Amazon's profits(ben-evans.com)
ben-evans.com
Amazon's profits
http://ben-evans.com/benedictevans/2013/8/8/amazons-profits
150 comments
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.
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.
> 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.
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.
I think this is spot on. Many of the brick and mortar stores are scrambling, but finding ways to be just fine They have a certain customer base and actually are being forced to provide better service and value. I shop at Macys now more than I ever did because I can buy items online and deal with a live person at the store if I have any issues. I can't say that I ever shopped there often before getting on there mailing list.
Best Buy is being forced to step-up their price matching policies because of the "show-rooming" trend, supposedly leading to better deals for buyers.
Malls have made a huge comeback among the young people in my city, after the central city was decimated by a large earthquake.
One of the statistics that kinda blows me away, on Boxing Day, the largest mall in the city (which is still tiny by American standards) is visited by over 25% (>100000 people) of the population of the city.
One of the statistics that kinda blows me away, on Boxing Day, the largest mall in the city (which is still tiny by American standards) is visited by over 25% (>100000 people) of the population of the city.
Ha! I'm not quite that old, but I definitely came in to my mall-time on the tail end of that age and that may color my observations.
(on the other hand, I know of two other local malls that are jam packed at all hours of the day, so I don't know what that says)
(on the other hand, I know of two other local malls that are jam packed at all hours of the day, so I don't know what that says)
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
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
Omigosh, I love exploring dead malls. They're so eerie and surreal. The one I recently went to was ornate - huge tile floors, brass highlights, gigantic hallways, and giant fountains. Yet there were drips in the ceiling, a thin layer of dust on the floors, and half the lights were off. There were maybe a dozen people in the mall. Half the store fronts were filled with fake placeholder things. It was like uncovering a zombie Pompeii.
I encourage everyone to check out their local dead mall, especially one that you visited when you were a kid. Lots of strange nostalgia to be had for sure. Bring rollerblades or a skateboard if you want to get adventurous.
I encourage everyone to check out their local dead mall, especially one that you visited when you were a kid. Lots of strange nostalgia to be had for sure. Bring rollerblades or a skateboard if you want to get adventurous.
I've never been to a dead mall, but I think I know what the feeling would be like. I remember some years ago going to a Kmart (I don't remember why). I think besides one person running the cash register, and a janitor, I was the only person there. The shelves were fully stocked, it was pristine, and eerily silent.
It was like I was in a research lab's clean room or something.
It was like I was in a research lab's clean room or something.
Dead malls are surprisingly common in China, just that they were never live and just overbuilt enough to never have tenants.
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...?
In Sam Walton's autobiography, he mentions just that kind of store as the sort of place that can compete with Walmart:
* They can specialize more than Walmart can, and be real experts in what they are selling, which Walmart is never really going to do.
* They can focus on quality and not compete on price.
* They can get to know their customers and their town in a way that Walmart can't.
Amazon is pretty similar to Walmart from that point of view and the same approach would likely work.
Interesting book, BTW, I reviewed it here:
http://davids-book-reviews.blogspot.it/2013/07/sam-walton-ma...
* They can specialize more than Walmart can, and be real experts in what they are selling, which Walmart is never really going to do.
* They can focus on quality and not compete on price.
* They can get to know their customers and their town in a way that Walmart can't.
Amazon is pretty similar to Walmart from that point of view and the same approach would likely work.
Interesting book, BTW, I reviewed it here:
http://davids-book-reviews.blogspot.it/2013/07/sam-walton-ma...
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.
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.
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.
> I don't think all those jobs are going to be replaced any time soon if at all.
Again, anecdotal, but I wonder if this frees up parts of the workforce to explore other employment they might have not pursued otherwise.
Something I've noticed is that there seems to be a revitalization in the last few years in more..."traditional"...employers (meaning not in the tech industry) all populated by the kinds of folks you'd probably expect to see in the tech industry: chocolate makers, independent sandwich shops, bike shops, etc.
It's almost like the megacorps in the retails world have ignored certain market segments that are now populated by tons of small boutique shops.
Again, anecdotal, but I wonder if this frees up parts of the workforce to explore other employment they might have not pursued otherwise.
Something I've noticed is that there seems to be a revitalization in the last few years in more..."traditional"...employers (meaning not in the tech industry) all populated by the kinds of folks you'd probably expect to see in the tech industry: chocolate makers, independent sandwich shops, bike shops, etc.
It's almost like the megacorps in the retails world have ignored certain market segments that are now populated by tons of small boutique shops.
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.
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.
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.
Macy's has a bigger problem with Kohls and Target than Amazon, IMO.
Macy's keeps itself upfloat with Bridal and Baby registries. If there is a registry (which by the way, registries are rude), it's with at least Macy's. Seriously, why does everyone register with Macy's overpriced garbage?
The stuff on everyone's Macy's registry can be purchased elsewhere for half the price or less. I've looked.
The stuff on everyone's Macy's registry can be purchased elsewhere for half the price or less. I've looked.
>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?
>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?
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.
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.
Because most profits actually come from two cash flows that were in a much stronger position before
I tend to agree with you, even if I am no expert.
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.
Microsoft has some other sources of revenue but nothing really innovative or capable of huge amounts of growth.
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.
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.
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.
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.
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.
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).
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).
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.
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.
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.
> 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
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
Unless we are talking about a really big difference, for me it's not really worth it the time spent in comparing prices.
Even if not the lowest, I know that that Amazon is big, fast, cheap and I have previous positive experience with them, so most of the time why bother ?
I agree with the OP, definitely difficult to see Amazon being challenged in the short/medium run.
Even if not the lowest, I know that that Amazon is big, fast, cheap and I have previous positive experience with them, so most of the time why bother ?
I agree with the OP, definitely difficult to see Amazon being challenged in the short/medium run.
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.
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.
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
8/8/2013 AMZN: $295.74 @ $135.12 billion market cap MSFT: $32.89 @ $273.97 billion market cap
He thinks Microsoft is in trouble and Amazon is strong ... so you suggest he should short Amazon to buy Microsoft?
Thank you - I wasn't sure what the point of that was, other than illustrating that perhaps I don't make my points clear enough. :)
I think you are a tradeable fade!
I get that a lot, actually.
Still trying to figure out what it means, but thank you.
Still trying to figure out what it means, but thank you.
What is your point exactly? These numbers don't mean anything in an investment point of view. You can't compare them.
> Facebook seems more vulnerable by the day.
Why would you say that? I'm just curious.
Why would you say that? I'm just curious.
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.)
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.
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.
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.
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.
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.
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.
It's also a cushion for a down cycle in the global economy.
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?
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?
Microsoft's online business, for example, struggles, but cash helps to assuage the fears. Same with Yahoo, unimpressive performance and growth overall, sweet cash from Alibaba transaction kept investors excited and allowed them to grow via acquisitions.
Apple, for one, negotiates better manufacturing deals due to the wide knowledge of them having a fat checking account http://www.quora.com/Apple-Inc-2/What-would-be-a-good-use-of... A lot of dealings in the offline world (datacenter leases, procuring manufacturing capacity, loans of credit, bond issuance, contracting suppliers) is easier if you have a fat account to show.
Apple, for one, negotiates better manufacturing deals due to the wide knowledge of them having a fat checking account http://www.quora.com/Apple-Inc-2/What-would-be-a-good-use-of... A lot of dealings in the offline world (datacenter leases, procuring manufacturing capacity, loans of credit, bond issuance, contracting suppliers) is easier if you have a fat account to show.
please put a disclaimer about quora's log in requirement shenanigans. I "signed" up using one of my gmail acct, not sure if my contacts got spammed and ended up never seeing the actual post because the pop up never closed.
"They never die because of lack of cash. They always get murdered by more able competitor or innovation in their field."
Yet cash allows them to respond to those competitors as necessary. I see Facebook's acquisition of Instagram as both a strategic and defensive move. Strategic because they see photos as the primary focus of what gets shared on their social network. Defensive to prevent Google or Apple or someone else from jump-starting their own social platform. Cash affords a company the ability to be agile when necessary.
Yet cash allows them to respond to those competitors as necessary. I see Facebook's acquisition of Instagram as both a strategic and defensive move. Strategic because they see photos as the primary focus of what gets shared on their social network. Defensive to prevent Google or Apple or someone else from jump-starting their own social platform. Cash affords a company the ability to be agile when necessary.
If you respond you're losing already. What you should be doing is innovating, running circles around other companies and make them respond to you by bleeding cash.
Having cash is nice, but if you can invest in raw growth makes zero sense not to.
Having cash is nice, but if you can invest in raw growth makes zero sense not to.
By that logic any company with more than one acquisition is a failure.
Build vs buy analysis still applies, and "running circles around" could get expensive, as at early stage it's difficult to tell which innovations will pan out and which will fail.
Build vs buy analysis still applies, and "running circles around" could get expensive, as at early stage it's difficult to tell which innovations will pan out and which will fail.
I don't think it is possible to be a "winning" company all the time. If that were so, then only a single winner would be dominating the entire industry.
Is this a joke? Do you realize many dot-coms went under because of the bubble bursting and not being able to raise money in the capital markets? Venture capital money dried up and they weren't profitable so they had no cash.
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.
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.
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...
http://www.businessweek.com/articles/2013-06-06/costco-ceo-c...
> 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."
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."
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.
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 :)
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 :)
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.
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.
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.
Walmart does ~500B in rev. Amazon did 61B in rev in '12 and is on pace for 72B-ish in '13.
> 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?
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?
Difference is walmart is actually making money, amazon isnt. So Walmart can continue what they are doing forever and thats ok, if it were clear that amazon intends to continue what they are doing forever investors would bail and the remaining investors would force amazon leadership out if possible.
As far as when the Amazon endgame starts, my guess is when they are doing as much business as walmart
As far as when the Amazon endgame starts, my guess is when they are doing as much business as walmart
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.
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.
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.
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.
Walmart does $100B+ in revenue every year internationally, roughly accounting for 25% of its business. (For sake of comparison, Amazon earned ~$60B in toto in the year 2012). Walmart crashed and burned in Germany...and meanwhile, they basically own Mexico, large swaths of Latin America, have huge market share in the UK, do extremely well in China, etc.
So yes, I'd say that's significantly stronger than Amazon's international footing. Walmart has serious competitors internationally (Carrefour, etc.), and Amazon is barely one of them.
I'm as bullish on Amazon in the long run as anyone you'll find here. But even I have to admit that Amazon's international presence is one of its most glaring weaknesses, especially in specific juxtaposition to Walmart.
So yes, I'd say that's significantly stronger than Amazon's international footing. Walmart has serious competitors internationally (Carrefour, etc.), and Amazon is barely one of them.
I'm as bullish on Amazon in the long run as anyone you'll find here. But even I have to admit that Amazon's international presence is one of its most glaring weaknesses, especially in specific juxtaposition to Walmart.
Walmart is huge in uk (asda) and china and Mexico. Amazon still is only really operating in a handful of European countries and just got into India.
Walmart is actually investing in startup ecommerce plays in brazil (where it has been established 40 years)
Walmart is actually investing in startup ecommerce plays in brazil (where it has been established 40 years)
it's not number 1 though, which is hard for US to imagine ...
-http://www.4-traders.com/TESCO-PLC-4000540/news/Tesco-Market...
-http://www.4-traders.com/TESCO-PLC-4000540/news/Tesco-Market...
Amazon operates in China and Japan.
Despite being a rich country, the US has a surprisingly wide wealth disparity. Walmart targets the lower end of that wealth gap. It seems that Walmart struggles in countries with a smaller wealth gap (at least w/r to local economics).
Though the reason Walmart failed in Germany is most likely due to the strong competition by ALDI and Lidl and its effects on the competitiveness (and profit margins) of other German supermarket chains.
The US has a smaller income disparity than Germany...
Citation?
The OECD says otherwise (figure 4, Gini Coefficients for a number of OECD countries): http://www.oecd.org/els/soc/OECD2013-Inequality-and-Poverty-...
The US is on level with Turkey, only Mexico and Chile are worse.
The US is on level with Turkey, only Mexico and Chile are worse.
Huh, on what scale?
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
I just hate people saying what-not about easily verifiable facts.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
I just hate people saying what-not about easily verifiable facts.
I assume you meant the opposite ?
Nope.
The US disparity is equal with France and lower than that of Germany.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
The US disparity is equal with France and lower than that of Germany.
http://en.wikipedia.org/wiki/List_of_countries_by_income_equ...
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.
Culturally, I often wonder about the consumer value of monopolized markets.
Traditional economics holds that monopolies are bad for consumers. Essentially, this is because the monopolist can do whatever it wants, and the consumers have no alternative. The monopolist has no incentive to keep prices low, to innovate, or to improve its service level, because the consumer can't exactly go elsewhere.
These days, however, the threat of new entrants into any given market is much higher. Starting costs are drastically lower than they were when conventional microeconomic theory was being worked out. All things being equal, as a consumer, you still don't want a monopolist owning the market -- but the monopolist has to be somewhat cautious, for fear of disruption.
It seems highly unlikely that Amazon will ever operate a true monopoly over all categories of retail. Nor will the government (and competitive lobbying) allow it to get there. But an oligopoly is certainly possible.
(On a micro level, Walmart has basically functioned as a de facto monopolist in certain regions where it has virtually no competition. Those days are over, though.)
These days, however, the threat of new entrants into any given market is much higher. Starting costs are drastically lower than they were when conventional microeconomic theory was being worked out. All things being equal, as a consumer, you still don't want a monopolist owning the market -- but the monopolist has to be somewhat cautious, for fear of disruption.
It seems highly unlikely that Amazon will ever operate a true monopoly over all categories of retail. Nor will the government (and competitive lobbying) allow it to get there. But an oligopoly is certainly possible.
(On a micro level, Walmart has basically functioned as a de facto monopolist in certain regions where it has virtually no competition. Those days are over, though.)
Monopoly profits, from the very beginning of capitalism, have always been necessary for significant investment. Micro textbooks are just wrong. For most businesses the supply curve slopes down, not up.
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.
> 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.
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.
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.
I think they could probably beat ebay in this kind of game if they'll be interested.
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.
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.
The expansion into same day shipping is happening. In terms if people who want to physically see the product, I don't think that is Amazons game. They are are better off giving up that market segment and the overheads associated with it. Same day shipping and no hassle returns is probably close enough for a lot of people.
Is amazon offering no hassle returns? How's it work?
You box up the item using the original packaging, slap on a return label printed off Amazon's website, and drop it off at UPS (a box or a store). Item arrives back at Amazon, and your account is credited.
I've only done it once. It was a defective milligram scale costing in the low teen 2-digits, which arrived DOA. Taking a chance, I resubmitted my original order and dropped off the defective unit at the local UPS store. A couple of days later, I had a working scale and an account credited to reflect the purchase of one scale, net.
I've only done it once. It was a defective milligram scale costing in the low teen 2-digits, which arrived DOA. Taking a chance, I resubmitted my original order and dropped off the defective unit at the local UPS store. A couple of days later, I had a working scale and an account credited to reflect the purchase of one scale, net.
I don't live in the US and have never made an Amazon return. I was under the impression though that they organised for a courier to picking the package from you, rather than you having to go and send it?
I have had UPS pick things up from house for an Amazon return before. I'm not sure whether it happens every time or not, or how that is decided. It certainly happens at least some of the time though. Really fantastic.
Returns though lockers. You don't like it, you bring it to a locker (ie 7-11 or college campus) and Amazon will eat the shipping fees.
I've never had a return challenged or refused, and I can immediately print out a shipping label. It's not entirely "no hassle", but it's the least I've ever had, and the only reason I've ever purchased "risky" merchandise (e.g., clothing) online to begin with.
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.
They are effectively taking profit in the form of Amazon equity (via increased stock price) and not paying any taxes.
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.
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"??
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.
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.
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!
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!
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!
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!
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.
I found it especially funny in light of an article I was reading this morning: http://plover.net/~bonds/positivism.html
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"?
Nevermind this, I misread the parent. Yeah, it's a bit odd. Certainly, Popper's black/white swan analogy would've been sufficient.
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.
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.
[deleted]
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.
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.
> 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...
Doesn't that describe Google as well? Ads fund most of their initiatives...
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."
I'd say they've already found another hose: self-driving cars.
How they'll get them to market is the question.
How they'll get them to market is the question.
It will be interesting. They could launch several fully-automated business based on autonomous vehicles: taxi, parcel delivery, (B2B) distribution, and probably many more. Other options are for them to license out the technology, or get into vehicle manufacturing, but I think those are far less interesting.
The 'hose' has to actually produce money. Until such point it isnt a hose.
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?
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.
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
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
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!
"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!
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).
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).
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.
"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.
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.
"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.
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.
"It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception."
Only if you sold the stock at that price.
OK, Amazon is clearly not Pets.com. It has growing revenues and some profits.
But Amazon famously has a higher P/E than many other technology and Internet companies. This is only justified if Amazon has a clear path to greater profits and dividends than those other companies in its future. The article points out its not clear what this path for Amazon might look like.
This also makes me think of Facebook. As we waited for Facebook to go public, many speculated that Facebook was still in the stage of rapid growth, and it didn't matter that revenue and profits were low because eventually huge profits were guaranteed with so many users. Facebook is a profitable company, but since it's gone public, revenue and profits haven't grown the way people thought, and the stock is still below its IPO price.
My point is lots of users, lots of customers, and lots of revenue are necessary preconditions for a company to be worth investing in. But at some point, growing profits has to be a concern, too.
Maybe the best way I can phrase it: Do you want to be Apple or Amazon? Apple found a path to high profit margins, high growth, and a business generating lots of cash, and now they are both buying back stock and paying dividends to share holders. With Amazon, the profits, cash, and dividends seem always in the future, yet Amazon has usually had a higher P/E than Apple. Which do you think is the better model?
Only if you sold the stock at that price.
OK, Amazon is clearly not Pets.com. It has growing revenues and some profits.
But Amazon famously has a higher P/E than many other technology and Internet companies. This is only justified if Amazon has a clear path to greater profits and dividends than those other companies in its future. The article points out its not clear what this path for Amazon might look like.
This also makes me think of Facebook. As we waited for Facebook to go public, many speculated that Facebook was still in the stage of rapid growth, and it didn't matter that revenue and profits were low because eventually huge profits were guaranteed with so many users. Facebook is a profitable company, but since it's gone public, revenue and profits haven't grown the way people thought, and the stock is still below its IPO price.
My point is lots of users, lots of customers, and lots of revenue are necessary preconditions for a company to be worth investing in. But at some point, growing profits has to be a concern, too.
Maybe the best way I can phrase it: Do you want to be Apple or Amazon? Apple found a path to high profit margins, high growth, and a business generating lots of cash, and now they are both buying back stock and paying dividends to share holders. With Amazon, the profits, cash, and dividends seem always in the future, yet Amazon has usually had a higher P/E than Apple. Which do you think is the better model?
"Only if you sold the stock at that price."
Nope, you don't get to redefine a return as only realized gains. This is a very liquid and can be sold at anytime. I can borrow against it in my portfolio to get a mortgage, can use it for margin, etc.
"But at some point, growing profits has to be a concern, too."
Not when the cash can be more smartly reinvested in growth. Facebook is above it's IPO price btw which means growth is in line with a year ago.
"Maybe the best way I can phrase it: Do you want to be Apple or Amazon?"
Apple's growth has completely stalled and they have no clue what to do with $100B+ in cash which is the reason for their massive stock price fall. Amazon knows exactly what to do with their cash and is piling it into growth. This is a far more efficient use of capital for an investor.
And I don't know what it means to "be Apple or Amazon" but I'd rather be an investor in Amazon - and so would most of Wall Street.
Nope, you don't get to redefine a return as only realized gains. This is a very liquid and can be sold at anytime. I can borrow against it in my portfolio to get a mortgage, can use it for margin, etc.
"But at some point, growing profits has to be a concern, too."
Not when the cash can be more smartly reinvested in growth. Facebook is above it's IPO price btw which means growth is in line with a year ago.
"Maybe the best way I can phrase it: Do you want to be Apple or Amazon?"
Apple's growth has completely stalled and they have no clue what to do with $100B+ in cash which is the reason for their massive stock price fall. Amazon knows exactly what to do with their cash and is piling it into growth. This is a far more efficient use of capital for an investor.
And I don't know what it means to "be Apple or Amazon" but I'd rather be an investor in Amazon - and so would most of Wall Street.
> 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.
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.
You don't understand how corporate accounting works.
I don't understand either. How can reinvesting corporate revenue avoid taxation? Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?
If you reinvest your profits into your own business that money usually gets charged as a expense on the income statement so your reported gross profit reduces by that amount and thus, you don't pay taxes on that amount.
For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.
For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.
Is there anything analogous for personal income? That is, can I invest my income in such a way that my gross income is $0 for the year? I know mortgages are deductible, as well certain retirement savings accounts, but what about daily living expenses? It seems a tad unfair that corporations can effectively evade taxation while individuals cannot. Or is that by design because corporate spending trickles down to individuals' salaries?
Generally, no. The key difference between personal and corporate tax in most countries is that personal tax is conceptually taxed first, after which you can spend what's left. But a corporation gets to spend first, after which taxes are levied on whatever remains.
Unlike you or I, if a company makes no profits, it pays no tax on its income.
The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy.
I am not an accountant, this is not financial advice.
Unlike you or I, if a company makes no profits, it pays no tax on its income.
The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy.
I am not an accountant, this is not financial advice.
In theory, the basic exemptions for each dependent (including, for independent taxpayers, the taxpayer the self) serve a loosely analogous role.
But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.
But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.
Taxes are levied against profit, not revenue.
If you spend the money on operational expenses (OpEx), then you reduce your profit by that amount and thus your taxes.
If you spend the money on capital expenses (CapEx), you create assets that will depreciate in future. The depreciation can be deducted from your profit and also reduce your taxes in forward periods.
Thus a company can arrange its affairs to have very high free cash flow but low profits. And sometimes vice versa, which usually leads to unhappy surprises for careless investors.
If you spend the money on operational expenses (OpEx), then you reduce your profit by that amount and thus your taxes.
If you spend the money on capital expenses (CapEx), you create assets that will depreciate in future. The depreciation can be deducted from your profit and also reduce your taxes in forward periods.
Thus a company can arrange its affairs to have very high free cash flow but low profits. And sometimes vice versa, which usually leads to unhappy surprises for careless investors.
> Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?
No, in addition to regular business expenses being deductible, there's all kinds of special deductions and credits for specific kinds of reinvestment.
No, in addition to regular business expenses being deductible, there's all kinds of special deductions and credits for specific kinds of reinvestment.
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That isn't how it works.
The thesis of this article seems to be that Amazon is capitalism personified in one company.
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.
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.
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.
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.
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.
If you think of a warehouse as just a place to put stuff, then yeah, there has been a glut of capacity for over a hundred years now. Walmart has an incredible transportation logistics system. I have no problem admitting they do it better than Amazon. But WalMart still cant compete on fulfillment. Throw in the worlds largest inventory selection (I'm guessing at least an order of magnitude larger than WalMart as a whole, and about 2-3 orders of magnitude larger than an individual WalMart store), and the ability to guarantee same day fulfillment, and Walmart doesn't even come close.
Remember, even then, you are comparing Walmart to Amazon...not JoeSchmoe.com to Amazon. If you think it just amounts to putting things in a box and calling UPS for a pickup, I double dog dare you to compete with Amazon. It doesn't get any closer to a pennies-on-the-dollar comparison.
Remember, even then, you are comparing Walmart to Amazon...not JoeSchmoe.com to Amazon. If you think it just amounts to putting things in a box and calling UPS for a pickup, I double dog dare you to compete with Amazon. It doesn't get any closer to a pennies-on-the-dollar comparison.
Totally!
They reinvest heavily. It's sad that my interview didn't result in an offer. I really love Amazon.
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.
If Amazon seems like a place you'd like to work, there's no reason not to try again with a different team.
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.
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.