Why Amazon Has No Profits and Why It Works
a16z.com
a16z.com
Likewise, I think Amazon's self-funded retail operations are largely a break-even enterprise. Other businesses have been successful with this -- Costco comes to mind -- but the scope of capabilities Amazon is looking to develop is staggering.
If they can build a completely vertically integrated retail platform from procurement to payment to delivery, basically they're operating a retail enterprise without taking any inventory risk on themselves. Which is what this article means by "capture a significant portion of US retail": if they can provide merchant services to investors, it turns Amazon into basically an investment bank. Amazon takes a retailers money, turns it into inventory, sells it, takes a cut, then returns money. The only inputs and outputs into the Amazon machine are money, and it turns retail operations into an investment product.
Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.
I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
I mean there are large monster e-commerce giants in other nations, it is a very real possibility that Amazon will have to battle with some company at scale who is also in the razor sharp margin mindframe.
Its not impossible to imagine a world where amazon gets into a war with an Asian e-commerce giant for domination of the worlds e-commerce needs. If this does come to fruition this battle will probably not be resolved until 2020 ish time frame... so its a real possibility that amazon could be in business for 30 years, never return a profit to its investors, and NOT end up ever ruling ecommerce.
Couple that with a nice PR machine ( can't understate the value of people like PMarca writing about how amazing they are ) and you've got a way to reliably grow your portfolio.
It's certainly possible amazon could end failing and the stock would end be worthing much less than expected. It seems unlikely the name brand, market capture, datacenter and distribution facilities, etc would not end up with amazon being acquired by a walmart or something ala AOL/TW.
Amazon is worth money right now. Just like a lawn mower doesn't turn a profit on its own, but it is still worth something.
In the long term view, which Amazon definitely takes, this current process is just there to fund the final business. Which is providing infrastructure. It uses its current operations as a way to fund the build out of that infrastructure. The future of Amazon, in my opinion, is not selling books etc, but providing someone with the infrastructure to sell books. Its using its current book sales etc to fund that build out.
I dont think Amazon is taking a bad approach but, realistically feel Amazon is not going to produce any other return for its investors for the next ten years until it completely dominates the world market. Couple this with the fact that Amazon is not guaranteed to ever actually completely dominate the world market... its just unusual for a company to never return a profit after 20 years of business and investors are still hungry for the stock.
By that definition, literally every investment would be a Ponzi scheme. A savings account would be a Ponzi scheme.
Only the ones that you only expect to turn a dime on by finding a bigger fool to buy it from you. If the investment is something that returns money to you (for example, dividends), you're not expecting to make money by selling it for more. You're expecting to make money because you own a small piece of a business that makes money for its shareholders. I have a number of investments that I expect I will never sell (or at least, am not hoping to sell for more that I paid for it); I'm very happy just being given a nice share of the profits every year.
These investments do not require anyone else to buy in, ever; hardly a Ponzi scheme.
Many investments do not earn dividends, including ones that are widely considered to not be Ponzi schemes.
Essentially, there's a philosophy among some CEOs that at current tax rates profitability is something to be avoided, but a healthy EBITDA and reinvesting the capex is the way to increase the shareholder value. The voluntary nature of capital gains tax makes stock buybacks or busines reivestment a more efficient mechanism of delivering value to shareholders.
Amazon is completely different from that, no? A tremendous amount of their value is in intangibles that produce revenue, rather than have intrinsic value. This is fine when you say "I want to own a piece of that revenue stream for the future profits", but if Amazon by choice will never produce net profits from that stream... do you see what I'm getting at? A goose that lays golden eggs has no value if the eggs are never sold and simply hatched.
The bet that investors are making is that at some point the revenues and cash flow will be so huge that Amazon won't know what to do with them and at that point they will start showing a profit and perhaps even pay a dividend. It's not entirely unreasonable. Even Apple finally started paying a dividend once they got to 100 billion or so in the bank.
Noticing that Amazon only has 1% of the retail market is pretty crazy. the potential opportunity they have is staggering. It's not unreasonable to think at some point their will be profits to be had.
hedging
diversification
lottery tickets on bezos owning a significant fraction of world commerce
Because stock is a claim against the assets in the event of dissolution, so it should be valuable as long as the company is expected to have a positive net worth.
Dividends are simply a mechanism allowing stockholders to realize value prior to dissolution. Of course, so is simply selling stock.
Further, if Amazon runs out of good opportunities to funnel operating returns into expansion, then it would make sense to start returning some via dividends, its just that its not there yet and that situation isn't even apparent on the horizon -- its not that they'll never pay dividends, its just that it doesn't seem to be the optimum strategy for the foreseeable future.
stock is a claim against the assets in the event of dissolution
But that's because as long as a corporation is solvent, stockholders either expect that it will have greater net value in the future or can find someone else who thinks that, making holding or selling the stock preferable to dissolution. But its the claim against assets in the event of dissolution that supports all that.
I used to work for a strapping start-up. Our competition had a lot more money, and people than us... but it didn't really matter because we were smarter in how we approached building the product.
The future of eCommerce is going to be very heavily dependent on AI & robots. Product Suggestions > inventory management > ware house > packing > delivering.
AI makes your customers buy more, and robots make delivering it cheaper.
As good as Amazon is at creating this infrastructure, google has demonstrated a mastery in AI, and they're purchasing every robot company around. The competition is on, and I wouldn't count them out.
The future of EVERYTHING is going to be very reliant on AI and robots. My view is that the last 20 years have been the Internet revolution. The next 20 are all about AI and robotic automation. Both disciplines have existed for a long time, but they've hit a tipping point where price and effectiveness are putting them within reach of total ubiquity.
Google is much more forward looking, looking for big changes, like self driving cars. I can see google taking over more markets like they did with search. "more wood behind fewer arrows" was the saying.
Amazon is much more broad, if Amazon has something, they'll rent it to you.
a bit like Xerox and its PARC
To say otherwise is to confuse the issue, even if technically correct in some contexts.
It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI.
It's a very smart long term strategy.
Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further.
Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".
It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.
It's not a "non-technical API". We have name for those things: they're services. Amazon provides services, and that extends to both digital services (with which you interact via APIs — that P stands for Programming, damn it!), and meatspace services.
For instance, why can't I install a local print shop as a system printer? I do some graphics work, then I click File->Print..., pick the "Printing Company XYZ", alter preconfigured defaults if needed, OK, and the next day a courier brings me my print job, all payments and address information transfer being handled in the background.
Let me order pizza by RPC (we could streamline ordering in our local Hackerspace by voting on toppings on IRC and using a bot to make the order ;)). Let me do shopping by a POST request.
The end result would be that the use of aby service that doesn't require your physical presence could be streamlined, a lot of time wasted on boring paper/legwork could be optimized away, and the system would work smoothly in the background as long as you top up your credit card regularly.
I'm pretty sure that FedEx Office (formerly FedEx/Kinkos) has supported doing that for many years. I suspect they aren't alone.
A few minutes of Googling didn't turn out what I was looking for though. I can see an "upload and print" feature on FedEx website, I can see a dedicated mobile app that apparently can print files via FedEx...
... but what I was looking for is something that pretends to be a normal printer, so when i do File->Print in Word or Photoshop, I can choose it as a destination, much like we used to do with "PDF printers", which were programs that installed as printers but outputed PDF files, back in times when MS Office couldn't do PDF export.
So if I'm missing an obvious hyperlink to that, could you please help me out here and post it? ;).
In general, I don't want print shops to start making mobile apps or (even worse) desktop apps to "streamline the process" (i.e. scare the shit out of the living with crappy UI and "upselling opportunities"). My dream is for them to integrate into the system, like every self-respecting piece of consumer hardware does. In the end, I might even not care at all which print shop is doing the job (much like I don't care where I order Asian cousine - those restaurants are all commoditized - I only care about it to be hot, tasty and delivered on time). In a perfect world, I'd love to have it reduced to a single argument, a drop-down in printer settings dialog (but I'd happily accept a system printer per printing shop for now).
All the long winded explanation of the circumstances (such that Benedict gives in his writeup) hoping that people will be overwhelmed and not want to question what is going on (like a 20 page legal contract that can't easily be deciphered by non lawyers) I mean who even has the time to fully vet even what Benedict has "summarized" (not that it can be called that).
There is a saying in negotiating which is "you can name the price if I can name the terms". In the case of Amazon it's like "Let me name the business model and I will also name the time frame toward profitability".
One thing is for sure. Bezos may prove right in the end or not but there is no question he is operating according to his vision and doesn't look anywhere close to deviating from his (Benedict's words here) "lifestyle" business.
Jeff Bezos can do no wrong in this market place; that is where we have a somewhat growing marketplace for certain professions. Professions that provide a livable wage, with a few dollars left over after rent in order to spend on Amazon.
Besides Jeff's vanity projects(newspaper, drones, I don't fell like doing a bunch of research)--his business model has one glaring flaw. He needs cheap gas. There is good reason why have huge trucks that move a large amount of goods from one location to a more convenient location. Don't get me wrong I like Amazon. I am surprised he hasen't bought up some of the dirt cheap commercial Realestate and put in Amazon retail outlets. Outlets that just provide a place where customers could pick up their packages. Hell--he could automate them, and they could be open 27/7?
Well this is my opinion based on 35 years of business experience and having graduated from an Ivy business school as well. And reading, operating and observing business from before most HN readers were born. In other words not just reading blogs or online comments or whatever. It's a pattern that I've seen. Having seen bullshit of different types previously.
Sure I could be wrong "ask 10 doctors" but I do have a basis for my thoughts.
Edit: Because of course being in business and making a profit for 35 years means nothing to the younger generation on HN.
http://www.amazon.com/gp/help/customer/display.html?nodeId=2...
This invalidates the time value of money. In other words, if I am not getting a quarterly/annual dividend (ie a profit payout) on a stock, over the long term there is no incentive to hold onto that stock, because I could get a dividend from a different stock or some other investment in general.
But I definitely agree with the gold example.
They have a healthy EBITDA, they're just choosing to reinvest their earnings, as they deem it's more efficient use of their capital than declaring a profit, paying a corporate profit tax off it, and then keeping the rest of the cash.
This was the game played by John D. Rockefeller. He had so much infrastructure built up by the time they split up Standard Oil, that each new state Standard Oil immediately had everything it needed to keep operations going and the breakup was essentially a bunch of paperwork. As a stockholder in all of the new firms, Rockefeller's net worth tripled, from ~300m to ~900 million.
To make this strategy work, you need mountains of cash. In his salad days, Rockefeller cultivated excellent relationships with bankers, who would stop him on the streets of Cleveland and ask him if he needed money. Eventually he decided to buy up Cleveland's entire refining industry, an event that became known as the Cleveland Massacre.
John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed. He leveraged his extensive railroad connections and infrastructure to bury competitors, for one thing he owned virtually all the oil tank rail cars, without which you couldn't sell your products because you couldn't move them efficiently.
The right choice was to have taken stock, which would have made you fabulously wealthy. If you were any good at the oil business at all, he would also offer you a job, which again would have eventually made you very very rich. He had an insatiable hunger for quality staff. It was never a good idea to bet against Rockefeller.
It runs against the conventional story of SO being an inevitable monopoly.
Their main competition was from Russia oddly enough.
Above and beyond that, simply as a history of the most important substance in all of human history beyond sheer biological necessities, it's utterly fascinating. It's principally through Yergin's work that I came to pretty much diametrically opposite conclusions of the future of energy from his.
Thanks for the heads-up.
Am curious. What would your nominations be for the Rockefeller of the tech (software/hardware) world? Ever thought about that?
> John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed
... is also a pretty good description of how Microsoft approached anyone they considered competition in the '80s and '90s: you either licensed your software to them ("cash"), sold your company to them ("stock"), or got destroyed by them.
Gates' charitable efforts have earned him a warmer and fuzzier reputation these days (another parallel to Rockefeller?), but back then he was an absolute barracuda.
I like to say yes. I think. I mean, he may have destroyed hundreds of people's livelihoods/jobs/companies, but his efforts these days are literally saving peoples lives.
Does anyone have an opinion on this? I'm a firm believer people can change and while this might not be Bill Gates changing, it might simply be him "atoning for his sins" so to speak, not that I'm religious, nor that he is either I think.
No. Changing doesn't remove your past sins and helping one person doesn't balance your hurting another. To believe so would mean saving a life makes up for taking another life, obviously it doesn't.
It's certainly not fair to make the comparison of saving one life in exchange for taking another. A better comparison would be saving many (millions?) of poor, non-white lives in exchange for stealing money from privileged white men (majority of people in the software industry during his era).
In the 1980s, Apple went round Hong Kong, Taiwan and China suing companies for making knockoffs of the Apple II (ie better, faster, more reliable and much cheaper versions of the Apple II). Then along came the PC industry, which welcomed them -- and their innovations -- with open arms.
How do you balance a handful of self-righteous American programmers against the wealth and the millions of jobs generated by Acer, Asus, MSI, Hon Hai, Wistron, Pegatron, Quanta, Compal, Inventec, etc?
Of course not.
> It's certainly not fair to make the comparison of saving one life in exchange for taking another.
It's exactly the right example because it makes the moral choice clear and that same choice applies to the lesser scenario.
> A better comparison would be
We don't need a better comparison, it's already been made clear that you can't make up for sins against one by helping another.
Microsoft wrote some software that was, I would argue, overall an improvement on the software against which it competed. So Microsoft did some good. However, in the process of extracting value, they actively - and, in my opinion, often unethically - suppressed the efforts of those with whom they competed. I don't pretend to be very knowledgeable on the exact value of these positive and negative effects, but I think it's pretty clear that all of the above effects more or less amounted making a bunch of computer nerds like us a little richer, or a little poorer. Not necessarily in money, but in power... like the power to track business expenses cheaply (which Microsoft enhanced, with Excel), or the power to collaborate on making productive software for ourselves and share it freely with the world (which Microsoft harmed, see the Halloween Documents, or other conspiracy evidence of your choice).
For the most part, this only affects a few dozen million humans, and even interpreted broadly it affects perhaps 10% of humanity. And the effects are small; for almost all of the affected, life gets less than 1% better or 1% worse, due to Microsoft existing. I mean, that's bigger than most companies, but.
I'm less able to give clear magnitudes of the impact of the Bill and Melinda Gates Foundation. My understanding, though, is that they're playing a significant role in the attempts to eradicate polio. Frankly, you can inflict Windows95 on me for the next 50 years, if that's what it takes to save one person from polio. Suppose that it turns out that polio is eradicated, and the B&MGF is due 1% of the credit for that; wouldn't this be more valuable than all the harm ever done by MS, past and future? And then there's their malaria-eradication efforts, their money spent on education, their money spent on sanitation, etc etc.
Bill Gates seems to have stolen a very manageable amount of our first-world wealth, burned a good fraction of in an engine of inefficiency (for example, Ballmer got some money too), and given most of the rest of it where it could do the most good (modulo a small fraction kept for himself, to indulge in fabulous luxury). As far as I can tell, although it astounds and confounds me, Bill Gates is Robin Hood. wtf.
My candidate explanation, Melinda.
They did an absolutely unprecedented assault on the Internet on the developer, policy, and user front when they found out they could not compete there, until they turned that policy around. We only see vague results of this today, on that all development of the web itself was put on an 8 year hiatus, and in some of the crazy proprietary formats that still plague us.
But how do you put it in economic terms? How much is the break-ins at RSA, Cisco Google, Valve, and inbetweens unknown worth to the global economy, because bad business practice forced peoples email clients to have the ability to run code?
Rockefeller had a strong Christian Soldier belief system, in which he was righteous and most other oilmen were sinners. (The 19th century oil business attracted a lot of hard-drinking, gambling, womanizing types.) He did good works with his money, while many of his competitors would have spent it on vice. Therefore, he was furthering God's plan for the righteous to inherit the earth by beating them in business.
It's a worldview difficult for moderns to relate to, but I think it was authentic for him.
That was eerily reminiscent for me, too.
There are plenty of ruthless people in business even today. But Rockefeller was driven by the belief that cooperation in business, rather than competition, was the way forward for society. The business he built reflected that. Eventually the world learned from his model and now business isn't quite so cutthroat.
But it took Rockefeller to create this new order. Someone so genius at business that there was no stopping him from doing anything he wanted to do. Not even the full might of the federal government could bring him low. Maybe they could have eventually, but the government's position on monopoly softened after it realized what the economies of scale it generated meant for our wartime industrial efficiency. There were other titans in that time period. Rockefeller stands above them all.
Really, you don't see what is happening here?
Who else mounted a private space company able to dock with that of the global governmental effort that is the ISS?
But. They're not there yet. At the moment, they're currently providing a launch facility that is equivalent to services offered by a number of other vendors, albeit at a slightly lower (currently) price. And the service they're providing really does not directly impact on 99.9% of the lives going on around you.
Yes, their reusable launch system program is way ahead of anything else anyone is doing, but it's still experimental, and isn't yet providing benefits to even their direct customers, let alone anyone else.
Musk hasn't made lasting change yet with SpaceX. I really, really hope he does. Becoming a multiplanetry species would be the biggest thing for Humanity since, well, fire, standing upright, or speech, and Musk seems to be the person best placed to make that happen in the next 20-40-odd years.
But he's not done it yet.
http://www.spacex.com/news/2014/07/14/falcon-9-launches-orbc...
http://www.spacex.com/news/2014/08/06/spacex-launches-asiasa...
http://www.teslamotors.com/de_AT/blog/promise-electric-vehic...
If you have low self-esteem maybe. Rockefeller was a piece of shit.
Also a reminder that the term "visionary" is very relative to your horizon.
Exxon still breathes Rockefeller, his imprint can be seen all over that company. To call him a visionary is absolutely appropriate.
AFAIK he wasn't off kicking puppies and punching beggars in his spare time. You can be a ruthless businessman and perfectly good human being.
At its peak Windows was running on 90% of computers and the biggest rival Apple (Steve Jobs) was taking money from Microsoft (Bill G) to survive.
Bill was able to leverage almost all other software companies to create software for Windows to create a lock in fro the customers.
It's hard to see how many people suffered who didn't fail thanks mainly to their own mistakes. I'd put DR, IBM (Lotus), Novell and Netscape in that group.
> The day before the announcement Apple had a market cap of $2.46 billion,[58] and had ended its previous quarter with quarterly revenues of US$1.7 billion and cash reserves of US$1.2 billion,[59] making the US$150 million amount of the investment largely symbolic.
http://en.wikipedia.org/wiki/History_of_Apple_Inc.#1996:_Ret...
That isn't a coincidence. According to[0] "The Everything Store"[1], the latest biography of Amazon, Bezos picked up the model for Amazon retail from Costco founder James Sinegal.
The first aspect was "value trumps everything" - where prices would be slashed and net margins thin. The second was the subscription model - Bezos learned that 70%+ of Costco's profit was from the membership fees. It was easier to charge a membership fee once and offer lower prices than it was to attempt to spread your profit margin across products and into the pricing.
Amazon slashed its prices and adopted the thin margin model in the future and then implemented Amazon Prime.
"The Everything Store" is a decent read, easy to flick through and some interesting cases and anecdotes within it. Ignore the negative reviews and give it a read if you haven't already.
[0] http://bobmorris.biz/what-jeff-bezos-learned-from-jim-sinega...
[1] http://www.amazon.com/The-Everything-Store-Bezos-Amazon-eboo...
Amazon has already set this up for books with their Kindle Direct Publishing platform[0]. Writers directly publish on Amazon (cutting out publishers) and their books are electronically delivered to customers' Kindles -> everything stays on Amazon.
a16z touches on this, but it has wider reaching implications than just Amazon's revenue.
Contrast this with the fact that an average Walmart does over $100 million a year in revenue (though Walmart's margins are closer to 1%), and it's actually not that huge.
So I thought I'd throw this comment in here in case others were misreading it as I did.
They had employees, but were still entirely owned and managed by a literal "mom and pop" whose children I went to school with.
I was a seller 5 years ago on Amazon and seller support was terrible. They use automated bots to ban your seller account and then offer no recourse or support beyond scripted emails.
I would think that if sellers like me were bringing in that much revenue for Amazon..that they would treat me a little better.
I guess this is the textbook example of why any sort of monopoly is bad.
It doesn't stop people from selling on Amazon though since it's almost a required channel these days.
Compare to eBay, where a fairly recent transaction by my father, buying an iPhone, was a scam, the cellular radio didn't work (rest including WiFi did), and the seller, who officially had a good reputation, knew exactly how to game the system so my father was out > $100.
Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an amazing unprecedented ride upward, institutional benefiting the most.
I also take umbrage with the idea that Bezos is running Amazon for "fun" as though it is frivolous. Bezos seems to have a grand vision and that is not something that matches with the ridiculously short term and arguably irresponsible thinking of the vast majority of investors.
We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.[1]
[1] This is refuting the broader point that Benedict Evans is making, and does not necessarily apply to Amazon perfectly.
Suggesting - even if lightly - that Bezos is running Amazon for "fun" and as a "lifestyle business", especially in the light of the great analysis done above it, indicates that the author looks at any business that has very long term goals as inferior to those who are solely focused on turning profits back to shareholders.
Only if they sell to realize those gains, and that can only occur if they can find a buyer who has an even greater expectation of profit in the future.
This concept seems to elude people, but the value of a company that never makes a profit is precisely $0.
Even with all that, the value of a company that doesn't turn a profit isn't 0, it's the value of it's assets, and Amazon has a lot of those.
Touche. They also have liabilities.
I suppose we could be even more precise and say the price is $0 above the expected value of the net assets at the time of liquidation. But my point stands.
Or admit that your point is absurd.
As others have stated profits = revenue - expenses. In this case they are positive on the right hand, even if slightly, so they are in fact making profits.
Your time horizon is also wrong and assumes that there needs to be a singular point where the top level goal becomes making profit, rather than profit being a byproduct of a top level goal of adding value.
I also disagree with your assertion that value comes solely from profit.
The top level goal is to provide an adequate return to shareholders. Shareholders (of which I am one) allow massive re-investment with the expectation that net earnings in the future will increase.
If you purchase ownership in Amazon (or any other company) for any reason other than to earn a share of their income, that's your prerogative. But you are in a very small minority.
Selling the stock and being taxed on capital gains is a voluntary act that can be planned for accordingly. A company with zero profit also owes zero taxes at the corporate tax level, which makes reinvestments and stock buybacks a more efficient value distribution strategy.
The latter portion of the post was not specifically applicable to Amazon, but was refuting the author's point of view.
The idea is not new, and conglomerates have been around for quite a bit now, with most prominent example being Berkshire Hathaway. Take the profits of a textile company, reinvest them in a new line of business, take the profits from that line of business, reinvest it into a new one.
* Also, this means no capital gains taxes until you sell your shares, because there are no dividend payments.
according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05%
So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends.
AMZN (WACC 10.05%) net sales growth: 22% (2011-2012) vs 18% (2012-2013)
AAPL (WACC 9.45%) net sales growth: 31% (2011-2012) vs 8% (2012-2013)
From Wikipedia: "The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere"
"a corporation will evaluate an investment in a new [x] versus an extension of an existing [y] based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital"
For more info, see sources: http://en.wikipedia.org/wiki/Weighted_average_cost_of_capita... http://thatswacc.com/ http://www.investopedia.com/walkthrough/corporate-finance/4/...
http://seekingalpha.com/author/paulo-santos/articles/symbol/...
While this guy seems to have lost his shirt betting against AMZN over the past couple of years, his bearish analyses of its valuation are quite precisely articulated and make interesting reading.
Alibaba may eat the 3P revenue: http://seekingalpha.com/article/2263623-this-is-amazon-coms-...
Amazon.com's profitability decline is structural and tied to its sales mix: http://seekingalpha.com/article/2169003-the-latest-developme...
I wouldn't short this monster, though, at least not until QE ends.
> Amazon has perhaps 1% of the US retail market by value
> With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.
If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively.
All of that being said, there are still plenty of things that could go wrong for AMZN.
Amazon's stock trades at a P/E of 910 exactly because it's deferring profit to continue growing its revenue. At some point it's going to stop investing its revenue into growth and start realizing a profit on that revenue. At that point the P/E will come down.
This isn't surprising considering there isn't much competition (in terms of brick/mortar) in most of the US.
Electronics? Best Buy
Books? Barnes and Noble
DVD's? Best Buy
Video Games? Game Stop, Best Buy
Without much competition in most categories, it's not surprising most people opt for online shopping instead of going to the same place, paying much more and having a crappy in store experience.
This isn't to say other categories probably have much better local options. For myself, I've rarely purchased bike parts on the internet unless I'm completely sure its a good deal. My local bike shops tend to have what I want, or they can special order it for me and its still pretty close to cost.
1. http://www.reuters.com/article/2011/08/16/us-walmart-idUSTRE...
I that case he's done pretty well delivering ~$150bn in shareholder value accidentally.
Anyways, fascinating post, really enjoyed the different cross sections of perspective presented.
[0] https://plus.google.com/112678702228711889851/posts/eVeouesv... [1] http://www.amazon.com/b?ie=UTF8&node=8037720011
In Patrick O'Brian's novels, his captains always try to get upwind of their opponents. If you're upwind, you decide when and if to engage the other ship...
In this case, Amazon is upwind of becoming a giant, profitable company. They could have taken profits earlier but it would have shrunk their overall pie.
It's a very interesting dynamic, certainly not the way i've normally thought of a shareholder-company relationship but one that must apply to many companies.
Take the money away from Amazon? The shareholders are Amazon. It isn't Amazon's money, it's the shareholders. If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it.
In theory, yes. In practice, being an activist shareholder and going against the wishes of management is _hard_.
You're correct in asserting that the shareholders are entitled to direct the board to do their will. However, you seem to be assuming that the publicly traded shares of Amazon a) have significant voting rights, b) are a large enough share to be significant, and c) are not held in majority by those within the company.
I can't find information on either of these three... so I continue to assume it's entirely possible that Amazon's publicly traded share holders are a minority, with little voting rights.
i.e. the first time you buy something, you are comparison-shopping, and likely to choose an item that is particularly cheap at that moment.
When you go back a year later, you aren't comparison shopping -- you're looking to replace what you bought last time. And you may well find that whatever made it cheap in the past (promotion, overproduction, market conditions) no longer applies.
Also, outside of the US Amazon has just barely started to expand beyond books. In most countries online retailers are bracing themselves for the moment Amazon starts eating their lunch.
Unless Bezos suddenly has a change of heart, this growth strategy could go on for many, many years.
Not sure it's correct. For example amazon has a 2-day service across Europe from any amazon warehouse in the continent. But maybe what they do is not enough for Europe?
This growth strategy HAS gone on for many, many years.
And it's serving Bezos et al very well.
They package up and address individual items in shenzhen/guanzhou, stick them all in big containers, then when they reach the US/europe they deliver them by the cheapest means possible in a totally commoditised fashion. What competitive advantage does amazon.com have now? Why do all those small sellers need to exist? everything they sell is made in china anyway.
Amazon is increasing in value, but because they are investing in themselves, on paper (i.e. according to accounting measures) they are not profitable.
All companies have a "book to market" ratio that indicates they are worth more as a company than accounting measures would suggest.
"This is a model known as ILC, which stands for innovate leverage commoditize. The model is pretty simple: what you do is you provide a commodity service, you enable everybody else to innovate on top of it. They are actually your research and development group. You do not bother to do it yourself, you get everybody else to build on your services. Anything which is successful and starts to spread in your ecosystem, you can identify through consumption information, so you can leverage the ecosystem to spot successful development and then you commoditize these new components."
The America that is rich and poor is here. I hope the U.S. dosen't turn into Mexico; where the wealthy can't leave their house for fear of kidnapping, or worse. I know I casually slip off my watch when traveling to certain areas, and wouldn't think about buying an expensive road bike again.
I don't know either way, and I don't want this post to seem like a criticism of Amazon. I know some people who work in upper level management there and they all speak very highly of the way the company is run (very meritocratic). But reinvesting earnings is only a good strategy if those earnings are put to good use, otherwise they should be paid out as a dividend.
Anyways, just something to think about whenever the topic of Amazon's profits/earnings comes up.
Taxes bias this question.
Investors in Amazon typically look to selling their stock for higher than they bought it as the way they "get their money out of their investment" So not sure why the fascination on profits. Profits are important if they become the means to achieving a higher stock price. But lack of profits hasn't hurt AMZN's price over the years or made it an unattractive stock.
Basically, it's rational for a company CEO to invest all profits back into the business as long as he expects he can make a better return for them than the market can. Berkshire Hathaway's annual reports go into more detail in this. The trick is in recognizing the size of the market opportunity in front of you, so that you know when to switch from reinvesting profits to distributing them as dividends. Microsoft waited too long for this - they burned (and are still burning) billion on unprofitable business lines. Google has had debatable success - some of their new businesses are brilliant, some are huge flops.
Apple, and even Google, don't seem nearly as similar to Amazon in the question I asked. While they both invest heavily in R&D and other capex's areas, they also store a lot more cash (at least apple) and seem to report a lot more of a "profit" than Amazon. Do they re-invest _all_ profits or just a portion like most companies?
People don't talk about Apple, Google, or Microsoft as companies that failed to become "profitable" in nearly the same way people talk about Amazon, at least from what I see. AMZN still seems like such an outlier...
Google tries to accumulate cash so that when there's an opportunity - say, buying DoubleClick or YouTube or Motorola - they can pounce. Since Google is basically an IP company and tries to avoid having physical assets on the books, these are usually whole other companies, usually technology-related. These opportunities are unpredictable, so they bank the cash on the books, invest it in liquid instruments, and then spend it all at once.
Apple is a mature company now - it pays a dividend. But during their big growth years between the iPod & iMac and the iPad, they suspended the dividend, and ran very close to break even then too.
Amazon makes profit and immediately finances new warehouses/robots/etc. with it instead. Since this is not cash it is booked as zero profit from an accounting perspective.
Some investors like to complain about the lack of profit because turning it into an asset for the company to use makes it harder to give out to them as cash (dividend) but makes it easier for the company to grow. Many of the same investors use a flawed metric (P/E ratio) to saw that Amazon is effectively worthless, even though it dominates a market with huge revenue growth and a large amount of physical and virtual assets.
If the net worth is about $40 billion or more and growing (almost tripled since 2009?), and revenues are growing (almost tripled since 2009?), and it's not hugely inefficient (has relatively steady or increasing profits instead of increasing losses) - I don't understand why people think that sounds like failure.
Wonder why that didn't garner any traction. Perhaps it has something to do with the fact that this duplicate link is from a16z?
With Amazon, Bezos is deferring that profit-producing,
investor-rewarding day almost indefinitely into the
future.