Sales Are Colossal, Shares Are Soaring. All Amazon Is Missing Is a Profit
nytimes.com
nytimes.com
None of the other titans are challenging Amazon. They can't because Amazon's Earnings Per Share are...
-0.23. Negative 0.23.
Investors often lump AMZN with GOOG and the like but GOOG's EPS is 33.59. TGT? 4.26. Walmart is 5.07. No other company with a market cap (100+Bn) as large as AMZN is allowed to get away with negative EPS. The only one that comes close is Vodafone, with a tiny positive EPS (0.13).
It's important to note that if any other company spent until their EPS was negative, investors would flip. Amazon is playing with razor thin margins while trying to scale up a platform to end all platforms that we might someday use for everything without thinking about it. If successful, on that day/year/eon dollar bills might as well be printed with Jeff Bezos' face on them.
Amazon won't be using UPS and Fedex trucks on that day. They'll be using Amazon trucks. You'll know that era when you see it, I think.
If you're Walmart or Target its hard to justify trying to do something similar at this point, the stock could take a major dive from such a risk. They're at the "Ask-questions" phase, and the questions are always "What's the profit?" because these are publicly traded companies. Amazon has been playing it risky since the get-go. Bezos is in for a very long gamble, and that frustrates the hell out of some investors, but its lofty enough to still attract investment dollars while in the "build-first" stage. Hopefully they can pull it off for a few more years before the stock market shifts to asking questions.
So Amazon gets to play the long game that other companies are literally disallowed from playing because investors that have seen profits want more. Amazon gets to do something bold that would cause the mother of all stock dives in any other 100+Bn company. They get a free pass because Bezos is convincing and for Amazon its sort-of-always-been-this-way. Walmart/Target/Etc do not have either of those luxuries - the incredible (or believable) visionary and being a company that's still in burn (build) mode.
~~~
All that said, an interesting question I think: What can we do to make more companies like Amazon? And is there a way to allow the older giants (such as Target) to ever be as ambitious again, without huge stock punishment?
On the flip side, I have to wonder if this is actually something of a benefit for Amazon. They get to save a ton of money by using a cheap delivery service, but the delivery service takes much of the heat for bad service. I'm a little annoyed with Amazon for using LaserShip, but I'm much more annoyed with LaserShip for sucking. If Amazon handled the delivery, they would have to do better just to get the same amount of satisfaction from me.
It's quite attractive to us as a retailer as they take all the negative feedback, handle returns, etc etc. FBA makes us, as a retailer, look good and saves us money (no shipping costs), while protecting our reputation.
From a logistics point of view it simplifies things immensely (we just need to manage stocks in another warehouse).
Coding this should, however, be interesting :)
AWS and MechTurk both came from Amazon realising it could commoditise and spin off what it was using internally as separate products. A kind of reverse dogfooding.
They will probably be announcing some sort of global supply chain and fulfillment service.
And the building blocks look interesting: robots, amazon level customer service and fulfillment, better supplier financing(enabled by sales data), global handling services(customs ,etc), offering better IT tools(for example demand prediction, A/B testing globally), Advertising deals on the amazon platform, etc. Almost like telling the manufacturer: you just build stuff, we'll do the rest for you.
If this guess is true, seeing all this packaged would be very interesting.
Now you can make big picture arguments about the improvements in efficiency ultimately leading to structural improvements for everyone overall -- that's Econ 101 -- but we've been doing a whole lot of that for the last 20 years and it's mostly making people in China better off and it's not at all clear that more factory jobs in China has positively affected the direction of demand for factory workers in the US.
But don't let facts get in the way of hand-waving theory.
Oh and your ground assumption is that Amazon fulfillment center workers want to be paid more for their jobs. No, they want different jobs. Creating more Amazon fulfillment center jobs at the cost of other jobs is not what they want.
Just Google stories on what it's like working in fulfillment centers for online retailers.
As for shipping, amazon already has a delivery service (amazon fresh) but I don't think they have a strong desire to completely own delivery, they have very cozy relationships with all of the major shipping companies. If you knew how much money amazon actually pays for shipping you'd be astounded, they're very good at using their volume as negotiating leverage.
Logistics is at the core of amazon's business though, and it's a big reason why they are succeeding where others are not. If you order through amazon you can expect most items to be en route in less than 24 hours. That takes a lot of work especially considering the sheer quantity of stuff they offer.
Aside from that, they aren't just trying to do one thing, they are trying to diversify the company, so that it will rest on multiple multi-billion dollar divisions over the next decade (retail, AWS et al, ebooks, mp3/VOD, etc.)
How do you know this? I don't think they have ever released this information in their financial reports. Are you going by analysts' estimates?
So their cozy relationship with the big shipping companies might not remain so cozy.
You're right in thinking that would only really work for new companies (with strong leaders), but if the stock punishment is an issue, then these two happenings will allow older giants to be this ambitious too: 1) Amazon succeeds wildly & shareholder demand these older giants copy that success 2) These older giants' stock starts to tank and must scramble to try something new.
There are certainly more, but this is what I can think of from the top of my head.
Their own logistics / delivery component would be a gargantuan undertaking, even for them. They seem to understand what businesses they can get into and do very well in (cloud computing, generic branding (Amazon Basics), eBooks), and which ones to steer clear of. I suppose they could launch this in urban areas, but that would be shortsighted in an area that they are particularly smart, so I wouldn't count on anything past a pilot program.
Regarding what could be done to make more Amazons... You can't. Walmart is the closest competitor (although they are a bigger company, but let's see about that in 15 years). If there is one company on Earth that can beat Amazon at efficiency (warehouses, shipping, and general business ops), it's these guys. They've made an empire around it. But it seems their only strength here is their storefronts, so it seems like their online strategy would be to go the "pick up in store" route, which is a giant hassle for most. So as Amazon finds ways to improve selection and reduce costs, Walmart will go the way of Borders, and a lot of other brick and mortar stores that came before it, albeit very very slowly. Unless one of the big box retailers is willing to say "screw this storefront crap, we're totally up-ending our business model", there is absolutely no one.
I see this sentiment all the time--that Amazon is simply still in its growth phase, and once it's "big enough" it will pivot and reap huge profits. I don't see any reason to believe that is true. I can't remember Bezos every saying anything like that, for instance.
I don't think so. I think Amazon expects to run at essentially break-even forever, or at least until Bezos leaves.
Once they're "big enough" they simply won't need to spend as much as they're currently spending on infrastructure and growth, and the profit (re)materializes without any business change at all.
A dream for many entrepreneurs is to start a fairly conservative line of business that buys freedom and a stable stream of revenue [consulting, online bookstore] and use the profits to fund a swing-for-the-fences idea. It's absolutely amazing that Amazon keeps that model going decades later.
Exactly - that's the OP's point.
Amazon has the vision to invest its cash in building entire new lines of business, whereas Apple can't see any opportunities.
Everything Amazon does, by contrast, is very clearly focused on one clear goal: becoming the retailer of record. It is able, either by institutional constitution or the nature of its market, to make investments in itself that will clearly add to its bottom line, either one or five or ten years from now.
http://seekingalpha.com/article/1547622-is-amazon-com-the-ne...
He noted that Wal-Mart had about the same levels of CapEx spending (~4%), yet it was also highly profitable by that point. Amazon isn't spending any more on CapEx than Wal-Mart was at the same stage of growth.
So Amazon isn't on some unique path in the business world by choosing to divert its profits to CapEx spending. Its level of CapEx spending is comparable to Wal-Mart at the same stage of growth. It simply has such low margins that it has no profits leftover after its CapEx spending.
1. Control. Absolute control over a huge chunk of worldwide B2B and B2C transactions is extremely valuable per se, in political and commercial terms. It's power that can be leveraged in a number of ways which are not necessarily reflected in the balance sheet. Bezos just bought the most influential newspaper in US political circles; this guy knows a thing or two about setting the agenda.
2. There is corporate profit and personal profit. Amazon employees are themselves turning quite a bit of personal profit. Does that make Amazon a No-Profit ? That's debatable. As someone else mentioned, pure profit is easy to tax, while "operating expenses" and share dealing can be shuffled around.
3. Industrialism. Many XIX-century industrialists saw their companies as agents of change as well as sources of profits. Amazon is pushing the envelop in commercial infrastructure (fully-automated warehouses, software-enhanced packaging, customer-seller variable relationships, etc etc) as well as creating whole new markets (AWS). As long as they don't start bleeding money, they're running a self-sustained engine of change, which is an achievement in itself.
The Amazon's board have a fiduciary duty not to enrich themselves at the expense of their shareholders. Amazon certainly is not a non-profit.
If you think about it, self-financing out of profits is a smart way to go about this empire building. If it was financed on bonds or loans they'd be under pressure to "turn a profit" on the investments and they'd have to pay some nominal interest rate. Selling more shares to raise the money would dilute everyone and if part of the plan is to enrich people through share price appreciation, that's not the way to do it. Plus it's easier for share prices to continue to go up on hopes and dreams of a wildly profitable future than based on actual earnings. Once you get into that you have to balance growth against reported profits.
Just a nitpick: they're financing out of surplus cashflow. Profit is what's left after everything else (including investment expenditure) has been subtracted from revenues.
It's always worth studying both the income and cashflow statements. They can tell you very different stories about a business. People are particularly fond of getting stuck on looking at the bottom line of the income statement, when most of the useful information is sprinkled around the rest of the accounting statements.
The Washington Post is a damaged paper and damaged brand, which is why the Grahams sold it and why Bezos could afford to pay cash for it.
Amazon isn't losing money, it's operating at break-even to maximize growth. That should be obvious to anyone paying attention. They're growing AWS like crazy. They're expanding into new markets and services. And they're expanding into different countries. They're turning into a remarkably diversified company with both high-volume/low-margin and high-margin businesses.
If Amazon were a value stock distributing their profits in the form of dividends then their lack of profit would be a big deal, but it's a growth stock, and their tradeoff of profit in favor of growth is actually welcomed by the market, as evidenced by the stock price.
Amazon have a strategy which they believe is for the long term good of the company. Sell cheap, grow market share, get more repeat/prime customers, expand (by investing) into new areas. They've been doing that for a good while now. They're profitable. They don't rely on They're growing. It's articulated and consistent. Investors who believe in it, are welcome to buy stock. Those who don't can sell (at a nice, high price)Evidently many do believe.
HN likes to bring up fiduciary duty in these cases, but I don't think that extends as far as some comments suggest. Management can't deceive or steal or funnel money to friends. The board has a responsibility to get rid of incompetent managers. None of that is going on here. When it comes to the strategy of the company and decisions like growing market share vs maximizing profits, I think investors vote with their position more than anything else. Another way of looking at it is that "investor" is not a set thing. Different investors have different philosophies and strategies. The ones that like Amazon's strategy are the ones that own the shares in Amazon.
The second side, then, is what I see this all as evidence of. Disclaimer, I know fuck all about the subtleties of running large businesses, but when you step back and look at the what they're doing at a high level, expanding facilities, exploring new markets, new products, during what is as the article stated an investment boom time and where maintaining a certain level of revenue might be a "somewhat safe bet", it makes sense to me that you would use this time to make more bets. Risk becomes more acceptable when you're not living dollar to dollar; the box of nails anecdote, simple as it is, spoke buckets to me. (maybe I'm overreading.) At the risk of showing extreme naivete, I would LOVE to for once believe that a company is simply using all of its financial resources to continually try to provide optimal and novel services. Shipping goes up in price; that's how the market works when you add more services without anyone funding em, the cash has to come from somewhere. I guess my hope is that the shipping is only raising due to their trying to provide new services, and that there will still be sufficient competition that amazon hasn't killed off to prevent this from going out of hand; and that it was just as I said above, a way to fund growth and try to balance for changing economic times, and not a sign of the impinging amazon monopolypse.
Oops, suddenly essay, and now I'm late for work...
I grew up in a rural area. When Wal-Mart came at first, it was amazing. Clean stores, low prices, excellent service. They managed to put Ames, Jamesway and a few other marginal discount chains out of business. The convenience of driving to Wal-Mart and buying anything is more convenient that the closer speciality retailer, and thathelped kill of the specialty small retailers (hardware stores, etc). They mortally wounded K-Mart. They did this with ruthless efficiency and great service.
Now, Wal-Mart owns the rural market. Guess what? The lines are like DMV, the stores are filthy and poorly merchandised (in the grocery section, they don't even unpack boxes), and the prices are often not so good. I hope that Amazon doesn't go that way, but history suggests otherwise.
I think the only company I haven't seen go down this route is UPS? Their workers seem pretty happy?
My grandfather owned bars for many years. I remember him saying that he got more worried about bartenders who "weren't" stealing from him (either money, booze or pilferage) -- he assumed that if he didn't know about it, the guy was too smart and could do real damage.
UPS treats their people well and works them hard, and they have a strong union. The net result is that they make money, and they have a motivated workforce that performs and gets treated relatively fairly.
I'll explain by analogy.
Assume 2 businesses with the following assumptions
Store A: -sells jewelry -capital cost of store is $100K -inventory is $100K (1 turn per year) -annual revenue is $100K -net income margin is 5% -annual net income $5k
Store B: -sells pens -capital cost of store is $100K -inventory is the same $100K (they sell a lot of pens) -annual revenue is $500K (5 turns per year) -net income margin is 2.5% -annual net income is $12.5K
if you think Store B, the lower margin, higher turnover business, is the better investment, then you get the Amazon investment thesis.
as long as Amazon are able to generate that type of return on investment at that scale then they should continue to reinvest all their money back into their businesses.
The alternative is to bank the money, miss out on the next AWS or Kindle, give nearly half of it to the tax man, leave 60%+ of it offshore waiting for the next repatriation tax holiday, and only then get a return back which you will then invest in another stock that isn't returning as well or just buy more Amazon stock!
Google, Microsoft, Apple et al wish they could invest their cash as well - instead they have to listen to hedge fund managers lobby them for buybacks/dividends etc. because they believe they can invest the money better than Google, Microsoft, Apple can.
Given the option, i'd re-up with Bezos every year, his ability to innovate, invest and return is staggering and proven.
I really think of Amazon as an investment vehicle (like Berkshire) for web commerce with a strong umbrella brand.
It's incredibly convenient, I often buy stuff from mobile and it'll be on my doorstep in two days. It's literally magic and I love it.
I can't even begin to comprehend the levels of logistical wizardry it takes to make all of that happen.
I'm inclined to think Amazon knows exactly what they're doing here.
Throw in Amazon Fresh, and I wouldn't even have to go to the grocery store! Oh man, the thought of that is just magical. I'd be a healthier person for it.
It was until Amazon created the concept of 'Add-on Items', which they have retrospectively applied to thousands of items.
These items cannot be bought on their own, even if you wanted to pay for shipping. Not even by Prime members.
EDIT: I anticipate people getting hung-up on "value investor" because clearly AMZN is a "growth" company! Growth is always a function in assessing value, and sophisticated value investors know this. The popular convention of labeling something 'growth stock' or 'value stock' does the greater investing public a disservice.
> No one is asserting that Amazon is a flat-out bubble, but there is an increasingly noisy debate about when it will — or even whether it can — deliver the sort of bottom-line profits that investors normally demand from a company expected to post $75 billion in revenue this year.
Netflix started the year at under $100/share. It's up to nearly $340/share today. Tesla started the year in the $30s. Its high this year was just under $195/share. Pandora entered 2013 at under $10/share. It's above $26/share today.
You can make strong arguments that many tech companies deserve premium valuations. But this market has and is being driven by the Fed so debating fundamentals right now is sort of like talking about a fly on an elephant.
but what happens once profits are needed? or is amazon the largest NPO on earth?
1. Give away profit, to increase market share
2. Repeat
3. Enjoy your new monopoly
4. With competition gone and customers additionally locked in via your technology platform: Set your prices as you wish
*Note: there is no such thing as a non-government enforced monopoly. Marketshare != Monopoly
Microsoft (desktop OS), standard oil.
"Some economic historians have observed that Standard Oil was in the process of losing its monopoly at the time of its breakup in 1911. Although Standard had 90 percent of American refining capacity in 1880, by 1911 that had shrunk to between 60 and 65 percent, due to the expansion in capacity by competitors.[41] Numerous regional competitors (such as Pure Oil in the East, Texaco and Gulf Oil in the Gulf Coast, Cities Service and Sun in the Midcontinent, Union in California, and Shell overseas) had organized themselves into competitive vertically integrated oil companies, the industry structure pioneered years earlier by Standard itself. In addition, demand for petroleum products was increasing more rapidly than the ability of Standard to expand. The result was that although in 1911 Standard still controlled most production in the older US regions of the Appalachian Basin (78 percent share, down from 92 percent in 1880), Lima-Indiana (90 percent, down from 95 percent in 1906), and the Illinois Basin (83 percent, down from 100 percent in 1906), its share was much lower in the rapidly expanding new regions that would dominate US oil production in the 20th century. In 1911 Standard controlled only 44 percent of production in the Midcontinent, 29 percent in California, and 10 percent on the Gulf Coast.[42]"
http://en.wikipedia.org/wiki/Standard_Oil#Monopoly_charges_a...
There's also no great evidence that Standard Oil raised prices once they had established such large market share. http://research.stlouisfed.org/fred2/graph/?id=M04182US000NY...
That does not mean there's no such thing as a non-government enforced monopoly.
At its peak it had 90% market-share. It was never "illegal" or "impossible" to sell petroleum in competition to it -- just highly very difficult to compete with them.
In the same vein, google has 9-1 share of the internet search market....should we call it a "monopoly"?
Standard Oil, at its peak, had an actual near-monopoly on most discovered sources of oil. You can't even get into the oil business unless you discover more oil -- in theory, they could have used their resources to stay on top of each oil source as it was discovered. No amount of old-fashioned ingenuity can compete with that.
Once a company hits 75% or so they have no "economic need" to write restrictive exclusive contracts as they basically control the market. Remember, the RULES OF FREE MARKETS assume there are ALWAYS enough buyers and sellers that NEITHER side has a group large enough to independently affect the market prices. As soon as a buyer or seller hits about 25% they aren't following the rules of the "Free Market system" they are Capitalists attempting to REMOVE the RIGHTS of the Free Market system from others using aggregation of capital resources.
Investments is in their cashflow statement. Per their 2012 Annual Report, with units in millions of dollars:
Purchases of property and equipment, including
internal-use software and website development
(3,785)
And profit:
Net income (loss)
(39)
Anyone can read these figures. You, me, Amazon's competitors. The Annual Report doesn't give the raw numbers, it gives a detailed discussion of what the numbers mean, how they are evolving and so on.
This kind of disclosure is required by law so that investors aren't punished by unhappy surprises. There are some good books around on reading these kinds of figures, I recommend Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean.