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Comment by jon-wood | Hacker News Reader

There are things bought on Amazon which leave me wondering how they can possibly be making money on them. I recently bought 4kg of cat litter from Amazon, which was shipped to me next day for free - I may be utterly out of touch with how much they're paying for shipping, but I can't see the purchase price even covering that side, never mind the product itself.

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I'm sure they lose money or are right on the edge with some Prime customers.

That said:

* Large-volume shippers have always gotten much lower prices than you'll get walking into a UPS store. Amazon is an uber-volume shipper.

* Their warehouse network minimizes the actual distance products must travel on average.

* I naïvely assume they've worked with carriers to optimize how they interface with them (both digitally and physically; e.g. boxes stacked/arranged in certain ways for pickup).

* Amazon often does not have the lowest prices for things, especially small/cheap items. If you buy a $5 widget you could have gotten for $3 at the local hardware store, some of that is probably making up for cheap shipping.

They most likely make up for it (the small loss or lack of profit) by selling other items, at least that's what happens at other companies applying the same strategy. It evens out and they can boast about the huge number of SKUs they're able to offer.

... and they don't actually have to worry about actually making money. It's run as a charity for consumers paid for by investors.

Can you elaborate? Google Finance shows a profit of $631M for 2011, and $1.1B for the year prior, while only a loss of $39M for 2012. Their IPO is $1.50 compared to $332 today. Did they really take on so much investment that they still haven't made it back?

The thing is, companies don't pay tax on sales, but on profits. And Amazon is a company with a very strange attitude to profit: it doesn't seem to like it. In the year 2012, it made a worldwide loss of $39m, even as it had sales totalling $61bn. That year was an aberration, with a costly acquisition weighing the company down, but previous years have been similar. 2011 saw just $631m net income on worldwide sales of $48bn, and in 2010 – the company's most profitable year to date – it scraped $1.15bn of profit on revenue of $34bn.

631/48000=?

1,15/34=?

Those are your margins. If they are less than T+400bps[1] you are "losing money" for investors. Unless, there are other investors looking to take the stock off your hands.

It's hard to imagine where all those investors think the extra profits will come from. Do they expect Amazon to suddenly announce one day that it has finished trying to grow, and will be raising prices immediately? Or do they think that eventually, every single one of its competitors will have given up, and folded beneath the company's relentless expansion?

Unless you have a real answer for this, you are betting on the greater fool theory. Of course, you may have a better answe than this. [Digging around a bit, it seems to (/may) be tax avoidance. Amazon is eating fulfillment costs in lock-step with its increasing gross profits on product sales].

[1] technically, multiplied by another factor of around 1.8, which is the sales/asset ratio. This number appears to be <6%. http://static.cdn-seekingalpha.com/uploads/2013/1/8/2164901-...

The parent to my comment stated it was a "charity" funded by investors. I've no idea if AMZN is a good stock investment. I'd just be surprised to find out that investors buying shares from the company have kept it afloat.

People buying shares on the market doesn't give any money to Amazon and is rather meaningless in this context.

I don't really have a bone in the fight, but to answer your question. In the world today, the company is governed by the extant investors (not the ones that give them money to start up or IPO). So the sentiments of those investors basically determine how the management gets compensated (how high the performance bars are, etc). In a normal world, the investors would tend to default to management provided that management is generating "returns on investment" in relation to the Capital at risk in the organization. For a compnay that is 15 years old+, its pretty odd to see a continual state of "strategic" losses. I don't think anyone is arguing that Amazon is stupid (investors or managment). The legitimate question is more like...what is everyon missing here?

I see your logic, but calling it "paid for by investors" is not accurate. Maybe "not run with aggressive short-term behaviour like some shareholders would like".

This is a semantic distinction, between cost and opportunity cost. And the sentence is really just your imagination. The market is driven by quite sophisticated investors these days. You have to remember that hedge funds (as one example) are not mutual funds. They are in all kinds of illiquid complex stuff. There is plenty of depth for strategy that makes sense, and has longer term payouts. Again, the issue is more that Nobody appears to actually understand what that is. Or at least, nobody is talking about it. Wondering what that really is, again, is not short term thinking. Its more like sanity checking. That's why its worth playing devils advocate, occasionally. I'm actually sort of more curious to understand it myself after having looked at it a bit more today.

News flash: most technology companies don't really pay dividends. Probably, the main reason is because dividends are taxed at a pretty high rate. It's easier just to keep the money overseas in some tax shelter or other (Apple, Google), or plow it back into the company as investment (Amazon). Microsoft is one of the few tech companies that pays dividends.

Spending money on dividends looks like a poor choice. If your share price is sagging, you can always buy back your own shares with part of your cash hoard, like Microsoft did recently. Investors are always willing to believe that your investment will make the stock more valuable because TECHNOLOGY. And if they aren't, who is to guarantee that the stock will have any value at all next year? Cough-- Nortel Networks-- cough.

Notice how many tech stocks are in here? http://www.forbes.com/sites/dividend/2011/01/24/10-stocks-th...

News flash: most technology companies...

While its true that lack of profits limit dividends, return on invested capital is measured using other metrics. So the question of dividends "not a news flash", in the sense that it's not central to the topic.

The question of profits, though remains. Three possibilities:

(1) Tax losses & Tax Shields (avoidable, but cash positive)

(2) Obfuscation of earnings (avoidable, but to deter entry)

(3) Stategic operating losses (unavoidable)

_____________

(4) Incompetence (or actual lack of business leverage).

Since no one is really arguing (4) the question is more which of 1-3 is relevant? I don't think avoiding dividends would be a central consideration, but YMMV.

I'm pretty sure milesskorpen was just referencing this post by Matthew Yglesias:

http://www.slate.com/blogs/moneybox/2013/01/29/amazon_q4_pro...

The quote, while probably not wholly accurate, is funny. I think milesskorpen was going for funny, so don't take it too literally.

Indeed: "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. The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. "

I have 20kg of cat liter shipped to me automatically each month, for free, next day. Mail carrier might kill the cat if he ever figures out which one is mine.

That's nuts, the free shipping on something with such a low $/# ratio I mean. Loss leaders I guess.

If you really don't like your mailman, start ordering water too.

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