Amazon's heavy investing eats into bottom line, shares drop
in.reuters.com
in.reuters.com
Amazon reminds me a bit of Ford back in the day. Profitability is nice for the shareholders, but at the end of the day, the net benefit they create to the economy, just by employing all those people and spending all that money on development, isn't really a function of their profitability.
[1] http://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Company#Fac.... A fact often glossed over is that the Dodge brothers wanted Ford to pay dividends because they were investing money in launching a competing car company.
[2] Although that's unlikely to be good law today.
Can you explain further here? It seems to me that maximizing shareholder value is, at least today, the exclusive purpose for which corporations exist. The law seems to require this.
I like Amazon, and also assume that they'll actually make money at some point, but the financial graveyard is filled to the brim with companies like this.
Even being generous and giving Amazon a future 20 pe ratio, at the recent highs, would require roughly $9 billion in profit. Once again being generous and assuming they can ever reach a 5% net income margin, they need $180+ billion in sales. Let's recalculate for a 15 pe ratio and 3.5% net income margin: $342 billion in sales (that's the Walmart scenario).
The stock has nowhere to go for a decade from the recent $400x levels. The party is over.
Even discarding all other revenue streams, you want to compare the company to a retailer growing sales at 1% y/y (WalMart), while they grow sales at 22%? All this while only being in 12 international markets and citing a lack of non-English content as holding them back in the high margin area of digital content.
Your evaluation seems entirely misguided and ham-handed to be honest.
A further note: private corporations are under absolutely no obligations as to how they do or do not reinvest their profits. So your blanket statement is way off base, the private company economy is drastically larger than the publicly traded economy.
I highly recommend to just get the book [1], it's written very well and in layman terms but here's an extract taken from a review [2] of the same:
"Stout traces the birth of this “fable” to the “oversized effects of a single outdated and widely misunderstood judicial opinion.” Dodge v. Ford Motor Company was a 1919 decision of the Michigan Supreme Court. The opinion’s status as a meaningful legal precedent on the issue of corporate purpose is tenuous at best. Yet, its facts “are familiar to virtually every student who has taken a course in corporate law.” As Stout has observed in the past, “[t]he case is old, it hails from a state court that plays only a marginal role in the corporate law arena, and it involves a conflict between controlling and minority shareholders” more than an issue of corporate purpose generally. The chapter explains quite well that any idea that corporate law, as a positive matter, affirmatively requires companies to maximize shareholder wealth turns out to be spurious. In fact, none of the three sources of corporate law (internal corporate law, state statutes and judicial opinions) expressly require shareholder primacy as most typically describe it. To the contrary, through the routine application of the business judgment rule, courts regularly provide prophylactic protection for the informed and non-conflicted decisions of corporate boards"
[1] "The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corportations, and the Public" by Lynn Stout http://www.amazon.co.uk/The-Shareholder-Value-Myth-Sharehold...
[2] http://arizonastatelawjournal.org/book-review-the-shareholde...
All he really had to say was that investing in more factories would lead to more profit down the road.
Basically like this:
1. Invest in more factories. 2. ??? 3. Profit.
Ford was addressing the specific grievances of the plaintiff, given the legal precedents that existed at the time. The plaintiffs were complaining that he was not paying dividends, and Ford argued that he was under no obligation to do so.
Bezos has been completely transparent about his philosophy regarding long-term and short-term profitability. This is not out of character for Amazon. Rather the opposite: the day I hear Amazon cutting long-term projects to boost short-term profitability is the day I would sell my Amazon stock. This is the way Amazon has operated for most of its history. They've already built up enough of a track record for us to trust that they know what they're doing. It is stupid to expect them to behave like other companies when we have seen them operate in this manner for some 20 years successfully. Maximizing short-term profitability is not a high priority for Amazon, and it never has been. Why is the market surprised then when they re-invest in growth? Because the market can be stupid.
Amazon's performance in the public market is more or less than only communication channel that exists to prompt Amazon to shift from Alexander the Great mode to Qing Dynasty mode.
[1] http://www.goodreads.com/book/show/208006.Alexander_the_Grea...
Also, I liked Eugene Wei's response[1] to the comments of Yglesias and others.
[1]: http://www.eugenewei.com/blog/2013/10/25/amazon-and-the-prof...
It's a big deal that I can buy almost everything I need from Amazon and get it quickly so they are in the forefront of my mind instead of getting a camera from B&H or a PC from Newegg. I think this is pretty typical behavior with many of their customers.
Amazon has become a habit. Just like showing up at HN has become a habit.
How do you define "short-term"? Amazon IPO'd 17 years ago.
And there's a big difference between "maximizing short-term profitability" and being even marginally profitable.
I'm not even saying Amazon is doing the right thing. But they are doing exactly what they have been doing successfully for the last 17 years. Why do we keep getting worried about it?
Uh, that's pretty much the definition of "unprofitable".
Amazon is putting food on the table for thousands of people. They are facilitating the sale of product for tens (hundreds?) of thousands of businesses. Their technology underpins and enables many of the startups we love. Their cash flow was and is healthy. That is very different than being unable to turn a profit.
edit: What I meant by "a profitable business" is that Amazon is in several different industries. They have profitable business. They offset their profitable business with growth expenses, but they have business that is profitable.
A company that chooses to reinvest its profits is profitable; it is simply choosing not to distribute those profits to its shareholders.
Because Amazon has real competition now that they have to pay sales tax.
All useful retailers now have online sites. Most brick-and-mortar retailers will match Amazon prices so Amazon doesn't have a structural advantage anymore now that they also have to pay sales tax. And the brick-and-mortar retailers have in-store returns and pickups--often now faster than Amazon Prime.
Amazon used to deliver somewhat reliably but fast (and sometimes faster). Now, it's a crapshoot. I will not order anything time sensitive from them anymore.
So, I'm pretty much back down to buying non-time sensitive books from Amazon. And this last round, they scattered my delivery dates for each so far that I'm rethinking that idea.
Maybe the share price is hurting more because the market is actually taking a 2nd look at the valuation, and not because they didn't realize what Amazon's strategy was.
I don't know if this is transparency as much as controlling the narrative and preempting and spinning potential criticism. Rhetoric. This is often done in marketing whereby you take a disadvantage and turn it into an advantage in the buyers mind. "Sure we charge more because we take the time to hand craft ..." instead of "we can't afford the same people and machinery and distribution to make our product cheaper and widely used ....
We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
We aren’t so bold as to claim that the above is the “right” investment philosophy, but it’s ours, and we would be remiss if we weren’t clear in the approach we have taken and will continue to take.
He said he was going to do this from the beginning. You can call that spin if you want, but when you consistently do what you said you were going to do it seems more accurate to call it transparency.
Not saying that Amazon hasn't leaned on the PR machine from time to time, but at least on this issue they have been pretty clear and consistent from the beginning.
[1]: http://benhorowitz.files.wordpress.com/2010/05/amzn_sharehol...
From this;
http://en.wikipedia.org/wiki/Spin_%28public_relations%29
I see this:
"Bernays was able to help tobacco and alcohol companies use techniques to make certain behaviors more socially acceptable in the 20th-century United States. "
I don't think that the fact that it was said at the start makes that much of a difference. I think you can spin in advance as well as in retrospect.
In a sense he has been able to manage expectations the same way a high school student (who also plays football) might tell Dad "ok I will try out for the team like you want me to but I play sports keep in mind that my grades may suffer". Then when he gets mediocre grades he reminds his parents that he warned them. Or band or any extracurricular activity.
While traditional public relations may also rely on creative presentation of the facts, "spin" often implies disingenuous, deceptive and/or highly manipulative tactics.
That is the core of my understanding of the term "spin". Every conversation has a frame of reference, a shared context within which it is communicated. Somebody has to frame that context, and I don't see anything wrong with trying to be proactive about framing the context, as long as you do so in a way that is not disingenuous, deceptive, or manipulative. Controlling the narrative is not necessarily "spin" in this sense. It may be just seeking the truth. In fact, I have a hard time finding a better description of integrity in action that doing what you explicitly said you would do. How can you get any more straightforward than that?
The fact that it was said at the start makes all of the difference. It means that anybody who got into a relationship with Amazon knew at the beginning what kind of company they would be from an investment perspective. Amazon was setting out specifically to avoid misleading or deceiving anybody.
Even the kid in your example is not putting a spin on anything. He is being transparent and honest, not disingenuous or deceptive. To work within that analogy, as a parent I would have said that his attitude was unacceptable, because part of a parent's job is to teach and help their child learn how to make responsible choices. I would encourage the child that I think they can excel at both and that I won't accept a cop-out. If they really couldn't do both, then I would tell them I appreciate their honesty and make them drop sports. The same should be true for Amazon. If people really had a problem with Amazon's approach, they should not have bought stock in the first place, after Amazon told them plainly how they were going to operate.
That's exactly the point: the parent knows ahead of time and can make a decision with full and accurate knowledge of the situation. People knew up front that Amazon would continue to invest the profits back into the business. If people still choose to invest, they have no right to claim they were deceived or manipulated, because Amazon was clear from the beginning. How is that "disingenuous, deceptive, or manipulative?"
On a basic level I expect that Amazon will continue to grow, and that in the future the value of the stock will be increased and that I'll be able to sell it. I think an Amazon that was paying dividends could be great, or not, but it doesn't sound like a business that I understand so I wouldn't invest in that because I don't think I could evaluate it. I'm investing in Amazon because I believe in Jeff Bezo's thesis and like what he's doing. It's also a significant but not life changing amount of money invested, so I'm comfortable having my own investment ideas here instead of playing safe with mutual funds, which is what I usually do.
But more importantly: why do I expect Amazon will continue to grow? Because they have an extremely large e-commerce business that is providing a base for them to expand into other markets, and because they have demonstrated ability to do so. AWS, Fire, Prime, content etc., are all built on an extremely solid e-commerce foundation. AWS is huge, and is expected to be more and more of Amazon's total business (7% in 2015), and I am betting that they will continue to make new business lines like AWS.
My time frame is very long, I'm young and don't need the money anytime soon.
AMZN Jan 30, 2014: $403 high.
AMZN Jan 30, 2014: Q2 2014 earnings.
AMZN Feb 5, 2014: $337 low.
The same standard as all the other online retailers that helped create and then dominate a new electronics product category.
And the same standard as all the other companies with the foresight to harness excess computing capacity and become the leading cloud services provider.
It's true that Amazon is, at the end of the day, just another company and we owe it to ourselves to judge it objectively. But in any other sense, it's not a standard company.
Apple has a P/E of 16, Google has a P/E of 30, Amazon has a P/E of 502.
Who is the fool here? Apple and Google for under recognizing their potential as innovators or Amazon investors for over estimating?
It's tough to say, as it all remains speculation.
But Google has only proven very innovative in terms of introducing products that do not generate revenue. It's success in search and e-mail have subsidized its many flops. And while it has ventured into some interesting long-term innovation (e.g., driverless cars), which is laudable, this is not the kind of innovation that investors seem to appreciate.
Apple continues to churn out great devices, and I'm an ardent fan, but the bloom is off the rose regarding the success of the iPhone/iPad. Android phones continue to chip away at its market share, while iTunes is being chipped away at by Spotify/Pandora/Netflix/etc. I don't see a compelling reason to believe they can repeat the success that was the iPhone. If the rumor mill is to be believed, their greatest hope apparently lies in a watch -- and that makes me very queasy as a potential investor.