon started in one business and is slowly dominating another one. They're revolutionizing cloud computing using the infrastructure that allows them to dominate the online shopping market.

I would say Amazon has two healthy futures as a company. Neither future looks ready to be unseated, given the shopping/cloud landscape in Q1 2013.

I view Amazon like I view Square - the value doesn't come just from the profit, but from their market dominance. Square is raising so much funding without reaching a break-even point because international dominance in finance is a highly lucrative position to be in. Likewise, Amazon is still making money - just not much compared to the amount of merchandise they sell. The value comes from the concept - Amazon is redoing supply chain, and with same-day deliveries coming to the USA soon, the value is in Amazon gaining marketshare such that they both increase sales and increase margins.

Here's what I don't get. Amazon seems to be all about growth; in fact, their stock price is so high that its investors seem to believe that Amazon intends to expand enormously internationally and that it will crush all of its competitors when it does.

However, to this casual observer it seems they haven't made grounds in new markets in ages. And they're not at all a raging success in all of the markets that they have entered.

I'll give two examples.

China. They absolutely botched this. Chinese people just don't shop there. Worryingly, Amazon doesn't seem to know how to react. E.g. some time ago they started using this new Z.cn branding, but now they're just inconsistently using both the Amazon.cn and Z.cn names. (And of course they have a Chinese name also.)

Europe. For some reason they have three different stores in Europe. Two of those are in France and Germany. These stores charge in euro, which would be convenient for other Europeans except that these stores don't have English language front-ends. As such they only serve a limited market. The third store is located in the UK. It charges in pounds, which makes it a hassle to shop there. Moreover, they have weird restrictions on what they will and will not ship internationally and you have to pay by credit card—which relatively few Europeans have.

I recently read that Amazon is going to launch Amazon.nl in the near future. I've been hearing those stories for ages now, though, so I don't know if it's true. But suppose they did. Is it really a given that they will do well? In the many years that Amazon didn't open a Dutch store, tons of web stores have sprung up, and some of these have gained significant mindshare. I reckon it will be very costly and time consuming for Amazon to beat these competitors. Why is it that investors don't seem to be worried about this?

I don't see any evidence for your premise that their stock price is high because of international expansion.

Well, it's a conjecture. The stock price is sky-high and this should mean that investors expect Amazon to grow much, much larger. International expansion seems to be the best way to go about that.

For the long-term survival of Amazon it might also be a good idea to try to dominate everywhere. In every market that Amazon doesn't serve, a competitor will take its place. There's a danger that in the long run such a competitor will become large and efficient enough to compete with Amazon in Japan, UK, Europe, or even the US.

I just have doubts that moving your low-margin mail-order business into other markets is really a good strategy.

It's much more efficient to move into high-margin businesses in your strong markets.

You're right and it's still confusing me. I regularly enter "amazon.be" only to realize my "thinko" and then I head "amazon.fr". It's mindboggling that they didn't at least register and/or redirect the domains. Sure Belgium is a small market, but their european strategy seems totally lame.

There's a need in Europe. I don't get why they don't fill it better. They're great in the U.S. and amazing too in Japan. These are two gigantic markets of course. What I don't get is why they don't see Europe --or at least the eurozone-- as one single big market.

Disclosure: I have worked in Kindle, so I have insight into what's happening.

Think about Amazon's original market: books. In this case, it makes almost no sense to have a eurozone market.

1. Most countries speak different languages

2. The laws around selling books are CRAZY in Europe. Each country has different laws about how books are priced. FR and DE are fixed price (everyone sells the book for the same price), IT I think is Reseller (normal model, publishers sell to Amazon, Amazon sells to consumer), and UK is Commissionaire (Tax included Agent model, Amazon gets commission for selling books to consumers, but publisher sets price) and Reseller.

3. Each country has different publishers for the marketplace, with different requirements in terms of metadata etc.

> 1. Most countries speak different languages

Yes, and in some countries people speak more than one language. It's worrisome that Amazon is having such difficulties dealing with such a simple matter.

Additionally, there are a ton of English speakers in the eurozone and Amazon is doing a bad job in serving them. Here's one more example: Amazon.co.uk actually has a feature where you can pay in euros. However, it only works on check-out. When browsing the website you cannot have it show prices in euros. I'd shop a lot more often at Amazon.co.uk if they showed prices in euros!

> 2. The laws around selling books are CRAZY in Europe. Each country has different laws about how books are priced. FR and DE are fixed price (everyone sells the book for the same price), IT I think is Reseller (normal model, publishers sell to Amazon, Amazon sells to consumer), and UK is Commissionaire (Tax included Agent model, Amazon gets commission for selling books to consumers, but publisher sets price) and Reseller.

But you only have to abide by the system in the country you're shipping from, right? So what's the problem again?

> 3. Each country has different publishers for the marketplace, with different requirements in terms of metadata etc.

I don't understand what you mean.

Are you talking about translations of books? Those, of course, are different products from the original.

Also, some electric appliances are often sold under different brand names, but, again, in such a case we're talking about different products.

Or were you referring to something else entirely?

Approximately 1 percent of the Belgium market would think about putting in a ccTLD instead of using browser default search box.

Companies investing in themselves? Disgusting behavior.

How so? When you have an LLC and you buy a laptop for work -- isn't that investing money in yourself?

I can't be certain, but he may have been employing sarcasm.

Investing in sarcasm, even. Disgusting.

"There is only one valid definition of business purpose: to create a customer" - Peter Drucker's The Practice of Management[1]

Let's take shareholders (both internal/external) out of the equation for a second... What do profits really actually do for companies? You take those profits, reinvest them to create even more customers. Amazon does that, and very aggressively, and for about 18 years and counting.

[1] - http://www.amazon.com/gp/product/0060878975/ref=as_li_ss_tl?...

Amazon will never make a real profit, for two reasons:

a) Amazon is in a fundamentally shitty business: retail. It's retail on the Internet, but still retail. Amazon may successfully get into a real tech business, but they've been fairly unsuccessful at this so far--and there strategy continues to be to compete on price (AWS, Kindle etc.) which means no profits.

The real reason, though is:

b) Bezos is so focused on the long term that all profits will be immediately reinvested. Amazon is an ego thing for him and he wants it as big as possible at the limit. So Amazon will continue to grow but never make a profit. It's value is forever unmonetizable, even as it continues to own more physical stuff (warehouses, etc.).

Just proof to me how screwed up Wall St is. Apple makes a profit and sells a record number of iPhones and iPads and its stock gets hammered whereas Amazon loses an amazing 45 percent and gets a slap on the wrist from Wall Street.

That is not at all how any of this works.

First, expected growth is built in to the value of a stock at any time. If the market expected Apple's sales to double, for example, and it happens, the stock will not skyrocket when Apple announces "record results" - because that doubling is build into the price of the stock. If instead their sales go up 1.5x - which is still healthy - the stock will fall, because it missed the market's expectations. The price was set at the expectation that prices would double.

So what happened with Apple? While I don't claim to be an investor (and don't take any of this as advice), people cut price targets after it looked like Apple's sales had plateaued. The general consensus seemed to be that from the latest report, Apple's ability to beat earnings per share targets (ie. how much money it makes for each share that it has issued) is diminished, so the price has readjusted.

Amazon didn't lose 45%. Amazon's net income fell, from $147 million to $97 million. Net income is what most people refer to as profits. Amazon's revenue is up 22% from last year to just shy of $50 billion, and it has a ton of assets, around $32 billion. So how did profits fall? They spent more money building data centers and warehouses - in the same way that Apple's profits would fall if they spent more money building Apple Stores. It's an indication that the business is healthy, not unhealthy. Operating margin (ie. your return on sales, what portion of revenue turned into income) also increased, by quite a bit from 20% to 24%, which is very healthy.

Apple and Amazon are both great companies, but to be clear, I'm not recommending either of these stocks - if you're buying a single ticker, you're gambling.

If you want to learn about this stuff, I'd recommend as an very readable introduction the book A Random Walk Down Wall Street.

See, I think it's odd that some people seem to think stocks should go up on good news and down on bad news, regardless of whether people expected the news.

Didn't we just have a whole thread on how Amazon is not even trying to make a profit, but rather run razor thing margins to prevent any competition with less efficient methods?

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