Amazon's profits

http://ben-evans.com/benedictevans/2013/8/8/amazons-profits

by barista • 13 years ago

159 144 13 years ago

jmduke2• 13 years ago

Benedict's analysis is consistently interesting, as he tends to apply a level of financial rigor often absent from tech journalism/analysis. His stuff for Enders is incredible (though its unfortunate how difficult it is to get ahold of Enders material, as its quality deserves a much more massive audience.)

guard-of-terra3• 13 years ago

Why would you, as a shareholder, want a company to become profitable if it's not going to pay dividend anyway?

If anything, shareholders should push tech companies to reinvest every spare cent, assuming it already figured out how to make money to stay afloat.

Raking cash and sitting on it is an awful mode: Google and Microsoft grow suboptimally because of this.

prostoalex4• 13 years ago

Because cash, even when held in an account without payout, is easier to value than any other asset or investment.

It's also a cushion for a down cycle in the global economy.

guard-of-terra3• 13 years ago

Tech companies do not care about up cycles and down cycles. They grow in both.

I fail to remember when cash helped struggling tech company. Sun? Yahoo? Who could make better use of cash in the time of struggle than they could in the time of growth and ability?

Tech companies do not need to hoard cash. They never die because of lack of cash. They always get murdered by more able competitor or innovation in their field. Thus, preferring to keep cash instead of investing is basically a crime for one.

If you cate about assets and cushions, maybe you should invest in your pillow instead?

prewett• 13 years ago

As a shareholder, you don't want a dividend IF the company can invest that money at a higher rate of return than you can. Berkshire Hathaway is the textbook example of this: they have not paid a dividend in 40 years, but the book value has grown by about 20% every year (averaged out).

I would not say that Google and Microsoft necessarily grow suboptimally because they have a lot of cash sitting around. The current opportunities may not be worth investing in. Berkshire has tons of cash, waiting for a good opportunity. And when it comes, cash gets poured into it.

laxatives3• 13 years ago

I think thats only true if you have a lot of faith in the company. If you were guaranteed greater return on reinvest, of course that would be better. But all you're getting is less (or no) money now and the promise for more money later. If this isn't something your emotionally attached to, it sounds like you're just getting screwed.

josh26003• 13 years ago

Cool article, but I think the magic profitability button analogy ignores the underlying economic thesis of Amazon.

Right now, the only obstacle to Amazon's profitability is Walmart. If Walmart didn't exist, Amazon's pricing control supremacy would ensure they could operate at the lowest possible market price on every item, and as the market maker for product, they would control the cost floor as well.

In a sense, the end game for Amazon is this: it's fucking ludicrous to run a company without profit for years. At some point someone else is going to try to take more profits because of the volume pressure of Amazon. The end game for Amazon is choking all of the other retailers out of existence, IMHO.

They don't have to flip a switch, they just need to wait. They're playing the long game.

hcarvalhoalves• 13 years ago

I believe you're the one reading the strategy right. The fact they diversify a lot and squeeze revenue out of any by-product (AWS is an example, payments are another) might indicate that.

tnuc• 13 years ago

Amazon is nowhere near the size of Walmart.

Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it. Then they'll get Steve Balmer to make the growth stop :)

josh26003• 13 years ago

In what market?

In cloud infrastructure I think it's safe to say Walmart is actually the smaller contender.

Over time cloud infrastructure could subsume all of retail, at least in theory. If that's the case wouldn't you rather own Amazon than Walmart?

I'm not implying this is reality, I'm just saying predicting future potential is not as simple as current Market Capitalization might imply otherwise IBM would own the NASDAQ today.

true_religion2• 13 years ago

Bezos doesn't have an end game, he'll just keep driving growth until he gets sick of it.

What is the 'end game' of Wallmart? I mean, don't most established companies just want to continually drive growth till they saturate the market, then reap?

riggins3• 13 years ago

Amazon is nowhere near the size of Walmart.

Walmart does ~500B in rev. Amazon did 61B in rev in '12 and is on pace for 72B-ish in '13.

jonnathanson3• 13 years ago

All of which, ironically enough, was Walmart's original playbook: grow huge, realize economies of scale so drastic that nobody else can hope to compete on price, then use your size and buyer power to put even more downward pressure on supplier prices.

Amazon vs. Walmart is an extremely interesting battle to watch. Amazon has massive advantages in technology; Walmart has massive advantages in size, distribution, and logistics. Amazon is gaining a lot of ground in the US; Walmart is much stronger than Amazon internationally.

If I had to place bets, I'd take Amazon in the long run. They're much more forward thinking and are playing a much more strategic game. Walmart has become overly reliant on price leadership and has had a very hard time orienting toward the future of retail. The Innovator's Dilemma will catch up to it eventually -- but it'll take awhile, because Walmart is so damned massive and dominant right now.

josh26003• 13 years ago

Don't forget: All else being equal, Walmart takes a profit. That's why I'm bullish on Amazon from an economic perspective.

Culturally, I often wonder about the consumer value of monopolized markets.

revelation• 13 years ago

Walmart is much stronger internationally? They crashed and burned in Germany, and the map of their international locations is.. not very impressive.

Frankly, looking at the US map, as a non-american, even there their presence isn't particularly exhaustive. The USA just happens to be a big market.

srik1234• 13 years ago

Walmart is quickly catching up on technology. It acquired bunch of startups recently and opened walmart labs in the valley. Their website also improved quite a bit in terms of recommendations and other services. I think they are improving quite a bit in this regard.

raganwald• 13 years ago

The end game for Amazon is choking all of the other retailers out of existence, IMHO.

The trouble with this is that it plays exactly into the article's point. We can't disprove that Amazon will one day choke all the other retailers out of existence. We can always say, "tomorrow will be the day, just wait."

Meanwhile, Chinese factories are selling bicycle parts on eBay. Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business.

I'm not trying to debate eBay vs. Amazon, I'm simply suggesting that if we're talking "long games," there's a lot of uncertainties. Profitable companies are winning now.

sillysaurus2• 13 years ago

Will WalMart fail but be replaced by manufacturers selling direct to end-users and disintermediate Amazon? I have no idea, but it's no less plausible than Amazon driving absolutely everyone out of business.

Seems unlikely, because the main reason to go to Walmart or Best Buy is to get the product the same day you want it, and also to see it in person before buying it. Amazon won't drive everyone else out of business until they offer both of those.

ippisl• 13 years ago

Amazon currently plays a dual role; both a traditional retailer and a 3rd party logistics business, and they'll probably be quite good at both of those, see the kiva purchase for example.

I think they could probably beat ebay in this kind of game if they'll be interested.

prostoalex4• 13 years ago

There's a precedent of selling the product pretty much at cost and maintaining a profitable company. 80% of Costco's profits come from selling annual memberships, their product markups pretty much cover the costs of operating the warehouses, and yet even WalMart rarely beats Costco on prices

http://www.businessweek.com/articles/2013-06-06/costco-ceo-c...

melvinmt2• 13 years ago

They don't have to flip a switch, they just need to wait. They're playing the long game.

So.. why is that "fucking ludicrous"? Seems to me they're playing the Long Run Equilibrium game just fine: "In the long run, every competitive firm will earn normal profit, that is, zero profit."

johnrob• 13 years ago

I think Amazon is simply reinvesting in growth while avoiding corporate income taxes. Since they tend to move into proven industries, they are not likely to lose any of the re-invested money.

They are effectively taking profit in the form of Amazon equity (via increased stock price) and not paying any taxes.

tracker1• 13 years ago

I don't have a problem with that... imho corporations should be working to either grow (reinvest or diversify) or payout dividends... I'm pretty opposed to a corporation holding on to vast unused/underused properties and cash reserves. It does nothing for the communities they take hold in, or for the economy at large.

dnautics2• 13 years ago

could someone explain the marxism thing to me? I'm really scratching my head on this. Certainly it's not his labor theory of value. Is it supposed to be an analogy to "From those who can provide to those who need it"??

leod• 13 years ago

It certainly struck me as an odd analogy. There are plenty of theories that are hard to disprove, why choose one as politically loaded as "Marxism"?

jfb2• 13 years ago

Nevermind this, I misread the parent. Yeah, it's a bit odd. Certainly, Popper's black/white swan analogy would've been sufficient.

ser0• 13 years ago

I think the author was just trying to avoid the other, perhaps more controversial, unfalsifiable analogy, which relates to faith based theories (I don't want to offend anyone either).

I agree that the Marxist part at the end disrupts the flow of the article. The article would have been better served if it kept within a financial analysis context.

jlgreco• 13 years ago

Karl Popper is most famous for his work in the theory of science; primarily the importance of falsifiability. Apparently he had an issue with Marxism because he felt it wasn't falsifiable. The idea is that it should be possible in theory to prove any good theory wrong. For example, the theory of evolution is a good theory because there are things that we could discover that could prove it wrong (Precambrian rabbits).

Marxism is not really what I would pick to talk about Karl Popper and falsifiability... his writings on politics are pretty much a side-act. I am guessing the author was recently reading some of Karl Popper's more political writings. I would have picked psychoanalysis.

dnautics2• 13 years ago

oh, I see. There's a seriously flawed parallelism in his list; the first is a direct analogy (between GE and amazon itself) and the second is an analogy about analogies made on amazon.

jfb2• 13 years ago

I don't think Marxism was Popper's side act, particularly later in life (The Open Society And Its Enemies, The Poverty Of Historicism). Marxism and Freudianism were targets of Popper's because they appropriate the language of science for what he argued were in fact non-sciences.

It's important to remember that in the '20s, Marxism was presented as a scientific theory, that it described a logical, teleological process by which human society could be perfected. This was the Popper's later great white whale. Ask George Soros!

btilly• 13 years ago

An amusing fact about Karl Popper is that he also rejected quantum mechanics as a valid scientific theory because no probabilistic theory can be falsified.

The irony is that the standard methods of hypothesis testing which are often used to test statistical theories, including quantum mechanics, is based on reasoning with strong parallels to Popper's theory of falsifiability.

It is worth noting that Popper's theory is itself false. Real scientists do not simply throw away a theory because it is proven false. Good theories are hard to find. And a false theory may still be a useful approximation!

steveklabnik• 13 years ago

I found it especially funny in light of an article I was reading this morning: http://plover.net/~bonds/positivism.html

codex• 13 years ago

Amazon doesn't make a profit because the stock market doesn't demand it. As long as a company is growing, it's stock will appreciate. It's only when growth stalls that shareholders will demand that the intrinsic value of the company be realized.

This works well for Bezos, who is so obsessed with empire building and the future. So far growth has allowed him to continue this obsession. Even if growth stalls, Bezos is so intent on pursuit of the new that Amazon may not show real profits until he retires, or dies.

jmathai• 13 years ago

To put this another way, Amazon is LOTS of different startup ecommerce businesses on one platform. All the profits from the ones that work are spent on new, loss-making ones.

Doesn't that describe Google as well? Ads fund most of their initiatives...

mabbo• 13 years ago

While I interned at Google, my manager said to me once "See, at Google, we found a hose that money pours out of. It's name is 'Online Advertising'. We now do two things- improving the flow of the hose, and searching for another hose."

dictum• 13 years ago

I'd say they've already found another hose: self-driving cars.

How they'll get them to market is the question.

mintplant• 13 years ago

I'm a bit uninformed on this, so bear with me here. If Amazon is making no "profit", that still means that its employees are getting paid, right? If the people working there are making money off of the business, what problem exists, exactly? Does it have to do with investor returns?

valgaze• 13 years ago

Check these two ideas out:

1) Bezos said: "Percentage margins are not one of the things we are seeking to optimize. It's the absolute dollar-free cash flow per share that you want to maximize, and if you can do that by lowering margins, we would do that. So if you could take the free cash flow, that's something that investors can spend. Investors can't spend percentage margins" (http://blogs.hbr.org/ideacast/2013/01/jeff-bezos-on-leading-...)

2) Listen to Ruby on Rails' DHH break it all down here @ 44min30sec (he also knocks salesforce) quoting Bezos' line "your margin is my opportunity": http://www.youtube.com/watch?v=jzERXJgi5vQ&t=44m30s

barista• 13 years ago

Those are some good links. Thanks. He's very savvy guy. Interesting how he chose to conclude the interview which was very clearly targeted towards the "investors" of Amazon as this:

"And the reason that I'm doing this interview with you is I want customers to understand what makes us tick, how we operate, what our principles are. I think customers want to know who they're doing business with."

smart!

notatoad• 13 years ago

Yes, employees are getting paid. It isn't even investor returns, because amazon's stock price has stayed pretty independent of profits. The only consequence of not turning a profit is that their cash reserves do not grow. Profit is really a pretty meaningless number.

adventured• 13 years ago

Amazon is clearly capable of generating Walmart or Target range profit margins. In 2010 they earned $1.15b on $34b in sales. That's right on par with Walmart's sales to net income ratio, and I believe Amazon accomplished that without much focus on profitability.

The only concern I see about Amazon as a company, is the future stock market returns for the next decade are already baked into the stock. They're currently trading at three times the value of Target (with none of the profit, no dividend, and soon to be comparable sales).

nostromo• 13 years ago

Of all the big internet giants, I think Amazon will be the hardest to disrupt.

Androind could eat away at Apple. Google's search could in theory be disrupted. Facebook seems more vulnerable by the day. Microsoft is a dead man walking.

But Amazon has this entire subsystem of distribution centers filled with inventory risk. People focus on the website, but I think the real magic is everything that happens behind the scenes. The barriers to entry are enormous.

I once created a comparison shopping service. When we talked with users, we heard over and over, "I just go to Amazon. I trust them. I don't shop around online." Or, "I have Prime, so I'll save money on shipping anyway." It made the entire space seem pointless.

An internal Amazon company motto is, "it's still day 1." That's their view -- that it's still the early days of the internet. That's why they reinvest so heavily, because it's still early days.

mgkimsal3• 13 years ago

An internal Amazon company motto is, "it's still day 1." That's their view -- that it's still the early days of the internet. That's why they reinvest so heavily, because it's still early days.

MS people I spoke with as late as the late 90s still considered themselves to be a 'startup' (though not using that term), but were quick to point out that they could get disrupted in any market - they were playing in many fields, but weren't dominant ("yet", in their minds). I think this was perpetuated by the sr mgt in anticipation of the anti-trust trials - 'look, we're not some big monopoly - we're a scrappy startup that could fail/lose big at any time!'. I'm not sure anyone believed it, but also not sure that anyone in the mid 90s might have foreseen a time when MS wasn't a dominant player, but here we are.

They're still big, and they matter, in some markets, but very few people are afraid of them any more, or even care what their plans for the future are. People fear Google, Apple, Amazon, etc. MS is, if not totally dead man walking, in grave danger of becoming that without anyone (including their mgt) even noticing.

nwzpaperman2• 13 years ago

You should probably buy some MSFT at the open tomorrow and fund it with a short position in AMZN. For posterity's sake, the closing price of both companies today was:

8/8/2013 AMZN: $295.74 @ $135.12 billion market cap MSFT: $32.89 @ $273.97 billion market cap

taway2012• 13 years ago

This is probably contrarian ...

I wonder if people will still go by default to Amazon if they're not the cheapest.

For instance, Newegg always sells for a few dollars more than Amazon. Heck Amazon even sells for a couple of bucks less than their own subsidiary, Zappos.

I seriously doubt that Amazon's retail operation has demonstrated that they can retain customers while raising prices.

Unless I missed some news/data. Would be glad to hear comments.

jmduke2• 13 years ago

Overstock.com recently launched a promotional campaign selling all their hardcovers for 10% less than Amazon.com.

AmVess• 13 years ago

I'm just one person, but I shop Amazon all the time due to the sheer convenience of doing so...regardless of price.

Why? Free shipping (I get mine free, but $80 is well worth it because I buy a lot of stuff), always 2 days shipping, excellent service and a huge variety of goodies to buy. I also have their rewards card which returns $... Free coupla hundred bucks every six months, no sweat.

I mentioned convenience as an opener to this reply, and I'll close with it. In a world wherein lots of things become more and more of a PITA, Amazon delivers easy and pain free, every day (I don't work there, so I can say that).

robryan3• 13 years ago

I think to some extent yes.

Some of the stuff we sell via Amazons marketplace is the cheapest on the marketplace but by no means the cheapest online. This stuff doesn't come with the same kind of shipping service that Amazon provides either, people feel safe buying through Amazon though in that the very worse outcome they can come out with is their money back.

So other sites need to not only be cheaper but also build up the same level of service and trust to get a large amount of people away from Amazon.

laxatives3• 13 years ago

Amazon is significantly more convenient than other sites. I was about to buy my textbooks today using Bigwords and got a total around $220. I went ahead and added everything to the shoppings carts of 4 different websites. Just to compare, I added the same books to Amazon and got a total around $250. That's a big difference so I got ready to make the purchase on the 4 sites, but I couldn't remember my log ins for 2 of them and the other 2 wanted me to create a new account. That did it for me, I went with Amazon. Not to mention I would be guaranteed shipping in a few days while some of these sites take up to 2-3 weeks + slow media mail.

winter_blue• 13 years ago

I wonder if people will still go by default to Amazon if they're not the cheapest.

When I'm really out looking for something (online), I use Google Shopping to compare prices from various retailers.

And Amazon hasn't always been the cheapest. I've bought Oral-B toothbrush heads in bulk at a great price from Overstock.com

bane4• 13 years ago

I recently went to two malls in my area that, when I last visited them a decade ago were bustling with shoppers.

In one mall, I walked through a Macy's that may have had only 5 shoppers (I'm reserving "customers" as we weren't one until we actually bought something) in the entire store. The tile floor of the store was crumbling, wallpaper was peeling, everything felt old and ancient. I didn't want to be there.

In one mall, there was an entire wing of the mall that was almost completely abandoned and probably 30-40% of the mall was vacant store fronts. The food court I used to spend hours in consisted of a McDonald's and a Chinese fast food place. I remember years ago when it hosted a dozen different places, all with long lines. Getting a table to eat at required a friend to go reserve a table for you. These days? 3 people eat big macs in an empty large echoy room. It used to be the social center for the town, today it's nearly abandoned.

Amazon and other online shopping venues decimated these brick and mortar shopping venues. And it's not clear that it's generating the same amount of raw revenue in return either. It's definitely annihilating retail jobs in a way that Walmart could never hope to approach, yet it's rarely if ever discussed. At best, retail Macy's jobs are being replaced with contract warehouse work at a local fulfillment center, but automation and the loss of the requirement to interface with the customer means these places only require a fraction of the employees to move the same volume of inventory.

I don't know if the pendulum will ever swing the other way. My wife for example, buys clothes almost exclusively on-line. It's almost unthinkable that she does this, you want to try on clothes after all. But she overbuys a little, and only goes to the physical store to return items that don't fit or she doesn't like. The once proud storefront has been turned into the return counter in the customer service center. Why? "I don't like dealing with all the crowds and it's such a hassle to go there to see if things are on sale, I'll just check the web site every few days instead."

About the only brick and mortar we hit with any regularity these days is Costco, and that's largely because their wine selection is cheaper than online and very nearly always well selected and we can buy bulk toiletries and cleaning supplies at a discount.

dmix• 13 years ago

Amazon and other online shopping venues decimated these brick and mortar shopping venues

Brick and mortar stores are still just fine (or better thanks to Yuppies). Malls are getting decimated by Amazon and cultural trends against malls. The 80s suburban world where malls are the place to hangout is fading fast.

fsckin• 13 years ago

Macy's with 5 shoppers is nothing. If you want to see how bad it can get, check out DeadMalls[0], where they classify and document malls that are already dead or otherwise dying.

Rackspace just moved their HQ into one of these dead malls[1], which is highly interesting.

[0] http://deadmalls.com/ [1] http://www.planetizen.com/node/59071

snambi• 13 years ago

It depends on which city you live. The malls in urban area are really crowded. I'm talking about bay area. Malls need to adapt to change. by the way, amazon is not the only online business. There are 100s or may be 1000s of online stores today. ALL of them compete with Amazon. That is why we don't see a profit for amazon.

lostlogin2• 13 years ago

I wonder if this could lead to a rebirth of the high street? Malls going away. Small speciality stores that sell things you wouldn't buy online. Butchers, greengrocers etc with seasonal stuff that is nice to see before you buy. I might be extrapolating my buying habits too far...?

paul_f2• 13 years ago

Macy's has a bigger problem with Kohls and Target than Amazon, IMO.

Tichy2• 13 years ago

Also I think during the boom time they simply built too many malls. Don't know about the US, but even in Germany they build more and more malls while the malls next door are going bust (still building more as we speak). It's crazy.

aestra2• 13 years ago

Some malls are dying, some are thriving. Antidote is not data. There is one mall I've gone to the theater in a few times in recent memory, and it is swamped, I've almost get run down by shoppers at all times of the day, weekdays and weekends. Parking takes a long time to find. That's the only time I would go to that mall. I'd never shop there. Way too many people, only the theater for me. I've also been to dying malls. I've seen a few of them die over the years and are now dead.

There are so many places where malls are thriving. A few years ago, I used to live in a different city, and at Christmas time I'd have to take a different road to work, because just driving by the mall made my commute twice as long, if not more because of the traffic. On a weekday. Taking the long way was much quicker.

rpgmaker• 13 years ago

I want to read a good book examining the possible long term effects of the advance of digital technologies (web, mobile apps, cloud computing, etc). I don't think all those jobs are going to be replaced any time soon if at all.

PS: I'm also glad that the thought of a destructive internet has gone from "luddite talk" to "idea worth examining". I've read Paul Krugman talking about this a while ago for whatever is worth.

bedhead• 13 years ago

Extremely well said. Amazon remains one of the most bizarre companies in the world, and I mean this as a huge compliment. The only other company I can think of that's managed like Amazon is Berkshire Hathaway (and maybe Exxon). I am talking in the sense that they are built for the loooong run. Not five or ten years from now, but decades from now. Five years - an eternity for most companies - is a blip on the radar for these guys. It's fascinating to watch.

jzwinck• 13 years ago

What do Amazon (consumer goods), Berkshire (investments, many in "boring" companies), and Exxon (energy) have in common? They're all massive businesses with no product cycle (and mostly no recognizable "product" at all). They are unlikely to be quickly undone because not only does their business planning go on for decades, their customers do too. This is not a sufficient condition for corporate longevity (see: Hostess, Lehman, Enron), but it might be a necessary one.

lotso• 13 years ago

Androind could eat away at Apple. Google's search could in theory be disrupted. Facebook seems more vulnerable by the day. Microsoft is a dead man walking.
Microsoft is a dead man walking.

Why is the company with arguably the most diverse sources of income the one that is a dead man walking?

zzleeper• 13 years ago

Because most profits actually come from two cash flows that were in a much stronger position before

rm999• 13 years ago

Weak, myopic leadership which has consistently led to a lack of innovation or even (IMO) basic competence. Their profit mostly comes from windows and office, both products that are extremely old, vulnerable, and in a state of decline.

Microsoft has some other sources of revenue but nothing really innovative or capable of huge amounts of growth.

icefox• 13 years ago

They might have diverse sources of income, but the majority comes from Windows and Office. For at least the last decade I was watched as many new companies have been run with mac/linux. This doesn't mean much when they are little five person startups, but as the years go by those startups grew and now we have some very large companies that are not based upon Microsoft and plenty of medium size ones. This creates a feedback look of employees that don't train people how to write microsoft a check each quarter, but how to use linux servers etc. It is hard to ignore this as a long term trend. In fact it is so weird/odd/rare that stories get posted here on HN about the reasons why startup X choose to be a MS shop. Saying I am going to use github, amazon and google apps wouldn't get any interest, it is simply what people do these days.

vijayr• 13 years ago

Where I work, it is all Macs (100 people or so), iPhones and iPads - everything is Apple. 100 person company is tiny (by Microsoft standards), but consider 100 companies with 100 people each - suddenly it is not small anymore. Add to it some mid sized companies, and departments from big companies that slowly replace windows with Mac/Linux, it looks pretty bad.

Microsoft's death won't be sudden like Myspace's. It will be slow and will spread over decades. Unless wake up. Purely from a engineering view, they are still a formidable player, and they invest in R&D more than anyone else. If they want, they can still make things happen.

godbolev• 13 years ago

Facebook seems more vulnerable by the day.

Why would you say that? I'm just curious.

dev_jim4• 13 years ago

The problem with this whole profit "debate" about Amazon is that most people don't understand that public corporations are not like households or small businesses. Generating a profit is not the same as a person's savings. If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit, which is then taxed at 35%, and having either having that cash sit in the bank, buying back stock, or paying it out as a dividend (which then taxes the person receiving the dividend). I'd much prefer a company that has recognized opportunities to invest in then one that inefficiently uses my capital.

dragonwriter3• 13 years ago

If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit

If a company has excess income to reinvest, that is profit. You can't reinvest profits if you don't have profits to reinvest.

That is a much better use of capital then generating a profit

No, actually, its a use of profit (perhaps one that converts it into capital.) And, obviously, you have to generate profit before you can use it for anything.

dev_jim4• 13 years ago

You don't understand how corporate accounting works.

eclipxe• 13 years ago

That isn't how it works.

jimbokun2• 13 years ago

"If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price."

But why should you pay a high price for a stock with no expectation of profits, and, ultimately, dividends?

That's not an investment. It's a baseball card.

We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits, because the stock prices kept going up.

Until they didn't.

Which gets back to the point of the article. Sure, it is good for a company to reinvest revenues in growth, in hope of larger future profits which will one day be paid out in dividends. With Amazon showing growing revenues but flat, small profits over the first 18 years of its existence, it's a legitimate question as to when Amazon might finally give a return to its investors.

dev_jim4• 13 years ago

"We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits"

This is silly. Amazon has real revenue that is growing at a fantastic rate. Pets.com and it's ilk did not.

"when Amazon might finally give a return to its investors."

It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception.

nazgulnarsil• 13 years ago

The thesis of this article seems to be that Amazon is capitalism personified in one company.

riggins3• 13 years ago

I'm not sure Amazon will ever make profits.

The general thesis is 'they're the low cost provider, they're going to make a ton a profit'. This thesis is one that often leads Wall Street and investors to tears. Because there's another factor that needs to be taken into account: is there going to be a glut of capacity.

Here's the classic example. One of the managers of Buffett's textile mills came to Buffett and told him they could invest in a new power loom that would double production for the same cost to run. Buffett's response: that's terrible, none of that will stick to our ribs. Buffett could see that everyone in the industry would increase capacity, there'd be a glut of product, and the industry wouldn't capture the profits.

Another classic example: fiber optic. Read a research report from the late 90's on the fiber industry if you can get your hands on one. Lot's of comments on what a great investment Global Crossing would be because 'low cost provider wins'. Of course 'low cost provider' went bankrupt because there was a glut of capacity.

So bringing it back to Amazon, is there a glut of capacity? I'd say probably. What's Amazon's fundamental purpose? Matching buyers and sellers (which they do much much better than a mall). A computer basically has infinite capacity to match buyers and sellers. The warehouses are nice but when I look at the forest I question whether the profits are ever going to materialize. I see a glut of capacity and no reason why that would lessen. It's getting easier to start an internet company, not harder. The competition isn't going to cede the field either. They'll continue to put a ceiling on prices until the bitter end.

saosebastiao2• 13 years ago

I wouldn't be surprised if Amazon spent more on new fulfillment centers this year than they did on their entire web facing development team for the past three years. Amazon is an internet company in the same way that WalMart is a parking lot company.

atopuzov• 13 years ago

Totally!

riggins3• 13 years ago

if you think its all about fulfillment centers, Walmart has a pretty incredible logistics operation. The big brick and mortar companies have warehouse operations as well. Plus, with Sears and Walmart already using their stores as fulfillment centers its not hard to see that some of that brick and mortar space will get converted to 'fulfillment' centers (I just call them warehouses).

So then ask yourself, is warehouse capacity going to be constrained? Or will there be lots of warehouse space and lots of people who can create a web frontend to pair with that warehouse space?

Look, I love Amazon, I'm just telling you the 'low cost provider' wins thesis is one that people repeatedly get wrong because the low cost is often due to a technological advance that results in overcapacity in the industry.

vbl• 13 years ago

They reinvest heavily. It's sad that my interview didn't result in an offer. I really love Amazon.

bethling• 13 years ago

Try again later. Really - each interview loop has different people who look at different things. Just because one set passed on you doesn't mean that another will.

If Amazon seems like a place you'd like to work, there's no reason not to try again with a different team.

Tichy2• 13 years ago

The ponzi scheme theory: since apparently Amazon is making a profit it reinvests, it seems to me it could make a "real" profit any day simply by not reinvesting any longer.

Amazon's profits

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