Hacker News Reader

Comment by barista | Hacker News Reader

Given the razor thin margins that Amazon runs with, I am not surprised. This is a company that is struggling to make any money even after people bought hundreds of Billions of dollars worth of stuff from them. They are bound to cut corners to stay alive.

View on HN

Amazon works hard to have a minuscule profit. If they have no profit, they don't have any tax liability. The business they're in lets them adjust their profits in real time -- whenever they expect to have large profit, they just lower their prices to eat it. Consumers love this, so they have huge turnover, and thanks to this, small increase of prices earns them big profit, if they ever need cash to fund acquisition, or new warehouse, or whatever.

I don't understand why you'd want to minimize profit just because of tax liability. Even if I paid 60% in taxes, I'd still be better off keeping 40% of a higher salary. What's the rational?

The reason is that it's not the money you actually want. You want the stuff that you can exchange money for -- you want food, shelter, entertainment etc. If you had a choice, get a $10k pay rise, or $10k reimbursement for shopping, you'd obviously go with the second option, since the first one would only give you a certain percentage of that $10k.

There's no reason for a company to pay tax on money it does not need. If they need some money for some current expenses, they can obtain it any time and spend it as an operating expense, which gets them no tax liability. Think of Apple, which has a basically untaxed huge wad of cash outside of the US -- they will keep it there for as long as they don't need more money in the US, to avoid the tax liability. They only keep in the US the money they need, hoping that future changes in tax law will let them save on bringing that pile of cash home.

Lower prices (and hence, profits) don't just save on taxes monies - they also drive out the competition, expanding Amazon's footprint in the marketplace.

Growth first, money later.

It's the difference between a business and an individual. Individuals pay taxes on incomes. Corporations pay taxes on profits, so they can have arbitrarily large incomes while maintaing zero profits.

"Profit" is either "money you haven't spent yet" or "money you need to return to investors". Modern corporations have been telling investors to eat a bag of salted peanuts lately, so they really don't care about returning profits to investors. So if "profit" is just "money you haven't spent yet", you're better off spending it before you pay taxes, because then you get to spend X% more.

The individuals running the company are presumably compensating themselves lavishly to run a company with no profits.

So.. hold on.

If the companies have no profits, and investors get no return.

..why would you want to invest?

Indeed... Why?

Coz the value of the company is still increasing as more warehouses are bought

Because if the company is spending that potential profit on something that will increase its future value - you as an investor will get a piece of that increase in the future

Because they get no immediate return from profit (from dividends), but the value of the stock still increases (hopefully moreso if they are reinvesting more of their profit into future growth).

Hypothetically you are betting on future profits.

Historically, business ventures like Amazon have had two phases: a fast growth phase, and a long, stable, profitable phase. You don't expect profits while the business is still growing. You expect them to plow the profits back in to make it grow more. As long as companies can maintain absurd year-over-year growth, investors are willing to pretend that the company needs its giant cash piles to grow more faster. This is actually the rational reason why the stock market shoots a brick whenever one of these tech companies only increases its profits by 23% instead of the projected 27%.

Hypothetically, what Amazon's share price means is that investors believe that it will return more than that many dollars per share to its investors once it switches from its fast growth to its slow-and-steady phase.

Hypothetically; stock also has value because the expectation that it will go up or down creates a class of investor who buys or sells it based on its expected price regardless of its fundamentals, which can affect the price in either direction.

Then it'll be interesting to see what happens if they hit their stable phase, and proceed to give out no dividends whatsoever.

They're not fighting for survival, they're optimizing for market share.

Ha! Funny. Actually Amazon makes plenty of money, they're just recording their income in other countries as a tax dodge, like every other megacorp nowadays.

http://www.guardian.co.uk/technology/2012/apr/04/amazon-brit...

Reply on news.ycombinator.com