Amazon's profits
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Androind could eat away at Apple. Google's search could in theory be disrupted. Facebook seems more vulnerable by the day. Microsoft is a dead man walking.
But Amazon has this entire subsystem of distribution centers filled with inventory risk. People focus on the website, but I think the real magic is everything that happens behind the scenes. The barriers to entry are enormous.
I once created a comparison shopping service. When we talked with users, we heard over and over, "I just go to Amazon. I trust them. I don't shop around online." Or, "I have Prime, so I'll save money on shipping anyway." It made the entire space seem pointless.
An internal Amazon company motto is, "it's still day 1." That's their view -- that it's still the early days of the internet. That's why they reinvest so heavily, because it's still early days.
MS people I spoke with as late as the late 90s still considered themselves to be a 'startup' (though not using that term), but were quick to point out that they could get disrupted in any market - they were playing in many fields, but weren't dominant ("yet", in their minds). I think this was perpetuated by the sr mgt in anticipation of the anti-trust trials - 'look, we're not some big monopoly - we're a scrappy startup that could fail/lose big at any time!'. I'm not sure anyone believed it, but also not sure that anyone in the mid 90s might have foreseen a time when MS wasn't a dominant player, but here we are.
They're still big, and they matter, in some markets, but very few people are afraid of them any more, or even care what their plans for the future are. People fear Google, Apple, Amazon, etc. MS is, if not totally dead man walking, in grave danger of becoming that without anyone (including their mgt) even noticing.
8/8/2013 AMZN: $295.74 @ $135.12 billion market cap MSFT: $32.89 @ $273.97 billion market cap
Still trying to figure out what it means, but thank you.
I wonder if people will still go by default to Amazon if they're not the cheapest.
For instance, Newegg always sells for a few dollars more than Amazon. Heck Amazon even sells for a couple of bucks less than their own subsidiary, Zappos.
I seriously doubt that Amazon's retail operation has demonstrated that they can retain customers while raising prices.
Unless I missed some news/data. Would be glad to hear comments.
Why? Free shipping (I get mine free, but $80 is well worth it because I buy a lot of stuff), always 2 days shipping, excellent service and a huge variety of goodies to buy. I also have their rewards card which returns $... Free coupla hundred bucks every six months, no sweat.
I mentioned convenience as an opener to this reply, and I'll close with it. In a world wherein lots of things become more and more of a PITA, Amazon delivers easy and pain free, every day (I don't work there, so I can say that).
Some of the stuff we sell via Amazons marketplace is the cheapest on the marketplace but by no means the cheapest online. This stuff doesn't come with the same kind of shipping service that Amazon provides either, people feel safe buying through Amazon though in that the very worse outcome they can come out with is their money back.
So other sites need to not only be cheaper but also build up the same level of service and trust to get a large amount of people away from Amazon.
When I'm really out looking for something (online), I use Google Shopping to compare prices from various retailers.
And Amazon hasn't always been the cheapest. I've bought Oral-B toothbrush heads in bulk at a great price from Overstock.com
Even if not the lowest, I know that that Amazon is big, fast, cheap and I have previous positive experience with them, so most of the time why bother ?
I agree with the OP, definitely difficult to see Amazon being challenged in the short/medium run.
In one mall, I walked through a Macy's that may have had only 5 shoppers (I'm reserving "customers" as we weren't one until we actually bought something) in the entire store. The tile floor of the store was crumbling, wallpaper was peeling, everything felt old and ancient. I didn't want to be there.
In one mall, there was an entire wing of the mall that was almost completely abandoned and probably 30-40% of the mall was vacant store fronts. The food court I used to spend hours in consisted of a McDonald's and a Chinese fast food place. I remember years ago when it hosted a dozen different places, all with long lines. Getting a table to eat at required a friend to go reserve a table for you. These days? 3 people eat big macs in an empty large echoy room. It used to be the social center for the town, today it's nearly abandoned.
Amazon and other online shopping venues decimated these brick and mortar shopping venues. And it's not clear that it's generating the same amount of raw revenue in return either. It's definitely annihilating retail jobs in a way that Walmart could never hope to approach, yet it's rarely if ever discussed. At best, retail Macy's jobs are being replaced with contract warehouse work at a local fulfillment center, but automation and the loss of the requirement to interface with the customer means these places only require a fraction of the employees to move the same volume of inventory.
I don't know if the pendulum will ever swing the other way. My wife for example, buys clothes almost exclusively on-line. It's almost unthinkable that she does this, you want to try on clothes after all. But she overbuys a little, and only goes to the physical store to return items that don't fit or she doesn't like. The once proud storefront has been turned into the return counter in the customer service center. Why? "I don't like dealing with all the crowds and it's such a hassle to go there to see if things are on sale, I'll just check the web site every few days instead."
About the only brick and mortar we hit with any regularity these days is Costco, and that's largely because their wine selection is cheaper than online and very nearly always well selected and we can buy bulk toiletries and cleaning supplies at a discount.
Brick and mortar stores are still just fine (or better thanks to Yuppies). Malls are getting decimated by Amazon and cultural trends against malls. The 80s suburban world where malls are the place to hangout is fading fast.
(on the other hand, I know of two other local malls that are jam packed at all hours of the day, so I don't know what that says)
One of the statistics that kinda blows me away, on Boxing Day, the largest mall in the city (which is still tiny by American standards) is visited by over 25% (>100000 people) of the population of the city.
Rackspace just moved their HQ into one of these dead malls[1], which is highly interesting.
[0] http://deadmalls.com/ [1] http://www.planetizen.com/node/59071
I encourage everyone to check out their local dead mall, especially one that you visited when you were a kid. Lots of strange nostalgia to be had for sure. Bring rollerblades or a skateboard if you want to get adventurous.
It was like I was in a research lab's clean room or something.
* They can specialize more than Walmart can, and be real experts in what they are selling, which Walmart is never really going to do.
* They can focus on quality and not compete on price.
* They can get to know their customers and their town in a way that Walmart can't.
Amazon is pretty similar to Walmart from that point of view and the same approach would likely work.
Interesting book, BTW, I reviewed it here:
http://davids-book-reviews.blogspot.it/2013/07/sam-walton-ma...
The stuff on everyone's Macy's registry can be purchased elsewhere for half the price or less. I've looked.
There are so many places where malls are thriving. A few years ago, I used to live in a different city, and at Christmas time I'd have to take a different road to work, because just driving by the mall made my commute twice as long, if not more because of the traffic. On a weekday. Taking the long way was much quicker.
PS: I'm also glad that the thought of a destructive internet has gone from "luddite talk" to "idea worth examining". I've read Paul Krugman talking about this a while ago for whatever is worth.
Again, anecdotal, but I wonder if this frees up parts of the workforce to explore other employment they might have not pursued otherwise.
Something I've noticed is that there seems to be a revitalization in the last few years in more..."traditional"...employers (meaning not in the tech industry) all populated by the kinds of folks you'd probably expect to see in the tech industry: chocolate makers, independent sandwich shops, bike shops, etc.
It's almost like the megacorps in the retails world have ignored certain market segments that are now populated by tons of small boutique shops.
>Microsoft is a dead man walking.
Why is the company with arguably the most diverse sources of income the one that is a dead man walking?
Microsoft has some other sources of revenue but nothing really innovative or capable of huge amounts of growth.
Microsoft's death won't be sudden like Myspace's. It will be slow and will spread over decades. Unless wake up. Purely from a engineering view, they are still a formidable player, and they invest in R&D more than anyone else. If they want, they can still make things happen.
Why would you say that? I'm just curious.
Right now, the only obstacle to Amazon's profitability is Walmart. If Walmart didn't exist, Amazon's pricing control supremacy would ensure they could operate at the lowest possible market price on every item, and as the market maker for product, they would control the cost floor as well.
In a sense, the end game for Amazon is this: it's fucking ludicrous to run a company without profit for years. At some point someone else is going to try to take more profits because of the volume pressure of Amazon. The end game for Amazon is choking all of the other retailers out of existence, IMHO.
They don't have to flip a switch, they just need to wait. They're playing the long game.
Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. Then they'll get Steve Balmer to make the growth stop :)
In cloud infrastructure I think it's safe to say Walmart is actually the smaller contender.
Over time cloud infrastructure could subsume all of retail, at least in theory. If that's the case wouldn't you rather own Amazon than Walmart?
I'm not implying this is reality, I'm just saying predicting future potential is not as simple as current Market Capitalization might imply otherwise IBM would own the NASDAQ today.
What is the 'end game' of Wallmart? I mean, don't most established companies just want to continually drive growth till they saturate the market, then reap?
As far as when the Amazon endgame starts, my guess is when they are doing as much business as walmart
Walmart does ~500B in rev. Amazon did 61B in rev in '12 and is on pace for 72B-ish in '13.
Amazon vs. Walmart is an extremely interesting battle to watch. Amazon has massive advantages in technology; Walmart has massive advantages in size, distribution, and logistics. Amazon is gaining a lot of ground in the US; Walmart is much stronger than Amazon internationally.
If I had to place bets, I'd take Amazon in the long run. They're much more forward thinking and are playing a much more strategic game. Walmart has become overly reliant on price leadership and has had a very hard time orienting toward the future of retail. The Innovator's Dilemma will catch up to it eventually -- but it'll take awhile, because Walmart is so damned massive and dominant right now.
Culturally, I often wonder about the consumer value of monopolized markets.
These days, however, the threat of new entrants into any given market is much higher. Starting costs are drastically lower than they were when conventional microeconomic theory was being worked out. All things being equal, as a consumer, you still don't want a monopolist owning the market -- but the monopolist has to be somewhat cautious, for fear of disruption.
It seems highly unlikely that Amazon will ever operate a true monopoly over all categories of retail. Nor will the government (and competitive lobbying) allow it to get there. But an oligopoly is certainly possible.
(On a micro level, Walmart has basically functioned as a de facto monopolist in certain regions where it has virtually no competition. Those days are over, though.)
Frankly, looking at the US map, as a non-american, even there their presence isn't particularly exhaustive. The USA just happens to be a big market.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
I just hate people saying what-not about easily verifiable facts.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
The US is on level with Turkey, only Mexico and Chile are worse.
The US disparity is equal with France and lower than that of Germany.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
Walmart is actually investing in startup ecommerce plays in brazil (where it has been established 40 years)
-http://www.4-traders.com/TESCO-PLC-4000540/news/Tesco-Market...
So yes, I'd say that's significantly stronger than Amazon's international footing. Walmart has serious competitors internationally (Carrefour, etc.), and Amazon is barely one of them.
I'm as bullish on Amazon in the long run as anyone you'll find here. But even I have to admit that Amazon's international presence is one of its most glaring weaknesses, especially in specific juxtaposition to Walmart.
The trouble with this is that it plays exactly into the article's point. We can't disprove that Amazon will one day choke all the other retailers out of existence. We can always say, "tomorrow will be the day, just wait."
Meanwhile, Chinese factories are selling bicycle parts on eBay. Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business.
I'm not trying to debate eBay vs. Amazon, I'm simply suggesting that if we're talking "long games," there's a lot of uncertainties. Profitable companies are winning now.
Seems unlikely, because the main reason to go to Walmart or Best Buy is to get the product the same day you want it, and also to see it in person before buying it. Amazon won't drive everyone else out of business until they offer both of those.
I've only done it once. It was a defective milligram scale costing in the low teen 2-digits, which arrived DOA. Taking a chance, I resubmitted my original order and dropped off the defective unit at the local UPS store. A couple of days later, I had a working scale and an account credited to reflect the purchase of one scale, net.
I think they could probably beat ebay in this kind of game if they'll be interested.
http://www.businessweek.com/articles/2013-06-06/costco-ceo-c...
So.. why is that "fucking ludicrous"? Seems to me they're playing the Long Run Equilibrium game just fine: "In the long run, every competitive firm will earn normal profit, that is, zero profit."
If anything, shareholders should push tech companies to reinvest every spare cent, assuming it already figured out how to make money to stay afloat.
Raking cash and sitting on it is an awful mode: Google and Microsoft grow suboptimally because of this.
It's also a cushion for a down cycle in the global economy.
I fail to remember when cash helped struggling tech company. Sun? Yahoo? Who could make better use of cash in the time of struggle than they could in the time of growth and ability?
Tech companies do not need to hoard cash. They never die because of lack of cash. They always get murdered by more able competitor or innovation in their field. Thus, preferring to keep cash instead of investing is basically a crime for one.
If you cate about assets and cushions, maybe you should invest in your pillow instead?
Yet cash allows them to respond to those competitors as necessary. I see Facebook's acquisition of Instagram as both a strategic and defensive move. Strategic because they see photos as the primary focus of what gets shared on their social network. Defensive to prevent Google or Apple or someone else from jump-starting their own social platform. Cash affords a company the ability to be agile when necessary.
Having cash is nice, but if you can invest in raw growth makes zero sense not to.
Build vs buy analysis still applies, and "running circles around" could get expensive, as at early stage it's difficult to tell which innovations will pan out and which will fail.
Apple, for one, negotiates better manufacturing deals due to the wide knowledge of them having a fat checking account http://www.quora.com/Apple-Inc-2/What-would-be-a-good-use-of... A lot of dealings in the offline world (datacenter leases, procuring manufacturing capacity, loans of credit, bond issuance, contracting suppliers) is easier if you have a fat account to show.
I would not say that Google and Microsoft necessarily grow suboptimally because they have a lot of cash sitting around. The current opportunities may not be worth investing in. Berkshire has tons of cash, waiting for a good opportunity. And when it comes, cash gets poured into it.
They are effectively taking profit in the form of Amazon equity (via increased stock price) and not paying any taxes.
The only concern I see about Amazon as a company, is the future stock market returns for the next decade are already baked into the stock. They're currently trading at three times the value of Target (with none of the profit, no dividend, and soon to be comparable sales).
If a company has excess income to reinvest, that is profit. You can't reinvest profits if you don't have profits to reinvest.
> That is a much better use of capital then generating a profit
No, actually, its a use of profit (perhaps one that converts it into capital.) And, obviously, you have to generate profit before you can use it for anything.
For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.
Unlike you or I, if a company makes no profits, it pays no tax on its income.
The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy.
I am not an accountant, this is not financial advice.
But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.
No, in addition to regular business expenses being deductible, there's all kinds of special deductions and credits for specific kinds of reinvestment.
If you spend the money on operational expenses (OpEx), then you reduce your profit by that amount and thus your taxes.
If you spend the money on capital expenses (CapEx), you create assets that will depreciate in future. The depreciation can be deducted from your profit and also reduce your taxes in forward periods.
Thus a company can arrange its affairs to have very high free cash flow but low profits. And sometimes vice versa, which usually leads to unhappy surprises for careless investors.
But why should you pay a high price for a stock with no expectation of profits, and, ultimately, dividends?
That's not an investment. It's a baseball card.
We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits, because the stock prices kept going up.
Until they didn't.
Which gets back to the point of the article. Sure, it is good for a company to reinvest revenues in growth, in hope of larger future profits which will one day be paid out in dividends. With Amazon showing growing revenues but flat, small profits over the first 18 years of its existence, it's a legitimate question as to when Amazon might finally give a return to its investors.
This is silly. Amazon has real revenue that is growing at a fantastic rate. Pets.com and it's ilk did not.
"when Amazon might finally give a return to its investors."
It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception.
Only if you sold the stock at that price.
OK, Amazon is clearly not Pets.com. It has growing revenues and some profits.
But Amazon famously has a higher P/E than many other technology and Internet companies. This is only justified if Amazon has a clear path to greater profits and dividends than those other companies in its future. The article points out its not clear what this path for Amazon might look like.
This also makes me think of Facebook. As we waited for Facebook to go public, many speculated that Facebook was still in the stage of rapid growth, and it didn't matter that revenue and profits were low because eventually huge profits were guaranteed with so many users. Facebook is a profitable company, but since it's gone public, revenue and profits haven't grown the way people thought, and the stock is still below its IPO price.
My point is lots of users, lots of customers, and lots of revenue are necessary preconditions for a company to be worth investing in. But at some point, growing profits has to be a concern, too.
Maybe the best way I can phrase it: Do you want to be Apple or Amazon? Apple found a path to high profit margins, high growth, and a business generating lots of cash, and now they are both buying back stock and paying dividends to share holders. With Amazon, the profits, cash, and dividends seem always in the future, yet Amazon has usually had a higher P/E than Apple. Which do you think is the better model?
Nope, you don't get to redefine a return as only realized gains. This is a very liquid and can be sold at anytime. I can borrow against it in my portfolio to get a mortgage, can use it for margin, etc.
"But at some point, growing profits has to be a concern, too."
Not when the cash can be more smartly reinvested in growth. Facebook is above it's IPO price btw which means growth is in line with a year ago.
"Maybe the best way I can phrase it: Do you want to be Apple or Amazon?"
Apple's growth has completely stalled and they have no clue what to do with $100B+ in cash which is the reason for their massive stock price fall. Amazon knows exactly what to do with their cash and is piling it into growth. This is a far more efficient use of capital for an investor.
And I don't know what it means to "be Apple or Amazon" but I'd rather be an investor in Amazon - and so would most of Wall Street.
This works well for Bezos, who is so obsessed with empire building and the future. So far growth has allowed him to continue this obsession. Even if growth stalls, Bezos is so intent on pursuit of the new that Amazon may not show real profits until he retires, or dies.
The general thesis is 'they're the low cost provider, they're going to make a ton a profit'. This thesis is one that often leads Wall Street and investors to tears. Because there's another factor that needs to be taken into account: is there going to be a glut of capacity.
Here's the classic example. One of the managers of Buffett's textile mills came to Buffett and told him they could invest in a new power loom that would double production for the same cost to run. Buffett's response: that's terrible, none of that will stick to our ribs. Buffett could see that everyone in the industry would increase capacity, there'd be a glut of product, and the industry wouldn't capture the profits.
Another classic example: fiber optic. Read a research report from the late 90's on the fiber industry if you can get your hands on one. Lot's of comments on what a great investment Global Crossing would be because 'low cost provider wins'. Of course 'low cost provider' went bankrupt because there was a glut of capacity.
So bringing it back to Amazon, is there a glut of capacity? I'd say probably. What's Amazon's fundamental purpose? Matching buyers and sellers (which they do much much better than a mall). A computer basically has infinite capacity to match buyers and sellers. The warehouses are nice but when I look at the forest I question whether the profits are ever going to materialize. I see a glut of capacity and no reason why that would lessen. It's getting easier to start an internet company, not harder. The competition isn't going to cede the field either. They'll continue to put a ceiling on prices until the bitter end.
So then ask yourself, is warehouse capacity going to be constrained? Or will there be lots of warehouse space and lots of people who can create a web frontend to pair with that warehouse space?
Look, I love Amazon, I'm just telling you the 'low cost provider' wins thesis is one that people repeatedly get wrong because the low cost is often due to a technological advance that results in overcapacity in the industry.
Remember, even then, you are comparing Walmart to Amazon...not JoeSchmoe.com to Amazon. If you think it just amounts to putting things in a box and calling UPS for a pickup, I double dog dare you to compete with Amazon. It doesn't get any closer to a pennies-on-the-dollar comparison.
1) Bezos said: "Percentage margins are not one of the things we are seeking to optimize. It's the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that's something that investors can spend. Investors can't spend percentage margins" (http://blogs.hbr.org/ideacast/2013/01/jeff-bezos-on-leading-...)
2) Listen to Ruby on Rails' DHH break it all down here @ 44min30sec (he also knocks salesforce) quoting Bezos' line "your margin is my opportunity": http://www.youtube.com/watch?v=jzERXJgi5vQ&t=44m30s
"And the reason that I'm doing this interview with you is I want customers to understand what makes us tick, how we operate, what our principles are. I think customers want to know who they're doing business with."
smart!
If Amazon seems like a place you'd like to work, there's no reason not to try again with a different team.
Doesn't that describe Google as well? Ads fund most of their initiatives...
How they'll get them to market is the question.
I agree that the Marxist part at the end disrupts the flow of the article. The article would have been better served if it kept within a financial analysis context.
Marxism is not really what I would pick to talk about Karl Popper and falsifiability... his writings on politics are pretty much a side-act. I am guessing the author was recently reading some of Karl Popper's more political writings. I would have picked psychoanalysis.
It's important to remember that in the '20s, Marxism was presented as a scientific theory, that it described a logical, teleological process by which human society could be perfected. This was the Popper's later great white whale. Ask George Soros!
The irony is that the standard methods of hypothesis testing which are often used to test statistical theories, including quantum mechanics, is based on reasoning with strong parallels to Popper's theory of falsifiability.
It is worth noting that Popper's theory is itself false. Real scientists do not simply throw away a theory because it is proven false. Good theories are hard to find. And a false theory may still be a useful approximation!