Why Amazon Has No Profits (And Why It Works)
September 5, 2014 10:02 AM   Subscribe

Why Amazon Has No Profits (And Why It Works)

TL;DR? They do make money, they just invest it all back into the company.
posted by gwint (91 comments total) 33 users marked this as a favorite
 
Alternate TL;DR:

Because they want to have no profits, and their investors seem perfectly fine with that.
posted by Tomorrowful at 10:10 AM on September 5, 2014 [5 favorites]


tl;dr; They are running their business as an actual business, rather than trying to bleed it dry for a quick payout to investors.

The fact that this sort of behavior is seen as an anomaly is the real scandal here....
posted by schmod at 10:11 AM on September 5, 2014 [98 favorites]


tl;dr they are running as a non-profit charity and eventually the shareholders will get tired of subsidizing customer orders.
posted by cjorgensen at 10:15 AM on September 5, 2014 [8 favorites]


Definition of 'Growth Company'

Any firm whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business.


http://www.investopedia.com/terms/g/growthcompany.asp
Amazon is a classic growth company. But I still appreciate the charts!
posted by 2bucksplus at 10:16 AM on September 5, 2014 [12 favorites]


and the take away is the end -- do you (public investor or AMZN employee holding stock) believe Bezos will deliver ? (ie move from growth)
posted by k5.user at 10:18 AM on September 5, 2014


The Amazon Tax Problem: What Collecting Sales Tax Costs the Online Retail Giant When they do, sales in those states drop 10%.
posted by stbalbach at 10:24 AM on September 5, 2014 [1 favorite]


Apparently, some investors are getting a little weary of this.
posted by clvrmnky at 10:26 AM on September 5, 2014


tl;dr once Amazon puts most of their competitors out of business, they can start raising prices and making money.
posted by cell divide at 10:31 AM on September 5, 2014 [18 favorites]


... and Jeff Bezos is a 32-Billion heavy poor Man, because he stuffs every Penny into the Company?! It is amazing how Amazon keeps perpetuating this Myth that it keeps only investing in itself.

Not - they are destroying whole Industries, because they don't play fair, avoid paying their Taxes and decent Salaries to their Workers.

That's not Investment - that's called being a Robber Baron.
posted by homodigitalis at 10:32 AM on September 5, 2014 [51 favorites]


They don't have to raise prices to make money. They just start to dial back the re-investment knob and divert revenue to profits. But, yeah, we will see what happens. But growth at the expense of all else cannot continue forever, obviously.
posted by jeffamaphone at 10:35 AM on September 5, 2014 [1 favorite]


cjorgensen: tl;dr they are running as a non-profit charity and eventually the shareholders will get tired of subsidizing customer orders.
More like tl;dnr.
posted by IAmBroom at 10:35 AM on September 5, 2014 [11 favorites]


I can totally see a Warhammer 40K scenario where Investors suddenly decide that in order for the economy to function they have to sacrifice like 1000 people a day and suddenly that's just seen as normal.
posted by hellojed at 10:36 AM on September 5, 2014 [26 favorites]


Can we quit with the tl/drs by people who dr?

They may or may not be "subsidizing customer orders", but that's not why they're operating at a loss. They're operating at a loss because they're plowing what would be profits back into growing the company.

They may or may not put most of their competitors out of business, and they may then start raising prices after doing so, but they're not operating at a loss because they're keeping their prices low to drive their competitors out of business. They're operating at a loss because they're plowing what would be profits back into growing the company.
posted by Flunkie at 10:36 AM on September 5, 2014 [15 favorites]


Same old story flogged yet again. I learned absolutely nothing new from this article. In other news: latest from our astronomers - a newfangled theory, called heliocentrism, read the article about how it is that the earth revolves around the sun, thus debunking the geocentrism idea that the sun revolves around the earth.
posted by VikingSword at 10:38 AM on September 5, 2014 [2 favorites]


They don't have to raise prices to make money. They just start to dial back the re-investment knob and divert revenue to profits.

Or, they treat the workers like crap and pay them like shit.
posted by EmpressCallipygos at 10:39 AM on September 5, 2014 [9 favorites]


Will all you know-it-alls claiming Amazon is pulling one over on the shareholders explain how a 200-fold increase (yes, 200,000%) in stock value (EDIT: over 17 years) is somehow a bad thing for investors? (While the NASDAQ only gained 2.5x!)

Edited to include the RIGHT chart.
posted by IAmBroom at 10:40 AM on September 5, 2014 [6 favorites]


You can zero out profit with capital expenditures, but what happens if there's a loss? Is the business big enough that losses in one area (which aren't broken out publicly) can always be covered with profits in another? What if there's a world-wide structural change (e.g.) that reduces overall profits? Can they leave the foundation forms for a new warehouse in the ground and just not build it?
posted by morganw at 10:41 AM on September 5, 2014


I was trying to find it, but there was recently an article about how investors are for the first time getting a bit irritated because of unexpected expenses like developing in-house programming and content deals for Prime coupled with a failure of a phone is actually finally catching up. This was a theory why they are trying to squeeze the publishers, because they actually need some cash to show for once instead of just spending. I can't though, so if someone else read this piece a link would be great.
posted by cjorgensen at 10:46 AM on September 5, 2014


IAmBroom: Will all you know-it-alls claiming Amazon is pulling one over on the shareholders explain how a 200-fold increase (yes, 200,000%) in stock value is somehow a bad thing for investors? (While the NASDAQ only gained 2.5x!)

For the investors who bought low and sold high based simply on the fact that the share price was going up, it obviously worked, but the concern is that things that rise quickly often fall quickly, and if Amazon's plans for profitability in the future don't pan out, there are going to be a shitload of investors holding the bag. At some point, if you don't show that you can provide a real return on investment in the form of profits rather than an attractive stock that you can flip for a quick buck, investors will lose patience, and once that happens, it's often hard to stop the rush for the exits.
posted by tonycpsu at 10:47 AM on September 5, 2014 [3 favorites]


Found it.
posted by cjorgensen at 10:49 AM on September 5, 2014 [1 favorite]


... and Jeff Bezos is a 32-Billion heavy poor Man, because he stuffs every Penny into the Company?! It is amazing how Amazon keeps perpetuating this Myth that it keeps only investing in itself.

Not - they are destroying whole Industries, because they don't play fair, avoid paying their Taxes and decent Salaries to their Workers.

That's not Investment - that's called being a Robber Baron.


I love this old-timey capitalization.
posted by grobstein at 10:53 AM on September 5, 2014 [17 favorites]


It is amazing how Amazon keeps perpetuating this Myth that it keeps only investing in itself.

Not - they are destroying whole Industries, because they don't play fair, avoid paying their Taxes and decent Salaries to their Workers.


Those two sentences do not in any way contradict each other.
posted by Etrigan at 10:53 AM on September 5, 2014 [5 favorites]


(Goddammit, I still can't link the 17-year AMZN vs NASDAQ chart. Sorry!)

toncpsu, if I understand you correctly, you're saying those people who jumped on for a SEVENTEEN YEAR RIDE with HUGE GAINS IN PORTFOLIO VALUE are being duped, because those returns can't be guaranteed forever?

Shocked, shocked I say! If only I had had the foresight to invest in car wax and toenail clippers - at least there the 0.001% returns are guaranteed! (Give or take 3%.)
posted by IAmBroom at 10:56 AM on September 5, 2014 [1 favorite]


I love this old-timey capitalization.
posted by grobstein at 10:53 AM on September 5 [−] [!]

It may look like I'm Running at a Loss, but actually I'm just Plowing all my Earnings into Old-Timey Capitalization Expenditures.
posted by You Can't Tip a Buick at 10:57 AM on September 5, 2014 [18 favorites]


IAmBroom: Will all you know-it-alls claiming Amazon is pulling one over on the shareholders explain how a 200-fold increase (yes, 200,000%) in stock value is somehow a bad thing for investors? (While the NASDAQ only gained 2.5x!)IAmBroom: Will all you know-it-alls claiming Amazon is pulling one over on the shareholders explain how a 200-fold increase (yes, 200,000%) in stock value is somehow a bad thing for investors? (While the NASDAQ only gained 2.5x!)

Past performance and all that.

That chart looks great until you get toward the end. Then you have to decide if you are a bull or a bear.

The newspaper industry had charts like that in the late 80s and early 90s.

It's also perhaps great for the investors that got in early. Would you put in money now?
posted by cjorgensen at 10:58 AM on September 5, 2014 [2 favorites]


That's a different subject, cjorgensen. People in this thread are claiming those who already invested are getting hoodwinked somehow. I'm saying that in fact all the evidence points to them having been right so far.

Unless someone is suggesting AMZN is the new Enron. Despite some pearl-clutching above, reputable sources seem to believe AMZN actually delivers the products it sells, at the volumes it claims.
posted by IAmBroom at 11:01 AM on September 5, 2014 [1 favorite]


Or, they treat the workers like crap and pay them like shit.

But they already do that. The could also turn up the treat-like-crap knob and push the input on the pay-like-shit oscillator to increase profits, yes. One could argue they've already pushed the limits of those knobs.
posted by jeffamaphone at 11:01 AM on September 5, 2014 [5 favorites]


tl;dr once Amazon puts most of their competitors out of business, they can start raising prices and making money.


So once they put Wal-Mart, Target, Costco, Best Buy, CVS, Walgreens, etc. out of business, then they'll raise prices?
posted by skewed at 11:03 AM on September 5, 2014 [3 favorites]


People in this thread are claiming those who already invested are getting hoodwinked somehow.

The logic isn't that difficult though:
The idea is I invested so you would grow big and make lots of money. I've been patient. Looks like others invested as well because they want in. You're big now. Now make money!
Personally, I agree with this take, but I can see how reasonable people might not.
posted by cjorgensen at 11:05 AM on September 5, 2014 [1 favorite]


IAmBroom: toncpsu, if I understand you correctly, you're saying those people who jumped on for a SEVENTEEN YEAR RIDE with HUGE GAINS IN PORTFOLIO VALUE are being duped, because those returns can't be guaranteed forever?

Don't be ridiculous -- that's not what I'm saying at all. For one thing, the number of ten-year shareholders as a percentage of all shareholders is likely a tiny minority, and you could probably fit all of the seventeen-year shareholders comfortably in a high school gymnasium. I'm not talking about any of them -- I'm talking about what is likely the vast majority of the shareholders who bought a year ago, two years ago, five years ago, or is looking to buy today, all of whom are buying at a valuation that is decoupled from the company's profitability.

Now, I would never bet against "company swallowing up entire industries, investing in capital improvements, and becoming a behemoth that can jack up prices and rake in future profits" in this global economy, but there certainly is downside risk that they do all of this and can't satisfy the demands of people who bought in at a very high price and expect the price to remain high when profits are merely okay.
posted by tonycpsu at 11:07 AM on September 5, 2014


(And, to avoid the pedantry: I'm not counting people who own 0.0001 shares as part of a mutual fund holding or something in the decades-long shareholder category -- only people who had a significant position in Amazon itself. Obviously, any of us with a 401k/403b probably owns some AMZN at this point, and has for quite some time.)
posted by tonycpsu at 11:10 AM on September 5, 2014


Didn't Amazon come around on the sales tax thing? I thought they finally admitted that local sales taxes were making it difficult for them to build a sane distribution network.
posted by schmod at 11:14 AM on September 5, 2014


I know they charge sales tax in PA, now.
posted by dirigibleman at 11:16 AM on September 5, 2014


They charge in TN as well. I *think* (but could be wrong) that they charge tax wherever they have a distribution center.
posted by Twain Device at 11:18 AM on September 5, 2014


Didn't Amazon come around on the sales tax thing?

"Come around"? That sounds like Bezos had a moral epiphany. They charge tax in states where they can't get away with not paying.
posted by IndigoJones at 11:29 AM on September 5, 2014 [3 favorites]


in order for the economy to function they have to sacrifice like 1000 people a day and suddenly that's just seen as normal.

I am contractually obligated to mention the Wicker Man at this point.

posted by poffin boffin at 11:32 AM on September 5, 2014 [2 favorites]


I, on the other hand, work for a company that does make a profit. Our stock hit a recent high of over 14 (before dropping back down). Amazon's is 346 and their market cap is 10x ours. Just sayin'.
posted by tommasz at 11:33 AM on September 5, 2014 [1 favorite]


Back in the day (mid 90's), there were the three musketeers of stock - Amazon, AOL and Yahoo - you were advised never to short. The reason for the advice was because there were always tons and tons and tons of articles and conventional wisdom telling people that these were companies all built out of illusions and with vastly insanely overvalued stock and a business model that was unsustainable or even actual scams - so of course, the 'smart' investor was going to short them. Except disaster resulted as the shorts would get squeezed and the resulting squeeze would push the stock price even higher. And so that advice was very solid - never short Amazon, AOL or Yahoo - for many, many, many years. The flips side was that if you were willing to risk some "crazy money", you'd go long on these - and those who did, made out like bandits for a very long time too.

And now we're here with the benefit of hindsight, some 20 years - give or take a few - later. AOL and Yahoo are shadows of their former selves. Have shorts been right all along? Well, not really, and those companies failed for reasons not having much to do with what the critical analysts originally projected.

The last man standing is Bezos and Amazon. People like tonycspsu are cautioning that Amazon is just like the other two muskateers, and that the day will come when Amazon might fall to the sword it's been wielding so skillfully up till now. Others are betting that Amazon will prove the one true winner.

The truth is much more mundane. Amazon used to be a great investment. Will it continue to be so? That's unlikely - at least on the scale of returns it's been showing in the last 15 years or so - and the reasons have nothing to do with the economy or any abstruse stuff, but simple mathematics. When you get up to a certain size, you are mathematically unlikely to show the same kind of stock growth, because you will quickly run out of all the money in the world. It's like that old tale about the king, the inventor of chess, grain and the chessboard. The inventor asked of the king only a small seemingly reward - give me a grain of wheat for the first square on the chessboard, and then double that amount on the next square and so on for all 64 squares. The king laughed, delighted at having to pay only such a tiny reward. And then they barely got to about half the chessboard and there wasn't enough grain in the whole kingdom to cover the next square and there were still a ton of squares left empty.

Which means, odds are that as AMZN cap goes into the hundreds of billions, just like with every other stock ever, including AAPL, the growth will slow dramatically, almost regardless of underlying performance of the business.

That still leaves open the question as to whether it's a long term winner a la the Ma Bell of old, a stock you could buy and hold for the ages, recommended for widows and orphans as at least the one solid thing, maybe not a great wealth creator, but a wealth preserver. And now where is Ma Bell? That too shall pass. It had a good run. Nothing lasts forever. How long must Amazon last in the stockmarket to be declared a success?
posted by VikingSword at 11:36 AM on September 5, 2014 [9 favorites]


I didn't think we were weighing in on whether Amazon the company is a success or not -- by any measure, it is. The only thing I was pushing back against is the notion that a 200x increase since the stock began trading says anything about whether it's a good buy now. As you say, there's only so much room for it to grow, and the more it grows, the more shareholder value will depend on actually turning a profit. Those who got in on the ground floor with a significant investment are already very happy, those who got in last week have, in my opinion, serious reasons to be concerned about Amazon's strategy to pour every nickel back into the business.
posted by tonycpsu at 11:43 AM on September 5, 2014 [1 favorite]


I don't see a limit to Amazon's expansion on its shopping, delivery, and e-content services to individuals. I do know that AWS will never break into big enterprise because of this clause in the AWS customer agreement:

"During and after the Term, you will not assert, nor will you authorize, assist, or encourage any third party to assert, against us or any of our affiliates, customers, vendors, business partners, or licensors, any patent infringement or other intellectual property infringement claim regarding any Service Offerings you have used."

Relatively smaller companies like Instagram and Reddit are perfectly happy on AWS, though. It's more about not getting sued than losing the ability to defend intellectual theft for them.
But I guess I'm looking at it from a business limitation as opposed to investor returns.
posted by halifix at 11:45 AM on September 5, 2014


Didn't Amazon come around on the sales tax thing?

They not only "came around," but they lobbied for it.

It was a bad idea until they wanted to make sure others hurt as much as them. At the time this drove speculation they were going to create physical stores, but basically it came down to the idea that if they were going to have to pay taxes (because of changes they wanted to make in how they ran their business) then everyone should pay taxes or Amazon would be at a disadvantage (doesn't get much more hypocritical than that).
posted by cjorgensen at 11:48 AM on September 5, 2014 [1 favorite]


Amazon got years of benefit from no sales taxation AND they closed the door to competitors on the way out. It was masterfully executed from a business perspective.
posted by 2bucksplus at 11:51 AM on September 5, 2014 [7 favorites]


I've been a long time Amazon Prime member. The convenience of being able to order diapers or Rio 2 at 11PM and know that it'll be at the door in a couple of days has always trumped my moral queasiness about the Walmart-ization of local stores and the death of Best Buy - so I have to confess to being a total hypocrite on this front.

But even as their stock price has defied gravity, I've never been convinced. Never saw how it could work out long term. (And that's why Jeff Bezos is a multi-billionaire and I'm me.)

The thing that bothers me, though, is something subtler. I can't quite put my finger on it, other than the feeling that Amazon doesn't have any taste. This shows particularly badly in their video streaming service - wow, their organization, search, discovery all suck. If it's on both Netflix and Amazon - and most things are on both or not at all, these days - it's a guarantee that it's easier to find and stream from Netflix. Likewise with music. In fact, if you go outside any of their obvious headline product categories, it's a giant disorganized mess, where the exact product you want may be available at a much lower price if only you search in a different way.

Ultimately, if I had to bet on it, I'd bet that this lack of taste will be their downfall. (OTOH, lack of taste sure hasn't hurt Walmart. See above about Jeff being a billionaire and bet accordingly, I guess.)
posted by RedOrGreen at 11:54 AM on September 5, 2014 [8 favorites]


Jared Spool has an entire presentation on Amazon that's well worth watching. The bit about the design of the way cash flows in and out of the business is interesting. Basically, since they go through inventory way faster than anyone else, they can kill on pricing.

(Also, do look up Tuscan Whole Milk. Later versions of this talk included the Playmobil Security Checkpoint and the Steering Wheel Lap Desk, other elements of Amazon Review hilarity.)
posted by fifteen schnitzengruben is my limit at 11:57 AM on September 5, 2014 [8 favorites]


I agree that the Amazon Instant Video product is total garbage, and would also like to add their kinda-sorta-foray into being an alternative Android universe as another example of "WTF, Amazon?" The company's got all these resources, and is pouring all this money into product and service development, but two of their most prominent non-retail products are languishing. Surely they can improve on them, but they've been around long enough that they should be better.
posted by tonycpsu at 11:58 AM on September 5, 2014 [1 favorite]


Apparently, some investors are getting a little weary of this.

Bezos can do whatever he wants. Who's to tell him otherwise?

Bezos owns almost 20% of the company outright. The next largest investor owns just 10%. The next two-thirds of the company are owned by pensions and index mutual funds such as Vanguard, T.W.Price and Blackrock and the like who almost never vote against management.

Bezos's buddies are on the board of directors. How could you ever get rid of him? How could anyone acquire 50% of the voting stock worth $80 billion? Bezos just needs to get a quarter of other shareholders to back him up. A takeover would require accumulating 75% of outstanding shares. Not going to happen.
posted by JackFlash at 11:59 AM on September 5, 2014 [1 favorite]


Who said anything about getting rid of Bezos? More likely would just be a sell off and then he would go away. Sort of like Ballmer.
posted by cjorgensen at 12:02 PM on September 5, 2014


I've been a long time Amazon Prime member. The convenience of being able to order diapers or Rio 2 at 11PM and know that it'll be at the door in a couple of days has always trumped my moral queasiness about the Walmart-ization of local stores and the death of Best Buy - so I have to confess to being a total hypocrite on this front.

I worked for Borders for 6 years and believed I was born to be a bookseller, so imagine how I feel as a longtime Prime member.

I tried/try to shop at physical stores, but often you just can't. Last weekend I was in a B&N with money to spend. I wanted a book on Logic Pro or Final Cut or on designing a home audio studio or anything about home recording. I wasn't picky. I had money and I was bored. I was advised to go online.

I agree with Amazon lacking a sense of design. I have a Kindle Fire HD, but seldom use it (I use my iPad instead). I hate their interface for their iPad Apps. Their design is why I didn't buy their Fire TV (or whatever it's called). I have more HDMI devices plugged into my TV than I can count, and thought about adding this, since I do have Prime. I just knew it was going to have a suck interface though so didn't. Maybe with version 2.0.
posted by cjorgensen at 12:06 PM on September 5, 2014 [2 favorites]



I agree that the Amazon Instant Video product is total garbage . . .

And I doubly agree, *except* that despite the barriers to usability I will pay $2.99 to them to stream Poltergeist (for example) because it's still the easiest place for me to do it.

Imagine what would happen if they got their shit together and made a better system.
posted by jeremias at 12:15 PM on September 5, 2014 [3 favorites]


Will it continue to be so?

The question is really, on the reinvestment model, will revenues continue to grow?

How much potential does Amazon have? With 1% of the total market, as a general goods company, they naively look like they can still get bigger. Amazon's revenue last year was 74.45 B$, growing by about 15%/annum. By comparison, Walmart's was 476.29 B$ and relatively flat.

So Amazon is 15% of one of their main competitors. They seem to have some headroom yet , based on their historical growth rate.
posted by bonehead at 12:18 PM on September 5, 2014 [3 favorites]


Imagine if Apple was investing their cashflow (north of $50bil/year) like Amazon - they could be building the BellLabs of this century, where the returns over time were truly astronomical. Instead, they are just buying back their stock.
posted by H. Roark at 12:19 PM on September 5, 2014 [9 favorites]


Aside:

grobstein: I love this old-timey capitalization.

A quick check of his profile shows that homodigitalis is German. It's standard in German to capitalize all nouns.

posted by vibratory manner of working at 12:21 PM on September 5, 2014 [6 favorites]


Does Amazon really need to care much about share price? They don't seem to do a lot of new series. They don't seem to be hugely investment hungry.
posted by bonehead at 12:22 PM on September 5, 2014


Amazon might fund acquisitions with stock. I'm not sure if they did for Twitch recently, but they bought Zappos with a mix of cash and stock.

As a tech company I'm sure Amazon uses stock awards to recruit and retain employees.
posted by 2bucksplus at 12:30 PM on September 5, 2014


Imagine if Apple was investing their cashflow (north of $50bil/year) like Amazon - they could be building the BellLabs of this century, where the returns over time were truly astronomical.

This is a total derail, but (he said as he waded in...) That's exactly the point about taste. Apple does a very small number of things, and tries to do them well. It doesn't always succeed (MobileMe, anyone?) but it does have more hits than misses. And the hits have changed the world - no matter how many slates and touchscreen phones people pull up from long ago, the iPhone and iPad really have been transformative. They could have bought AT&T and avoided the whole carrier hassle. They could have bought the movie studios or music labels - outright - and become a one stop content shop. Instead, they pursue their narrow product categories with intense focus. Just look at the Lightning cable - intensely irritating to everyone who invested in the 30-pin hardware, but it sure beats fiddling with microUSB, which always takes 3 attempts to plug in. (But - Beats audio? Huh.)

The contrast with Amazon - or Samsung, who supposedly spend more on R&D than Apple, and make everything from refrigerators to TVs to phones to processors - is profound. Is it better, or worse?

Instead, they are just buying back their stock.

Yes, I agree that this looks stupid. What it takes to keep Carl Icahn off their backs, maybe? Or maybe that's what it takes to keep attracting engineering talent with stock options, and it's not so stupid.
posted by RedOrGreen at 12:33 PM on September 5, 2014 [1 favorite]


What Bonehead said.

Speaking ONLY of the domestic here, Amazon's growth potential is huge.

Within a couple of years they will be at small-surcharge same-day for 25% of the population and free-for-Prime next day delivery for 75% of the population. This will make them a HUGE fresh & cold grocery competitor as well, a market in which they are at near zero now. There easily could have the sales of Wal-Mart PLUS Kroger 20 years from now.

In streaming and downloads, I think the potential is pretty strong. It has a vastly stronger cash position to buy programming than Netflix and the ability to deliver a "triple play" media subscription package (to include music and Kindle books) which Netflix presently lack. Also, it is the only player in the space that has comfortably managed to blend fixed-price subscription screaming, purchase, and "rental" downloading. Content owners are deeply suspicious of subscriptions and the winning solution needs to accommodate purchase-only and buy-or-rent-only, especially with a more robust micropricing regime (more movies renting at 50 cents a pop, etc) for which Kindle has given them 10 years of experience and data.
posted by MattD at 12:44 PM on September 5, 2014 [1 favorite]


VikingSword: Have shorts been right all along? Well, not really, and those companies failed for reasons not having much to do with what the critical analysts originally projected.
See, when you're talking about a hugely successful company eventually dropping in growth, and then falling, of course that's going to happen. Anyone have shares in that old reliable, Standard Oil?

But to actually short a stock costs interest (because you are borrowing money when you do so). Shorting a stock for more than a year or two takes some real faith in the demise, since not only are your losses completely unlimited, but - insult to injury - you're paying interest, too.
The last man standing is Bezos and Amazon. People like tonycspsu are cautioning that Amazon is just like the other two muskateers
10 out of 10 of the most recent recessions have been predicted. Eventually, bears are right. But so are bulls.

See, this series of arguments is meaningless, because it's completely unattached to time. My net value has moved up and down by thousands of dollars today, as the market breathed in and out - making both "It's going up!" and "It's going down!" true, in some sense. Now, if I cash out of the market, then and only then can I conclusively say "it went up"... relative to when I bought.

If someone wants to say, "AMZN stock is overvalued today, and I expect it to fall dramatically in the next X months, because Y reasons", that would be meaningful. "Amazon can't continue to grow at it's current rate forever" is tautological, and therefore devoid of real information.

Personally, I'm still a bear on the market and AMZN (although I don't buy individual stocks as a rule). Five years from now, I'd say it's even money if Amazon becomes Walmart's biggest threat, or another J.C.Penney.
posted by IAmBroom at 12:47 PM on September 5, 2014 [4 favorites]


... fixed-price subscription screaming...
I would sign up for this!

posted by RedOrGreen at 12:48 PM on September 5, 2014 [1 favorite]


cjorgensen: basically it came down to the idea that if they were going to have to pay taxes (because of changes they wanted to make in how they ran their business) then everyone should pay taxes or Amazon would be at a disadvantage (doesn't get much more hypocritical than that).
Say you aren't keeping your sidewalk up, per city law. It's cracked, with some pieces missing. You get a notice that you have to start complying with that law, pronto. 30 days, or there's a fine. So, you pay a contractor $1,000, avoid the fine, and decide you better watch out in the future so you don't get this problem again.

Only problem is: your sidewalk was EXACTLY like every other sidewalk on Internet Purchases Lane. None of your other neighbors got a citation; just you.

Now, you are claiming that there's something hypocritical if you say to the city, "Hey, if you're going to punish me, why don't you make everyone clean up? Then people will have an even walk down our block."

Nope, not hypocritical. Strategic thinking. They are playing by the same rules as the other internet businesses.
posted by IAmBroom at 12:52 PM on September 5, 2014 [3 favorites]


What Bonehead said.

Speaking ONLY of the domestic here, Amazon's growth potential is huge.


Well, let's be careful here. Growth as in *business* (market share, cashflow, profits etc.), or growth as in stock price? I agree with the first, but I think caution is advised on the second.

The reason is extremely simple. The stock value today already prices in all that future *business* growth - look at the p/e. So an argument could be made that at some point the stock price reflects the size of Amazon (the business) at as big as it will get, ever. Retailers like Amazon, typically have pretty thin margins and resulting p/e. Therefore, Amazon the business may continue to grow, but the stock price may not, because it's growing into the stock price (through falling p/e). Imagine that you made a suit for a huge man and gave that as a present to a baby boy. The suit is the stock price, the baby the *business*. The baby still has a lot of room to grow, but it may not ever grow big enough to even fit into the suit, or perhaps just fit. So it would be wrong to say, hey, we should make a bigger suit (price stock) because "look, the baby still has a lot of room to grow!". The point is that in any growth stock, the stock price is a projection of what the company will be worth one day. How far away that point is, who knows - probably not in the near future, but perhaps not that far off. Unless Amazon diversifies into other businesses (than strict retail) that have huge growth potential - at that point it's a different bet altogether.
posted by VikingSword at 1:01 PM on September 5, 2014 [1 favorite]


EDIT: Personally, I'm still a bear bull on the market and AMZN...
posted by IAmBroom at 1:06 PM on September 5, 2014 [1 favorite]


Trickle-down drones?
posted by Fizz at 1:14 PM on September 5, 2014


Relatively smaller companies like Instagram [are fine on AWS]

..owned by Facebook.
posted by thedaniel at 1:25 PM on September 5, 2014 [1 favorite]


tl;dr once Amazon puts most of their competitors out of business, they can start raising prices and making money.

No, this is NOT what the article said. The point is that once Amazon stops reinvesting all its profits into expansion, it can accumulate cash reserves, offer dividends, etc. You can expect Bezos to keep reinvesting as long as he can expect to gain market share.

What I don't understand is why this is necessary/important. As I understand it, the value of the stock is based mostly on the capital value of the company, not so much on how much they pay out in dividends (which is zero for most stocks, anyway...right?). In other words, you're buying a share of the cash-out if and when the company decides to sell off its assets. Amazon's capital reinvestment would seem to justify rising stock value. What am I missing here?
posted by Edgewise at 1:58 PM on September 5, 2014


What I don't understand is why this is necessary/important. As I understand it, the value of the stock is based mostly on the capital value of the company, not so much on how much they pay out in dividends (which is zero for most stocks, anyway...right?). In other words, you're buying a share of the cash-out if and when the company decides to sell off its assets.

No, the assets of a company are generally only a tiny portion of its price, especially for a company like Amazon. It doesn't have big factories or lots of machinery. It has some warehouses and some office building and some computers, a fraction of the stock value.

Ultimately, for any stock you are paying for the discounted value of all of its future dividends, whether it is currently paying dividends or not. A company is worth what it can give back to you from its earnings in the future, sort of like a bond that never matures. If the company does not currently pay a dividend, people are valuing the company based on its reinvestment of earnings to grow the company for larger future dividends. If someone is willing to pay you a higher price for a stock, it is because they believe the future dividends will be bigger than you think and the price goes up even though it isn't currently paying dividends.

So the value of a company isn't its assets (unless they are hoarding lots of cash like Apple). If you were to liquidate most companies and sell their assets, the shareholders would lose most of their investment. It is future dividends that are the basis for price.
posted by JackFlash at 2:19 PM on September 5, 2014 [3 favorites]


Stocks prices are set by "the market." Stocks are valuable because they represent a portion of a business that is inherently valuable (ie. Amazon owns assets that are worth something), or because the business is profitable enough to produce a consistent stream of income.

In Amazon's case, they're heavily vying toward the former. They're building a (very valuable) empire, and are sacrificing short-term profits to fuel their growth.

If a company doesn't have good and obvious ways to invest its profits to promote future growth, it pays out a dividend. If the company doesn't pay a dividend, the stock price (presumably) goes up by an equivalent/proportional amount, given that the company inherently has more value due to the amount of cash that it has on hand. This is one reason for Apple's astronomical stock price -- if you broke up the company and threw away the business and all of its assets, you'd still have a huge pile of cash left over.

Apple's huge pile of cash is certainly a curiosity -- while Apple's "conservative" spending/investment strategy might be laudable, it's pretty hard to imagine how they'd ever want to use the $160 billion that they have sitting in the bank.
posted by schmod at 2:31 PM on September 5, 2014 [2 favorites]


Thanks, guys, for clearing up my misunderstanding. I thought dividends were a much smaller part of the equation, but what you're saying makes sense.
posted by Edgewise at 2:34 PM on September 5, 2014


There are many ways to value a company. For service sector companies, which don't generally want to own a lot of assets, it can be difficult. I've seen formulas like three time annual sales, for example. Much more complex analyses are also common. Fundamentally though, it's really about what the market will accept in stock price.
posted by bonehead at 2:34 PM on September 5, 2014


Can Apple Investors Sue For a Dividend? (probably not).

Getting a larger payout seems to be what Icahn is trying with Apple. He's had some success, but with a buy-back rather than (just) dividends.
posted by bonehead at 2:40 PM on September 5, 2014


This is one reason for Apple's astronomical stock price -- if you broke up the company and threw away the business and all of its assets, you'd still have a huge pile of cash left over.

But even for the case of Apple with its extraordinary cash hoard of $160 billion, this only makes up about 27% of its nearly $600 billion market value. A company's value is in its future earnings, not its assets.
posted by JackFlash at 2:41 PM on September 5, 2014


I have trouble wrapping my head around a number as big as 160 billion, so I tried to think of something that normally costs an amount in the billions. The first thing that came to mind was aircraft carriers. A quick duckduckgo search shows that the US Navy's most recent aircraft carriers cost about 12 billion dollars. So Apple could buy at least 13 modern aircraft carriers with the stack of money it's sitting on.
posted by You Can't Tip a Buick at 3:13 PM on September 5, 2014


The Amazon Instant Video app for iPad is quite nice. The webpages suck donkey balls, of course, but their iOS app is actually a lot faster, more stable, and better designed than the Netflix one.
posted by jeffamaphone at 3:21 PM on September 5, 2014 [1 favorite]


You Can't Tip a Buick: "A quick duckduckgo search shows that the US Navy's most recent aircraft carriers cost about 12 billion dollars. So Apple could buy at least 13 modern aircraft carriers with the stack of money it's sitting on."

I believe the $12B refers to the new Gerald R. Ford-class supercarriers, which the US Navy has so far commissioned only one, though with two or three more are in the order pipeline. I think the bulk of US aircraft carriers are the previous generation of Nimitz-class which cost around half as much, around $6B in inflation-adjusted current dollars. So, Apple could buy 26 Nimitz-class carriers -- the US Navy has "only" 10. France has four aircraft carriers, China, Russia, and UK each have one aircraft carrier (not sure how these guys stacks up against Nimitz-class). I think it's fair to say that if Apple were so inclined, they could nearly double the world-wide fleet of aircraft carriers.
posted by mhum at 3:57 PM on September 5, 2014 [4 favorites]


Aircraft carriers with rounded corners, no doubt.
posted by JackFlash at 4:04 PM on September 5, 2014 [13 favorites]


They [Apple] could have bought AT&T and avoided the whole carrier hassle.

I still fantasize about this nightly. In my dreams, Steve Jobs used to berate Randall Stephenson until he cried. Now Zombie Steve Jobs just chows down on what passes for Stephenson's brains.
posted by entropicamericana at 4:52 PM on September 5, 2014 [1 favorite]


tl;dr; They are running their business as an actual business, rather than trying to bleed it dry for a quick payout to investors....
posted by schmod at 1:11 PM on September 5 [∞ favorites +] [!]

This seems a rather narrow spectrum to use in defining what businesses are, especially considering both sides of that particular spectrum involve only the stock price and massive payouts, which isn't exactly how capitalism traditionally works. Surely there's a sustainable middle ground.

For another perspective on "costs of doing busines" author Janet Fitch questions whether treating literature strictly as a business is actually the best thing for us, in a blog post titled: Dear Mr. Bezos:
The sheer amount of power you have gained in the literary marketplace negates any disingenuous argument that it’s just “business as usual.” With the amount of wealth and power Amazon has accumulated, you’ve also put yourself into a position of responsibility–wanted or unwanted–for the intellectual life of the country. You have seated yourself at that table. I urge you to consciously accept that responsibility, and respond to it by treating the small amount of your business which is represented by literature with fairness and even–understanding how important to the life of our society books are–preferential treatment.

The difference between a symbiotic and a parasitic relationship is that in symbiosis, the host is not harmed in any way. The two organisms work together for mutual benefit. In a parasitic relationship, the growth of the secondary organism outstrips the ability of the host to sustain itself. Unlike symbiosis, a parasite kills its host, and eventually, itself.

I ask you to please reconsider the effect of your demands upon publishers, authors, readers, and our democratic nation as a whole.

Sincerely,

Janet Fitch
Mr. Bezos has yet to respond.

Also Chris McCrudden has written a good piece on the Hachette/Amazon standoff and why so many people, including Bezos, don't seem to understand the business of publishing in The Profit Margin of Error: The ‘DRINK ME’ Economics of the Modern Book Business
posted by Toekneesan at 5:51 PM on September 5, 2014 [1 favorite]


You know what pisses me off. Writers who use an acronym without ever spelling it out. Feh.
posted by Mental Wimp at 6:17 PM on September 5, 2014 [3 favorites]


The author doesn't talk much about Amazon's compute cloud, called AWS in the article (which the author should have stated means Amazon Web Services--it is also called EC2, Elastic Compute Cloud).

Basically, to be the internet behemoth it is today it, like Google, Facebook, and many others, had to build up an enormous server farm--warehouses full of computers in racks. Amazon did something rather ingenious. It built up this infrastructure in such a way that it could rent it out to others. The Amazon property chart shows this huge growth.

The article states:
AWS is a platform both for Amazon's own internal technologies and for thousands of startups.

Thousands of startups? Talk about understatement. Amazon supposedly 'rented' out 18 million server 'instances' and made over a billion dollars in the last year just from EC2.

Amazon in the king of cloud computing.
posted by eye of newt at 7:54 PM on September 5, 2014 [2 favorites]


Yeah, but cloud space and services are also very competitive right now so they're also low margin. They're not competing in that space with incompetents like B&N, instead they're working against Google and Apple and a million start-ups. So like the Change Bank, volume ≠ margin.
posted by Toekneesan at 8:12 PM on September 5, 2014 [1 favorite]


There isn't a lot of information on the "3 buckets" Amazon does report on, so they aren't actually letting anyone know how much AWS earns them, but it is likely to be subsidizing their e-commerce investments in market share.
posted by Toekneesan at 8:15 PM on September 5, 2014


Neither Apple nor Google nor Facebook rent out their actual servers, that I know of.

side note: for a laugh google 'Bitcoin EC2'. I wonder how much money Amazon made from it?
posted by eye of newt at 8:17 PM on September 5, 2014


i was thinking more along the lines of cloud storage, which Amazon, Google, and Apple are all competing on, and which are growing exponentially, and which Amazon lumps into its cloud services bucket. Both consumer and third party cloud services are reported by Amazon as "other" in their net sales reporting (page 15, bottom, chart on sales categories) and it's the smallest amont of revenue they do report.
posted by Toekneesan at 8:28 PM on September 5, 2014


I think that the people running apple are genuinely not as concerned about making money as they are about making quality products. I don't think they think they can expand R&D and products and still have everything they make be as good as they can make it. They don't want to buy companies just because they can or for 'synergies' or whatever. It's a company driven by operations, engineering and design, not by bean counters. It's probably not the best company for an investor that wants to extract as much money from their investment as they can. I think you should buy apple stock only if you believe in the company and their products.

I think the money is there so that apple can afford to take risks, not because they don't know what to do with it. They want to have it there is a cushion so they don't need to sell stock or get loans if they have a bad year or two or three.
posted by empath at 8:57 PM on September 5, 2014


Cloud services are the smallest in revenue but the fastest growing. On the other hand you are right that competition is growing. It turns out Google does rent out servers: the Google Compute Engine (GCE). MIcrosoft does too: Azure. Though I don't think anyone is selling at the scale of Amazon.
posted by eye of newt at 8:59 PM on September 5, 2014


When Alibaba IPOs, things should get interesting. They can/are inserting themselves between Amazon and most of its product manufacturers.
posted by five fresh fish at 1:43 AM on September 6, 2014


The cloud service business is almost certainly the most capital intense and lowest return on capital business inside AMZN.
posted by JPD at 3:42 AM on September 6, 2014


Neither Apple nor Google nor Facebook rent out their actual servers, that I know of.

iCloud is (or at least was) hosted on AWS and MS Azure.

Many Facebook apps are powered by AWS.
posted by snuffleupagus at 7:56 AM on September 6, 2014


Apple's huge pile of cash is certainly a curiosity -- while Apple's "conservative" spending/investment strategy might be laudable, it's pretty hard to imagine how they'd ever want to use the $160 billion that they have sitting in the bank.

They use it to make them seem completely unassailable despite the predictable missteps that Apple has never really been able to avoid, or the stagnation of various lines of business. It's just that now those missteps aren't even speedbumps, let alone threats to the company's health that the old PC mags used to crow about back in the olden days.
posted by snuffleupagus at 8:01 AM on September 6, 2014


I think that the people running apple are genuinely not as concerned about making money as they are about making quality products. I don't think they think they can expand R&D and products and still have everything they make be as good as they can make it.

This make absolutely no sense. If Apple does not care about making money, then why do they charge the absolute highest premium prices they can get for their products? They have the highest profit margin on their products in the entire electronics industry. Why are they overcharging their customers by such unnecessary large amounts if they don't care about money? The answer is just because they can and because it makes them richer. It's certainly not because they need the money for R&D. They have $160 billion sitting around in the bank because 1)they have no useful idea for what to do with it and 2) they are hoping for a tax holiday so they can distribute all that money to their owners tax-free. Apple cares very much about making just as much money as they can because that's how Wall Street measures success.

Apple doesn't make good products because they don't care about making money. Apple and their employees make good products because they desperately care about making boatloads of money.
posted by JackFlash at 8:32 AM on September 6, 2014 [8 favorites]


> It's certainly not because they need the money for R&D.
Damn straight.
posted by morganw at 4:15 PM on September 6, 2014


> Relatively smaller companies like Instagram [are fine on AWS]

>..owned by Facebook.

or Reddit

...owned by Condé Nast.
posted by one weird trick at 3:24 AM on September 7, 2014 [1 favorite]


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