Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders | Hacker News Reader

Amazon’s Cloud Is Growing So Fast It’s Scaring Shareholders

wired.com

66 pointscryptoz43 comments

Misleading headline. Investors are scared of Amazon's persistent lack of profits despite their hugely popular offerings.

Exactly. Investors are afraid Amazon has found another low profit business to dominate. If they can't yield even a low margin profit at $80 billion in sales - eg 3% Walmart style, or $2.x billion in net income - why would anyone believe they will at $160 billion in sales. Not to mention they're a 20 year old, unprofitable business.

> Not to mention they're a 20 year old, unprofitable business.

But they've only been unprofitable the last hand few of years. Before that they were quite profitable. Amazon's pursuit of businesses with high R&D costs is the reason for their current lack of profitability.

The first half of their existence was spent as an unprofitable business. If 2014 ends up the way it looks like it will, the net losses will outweigh the net income for the life of the business (it nearly does now).

The first ten years of their operating life were spent being famous for bleeding prodigious amounts of red ink. That's why the tag: Amazon.toast - it was assumed they would bleed to death without the easy money of the public market and a massive valuation.

Here's their net income statement going back to '97:

1997: -$32m; 1998: -$124m; 1999: -$719m; 2000: -$1.4b; 2001: -$567m; 2002: -$149m; 2003: $35m; 2004: $588m; 2005: $359m; 2006: $190m; 2007: $476m; 2008: $645m; 2009: $902m; 2010: $1.15b; 2011: $631m; 2012: -$39m; 2013: $274m

They've never been quite profitable. Only one year, 2004, did they show even a modest level of profitability (in part due to one-time gains). The rest of the positive years the margin was between 1% and 4% typically.

You leave out the fact that they reached profitability years before their business plan called for it, showing excellent and stable growth.

The fact that their net income imploded so dramatically rather proves the lack of stability.

You'll forgive me if I don't trust in the judgment of a business plan built on losing money for two or three decades.

They can be a good company, grow to X hundred billion in sales, struggle to ever make money, and that's all perfectly fine - but it doesn't mean they deserve a hyper valuation. Target trades at a mere $38b valuation, and they only generated $8b in net income the past three years.

Dude, I don't think the Target comparison is apt.

People say the enterprise cloud market is a Trillion dollar opportunity world wide in the next decade.

A Trillion dollars up for grabs, and Amazon has a healthy lead in the segment.

When you go to an AWS event the thing that stands out is the number of consulting and service companies that offer integration/application services to enterprises based wholly on AWS. I've been to Google Cloud events and its not even in the same ballpark as AWS. The Amazon lead is huge.

I think Amazon is still a good buy.

If I total the numbers you present, they had a net $2.2b of positive income (i.e. profit) since 1997. Small profit as a percent of revenue since 1997, but overall profit. The first quarter of this year had an operating income of $108M and the second a loss of $126M. Are you suggesting that the remaining two quarters will have approximately $2.1b of loss?

And a lot of their profit is essentially reliant on competing by dodging taxes - their margin advantage to the consumer could, in many markets, simply disappear with the closure of a few sales or corporate tax loopholes.

That's not true at all. Amazon charges sales tax in lots of places and it hasn't really affected them much at all.

It's affected them quite a bit especially in expensive large items like TVs which are easier to buy locally but have large sales tax burdens. The business is still growing but slower than it would have without sales tax.

Best Buy's gains over the last 2 years have been achieved in no small part due to price matching with Amazon including sales tax.

That used to be true but they have been collecting sales tax the past few years.

Not charging sales tax in a jurisdiction you have no presence in isn't a loophole, it's an intentional feature at the federal level. States can't legally tax interstate commerce.

Amazon is only starting to charge sales taxes in states because they're establishing local presences in those states.

They skirted the rules for local presence for a long time too. They had an engineering office in California, but were not charging sales tax. The office was a wholly owned subsidiary

IMHO skirting the rules is legal. If you care about Amazon's behavior because of the law you should have no problem here. If you care about local presence for some other reason you should be talking about that instead.

You can't blame companies for operating within the four corners of the law. Perhaps you would prefer that they break the law.

Amazon doesn't agree. They are currently lobbying for Internet sales taxes and have been for at least a few years: http://seattletimes.com/html/localnews/2021778597_amazonlobb...

So far as I can tell, today (the past is another matter) Amazon has no issue charging sales taxes as long as buy.com and the rest have to as well.

One of Amazon's most profitable regions is Washington state, where they are headquartered and pay sales tax out the wazoo.

The Amazon profitability figures are a bit misleading. Amazon adds a very big revenue generating chunk of company every year that has enormous value. That's effectively their profit. One day, they could decide to keep money in their pockets, instead of investing it, but share holders would only demand that if they thought they could do a better job at investing than Amazon. The market has had enough confidence in AMZN for it to go up by 275% in the past 5 years, compared to 125% for the NASDAQ. It's not clear whether this shows that Jeff Bezos is a better investor than the market, or that the market currently believes that he is and this will eventually correct itself, but momentum definitely seems in Bezos' favour.

Yes, they are going to have to raise their margins at some point and there is no guarantee it can be done without costing them more business than they can afford.

AWS is already pricey for what it offers. Raising the margin on Amazon.com's sales requires squeezing suppliers more and raising prices and I'm not sure that outcome will be profitable either.

> Amazon's persistent lack of profits

This has been addressed several times already. Amazon is effectively making profits on several on its key businesses but is effectively reinvesting most of its profits into new infrastructure, distribution centers and new services. The day Amazon decreases that investment ratio, profits will significantly increase. In other words, Amazon is far from being in the red. They are just massively investing.

Some people want to see healthy EPS growth, and as you point out some patient investors are willing to buy the "reinvesting in accelerated growth" thesis.

But everyone is getting tired of AMZN's lack of transparency. Increasingly, buying AMZN is akin to buying the "Bezos is the next Jobs" meme on faith.

http://seekingalpha.com/article/2343265-amazon-com-bezos-ser...

Investments in capital items are shown on an income statement expensed over the life of the asset. Decreases in investment have no impact on increase in profit (only the opposite is true, increase in investment will add a decrease in profit of 1/n of the cost where n is the life of the asset in years).

Is Amazon capitalizing or expensing their R&D?

Good point but this is a separate discussion, R&D must be expensed up to a certain point, so reduction in research would improve the statements..

Decreases in investment have no impact on increase in profit

Yes they do. Imagine I have a business which has steady gross margin of 100 dollars per year, but to keep it going so far I have been investing 50 dollars per year (capex). Assume my capex is depreciated over 5 years. So, in a single year, my profit is 50 dollars:

- 100 dollars gross margin - Less 50 dollars depreciation (1/5th of my last 5 years' capex: 1/5 * (50 * 5))

Now, let's say I decide to decrease investment. My next profit will be 60 dollars:

- 100 dollars gross margin - Less 1/5 * (50*4)

So, by decreasing investment I have increased profit.

Yes, technically, but your example is too simplistic and the year by year can fluctuate. But the specific capital items we are talking about today that are not purchased do not contribute to the IS. The effect is just existing capital items making it's way through the statements. We are talking about today, short term.

> as [AWS] matures to the size of a company like VMware

LOL. VMware has never been able to hold a candle to what AWS is doing. To draw an equivalency between the two is misleading.

The true danger to AWS is not coming from any of their competitors (Azure is a long way from not sucking, and the Google challenge, while serious, only supercharged Amazon's growth).

Their true danger lies in the fact that Amazon doesn't treat their engineering/product employees well enough. The AWS products will suffer from high turnover and poaching if they don't address this.

Azure and Google are good enough in the eyes of a lot of people to compete, and Amazon believes this to be true, otherwise they wouldn't match price cuts the other two make. They have.

The problem for Amazon is that Microsoft and Google don't need to profit on Azure and Google Compute the way Amazon does. Microsoft can sell Azure services at low margin and make the rest of their money selling Visual Studio and MSDN subscriptions and whatever else to developers working on sites hosted on Azure, and selling Office 365 and whatnot to companies shifting their in-house resources towards the cloud. Microsoft sells a lot of complements that mean it can get away with selling services on Azure at close to cost and still make money. Google's in a similar position, in that it has other complements (AdWords, services like Maps, Android, etc.) for developers working on its stack, and it has enterprise products like Google Docs as well. Amazon meanwhile is selling AWS products but no strong complements. So being dragged into a pricewar with Google and Azure means a very real chance that they continue to not make a lot of profit on AWS, even if they beat Microsoft and Google.

How is that not an accurate statement? VMWare did $5.2 billion in sales last year (with a billion in profit to boot), it's definitely comparable in size to AWS.

that's a little misleading. From the article:

> Yesterday Amazon said that while its cloud business grew by 90 percent last year, it was significantly less profitable.

Investors aren't scared because AWS is growing too fast, they're scared because profits aren't growing along with it

A fairly vacuous article, but here's the takeaway:

> The company is taking losses to invest in the future, and Amazon’s 10 percent stock drop today shows that some investors are uncomfortable with that.

While its tough to be sure exactly what motivated that drop, the reasoning sounds accurate. More importantly, it shows a huge part of why public corporations in the US are so broken and may actually be hurting the US's competitiveness.

In a recent study (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1959125) entitled "The Dark Side of Analyst Coverage: The Case of Innovation", the researchers found that publicly traded companies who attract the attention of financial analysts are less innovative. Why? Share prices.

For many in upper management of these companies, their compensation is tied to share prices. Management works hard to keep their share prices high. Further, if share prices drop too much, the Board might decide it's time to start firing their "inefficient" managers. In a worst-case scenario, if a company has value but their share prices continue to drop, they leave themselves vulnerable to a hostile takeover, thus risking everyone's job.

In a publicly traded company, everyone is working together to prop share prices up. How do they do that? Amongst other things, they're much more risk-averse. Taking a risk is a strong signal to the market that you might fail and they reward you with lower share prices. That's why the above paper found that public companies produce fewer patents and of lower value: everyone is so focused on short-term goals that long-term opportunities are at odds with their mandate of maintaining shareholder value.

Curiously, it looks like public corporations can share the same defect that democracy does: people can vote. Sadly, democracies produce mediocre politicians because average voters have average intellect (duh) and can't evaluate brilliant candidates (http://www.livescience.com/18706-people-smart-democracy.html). Rhetoric takes the place of thoughtfulness and we see this with corporations, too.

Frankly, I have no idea how to avoid these dilemmas but pretending they don't exist is surely not good.

I sincerely wonder what percentage of institutional investors have any semblance of a fucking clue what "the cloud" actually stands for, or for that matter, that Amazon is even in the cloud business. I talk to friends in finance all the time who have no idea that Amazon is more than just an e-commerce website. Granted, they do not specialize in tech, and no 22-25 year old analyst is making any real investment decisions, but the general sentiment makes me wonder.

Who are the people responsible for tech sector investing at large investment banks? Do they know anything about the operational details of "the cloud," or is their knowledge limited to marketing gimmicks and enterprise parlance?

The fact is, the technical details of cloud businesses are what differentiate them, and ultimately what sway engineering decision makers one way or the other in terms of choosing an offering. Yet I get the feeling that the investors in these cloud companies have no fucking clue what any of these technical details are.

Wall Street is a joke.

If you (or someone you know) understands the cloud better than the existing investors and analysts, perhaps you should be trading shares of cloud companies yourself. Of course, if a deep technical understanding of such things does greatly influence long-term market value, you can expect there to be some competition doing the same thing already.

There are undoubtedly less-informed participants in every market...otherwise very few trades would ever occur.

When a business first buys into cloud computing, they're likely to compare prices between providers. But I think once most businesses are using a particular provider, they're going to have too much inertia to switch based on a minor difference in price.

Cloud computing is still sort of new. A lot of businesses are still switching from other options, and the cloud industry as a whole is growing rapidly as a result. But that will slow down at some point. That sounds to me like the right time for Amazon to start profiting.

"After all, if chipmakers deliver more and more transistors every two years, Amazon should be able to do more computing for less."

Pretty bad conclusion by the author, particularly given this is Wired. If chip makers deliver more transistors, customers of AWS will use them all up, Amazon will not be able to just sit on their hands and offer up the same computing at a lower total cost.

If amazon charges 10 $ for 10 Ghz, and by mores law the price to deliver 10 Gz is reduced by half, then Amazon should be able to do more computing for less. Without competition and with Moore's law, Amazon can can offer lower prices AND increase its bottom line due.

That assumes customers do not eat all the computation gains. That's an incorrect assumption, cloud customers will always eat all computation gains. Every unit of extra power a customer can get at zero additional cost, they will consume. It's a corollary to Moore's Law, and it's why customers bother to upgrade processors each generation.

In the time Amazon's cost for 10 Ghz went down by half, the demand for processing doubled.

That's good news. If they offer X processing for the same price and demand doubles that means revenue doubles. If they get 2x supply for current 1x price then they just made more profit.

Just because computing gets cheaper doesn't mean they have to offer it for cheaper. It's likely competition will force the price down, but the point the parent is making is that the price of service doesn't have to come down as fast as the cost of service does. That would imply more profit without raising prices, merely holding them steady while costs go down.

"Withou competition" seems like the problem. Competitors are going to get the same advantages from Moore's law, and they've already demonstrated the are exerting pricing pressure on AWS.

Can anyone explain what they mean by this?

"It’s invented and then built a nearly $5 billion cloud computing business catering to fickle software developers"

Amazon built AWS. AWS does $5 billion in business. AWS has the variety and depth of services that software engineers expect.

More importantly, it has managed to replicate the entire hosted rack experience without requiring a company employ staff to manage it. Rackspace is nice but they use OpenStack, which still struggles behind the plethora of networking options and protections AWS has - including VPCs, load balancers, firewalls, subnets both private and public, and so on.

There's very little I can't virtualize in AWS that I might find in a typical rack at a co-lo facility, and in that, AWS has no competitors.

(There are other offerings with varying degrees of awesomeness - Softlayer comes to mind - but bang-for-buck, my company still bets on AWS. My only gripe is I/O and the need for local-SSD-fast disk access for clustered KV database stores, which may finally cause us to start looking elsewhere.)

The other thing Amazon has done is build a service that managed to be both extremely complex (meaning I have a lot of control over it), but relatively straightforward for a novice sysadmin to actually use. This is clearly something they are investing a ton of time in these days. The web interface is getting a lot better.

Reply on news.ycombinator.com