Interesting note: Over 50% of the volume and driving force of Amazon's huge merchandise growth mentioned in the article is from small ($100k - $20m a year) mom and pop businesses around the country selling on Amazon. I wrote a blog post about it a while ago - http://www.kevinlordbarry.com/amazons-little-known-world-cha....
a16z touches on this, but it has wider reaching implications than just Amazon's revenue.
$20M annual revenue extremely impressive. Especially for "mom and pop" owned business. Mom and dad are either taking home $1M/annually or they are operating a very successful high dollar, low margin business. Both are highly unlikely.
In retail, yes. Retail margins are usually less than 3%; so $20m/yr in revenue would give you less than $600k/yr in profit. Not bad money by any means; but certainly not enough to need a bunch of shareholders.
Contrast this with the fact that an average Walmart does over $100 million a year in revenue (though Walmart's margins are closer to 1%), and it's actually not that huge.
I am not sure what kind of retail you are referring to (offline grocery perhaps?) but most ecommerce retail operations are running margins significantly higher than 3%. 10-30% is more typical in my experience, and 40-60% for operations selling unique products they make themselves.
At first, I thought "you meant $100 billion" not "million", until, on a 2nd or 3rd rereading, I realized you were referring to an average single Walmart store does over $100m in revenue.
So I thought I'd throw this comment in here in case others were misreading it as I did.
Sure. I worked summer jobs in IT consultancies with approximately that in revenue. They were owned and managed day-to-day by one guy acting as CEO/COO with his wife doing the books and payroll.
They had employees, but were still entirely owned and managed by a literal "mom and pop" whose children I went to school with.
I was a seller 5 years ago on Amazon and seller support was terrible. They use automated bots to ban your seller account and then offer no recourse or support beyond scripted emails.
I would think that if sellers like me were bringing in that much revenue for Amazon..that they would treat me a little better.
I guess this is the textbook example of why any sort of monopoly is bad.
They still treat their sellers like this today. Every seller we've worked with at my company has complaints about some ridiculous Amazon policies or just plain poor treatment and poor support/communication.
It doesn't stop people from selling on Amazon though since it's almost a required channel these days.
The only monopoly I observe them having is in trust. If I see a seller with 96% or better feedback on a minimum volume of business, I have a lot of faith I'll be satisfied one way or another with the transaction.
Compare to eBay, where a fairly recent transaction by my father, buying an iPhone, was a scam, the cellular radio didn't work (rest including WiFi did), and the seller, who officially had a good reputation, knew exactly how to game the system so my father was out > $100.
I've been buying more stuff off ebay, mainly on the basis that the site is hugely biased towards the purchaser and not the seller. I've sold stuff as well, but I'm always afraid a purchaser could just say I sold them a fraudulent transaction, trash my rating, and Ebay takes the money back and I'll never get the product back.
> Amazon has perhaps 1% of the US retail market by value
> With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.
Amazon stock trades at a P/E of 910. S&P 500 average is currently around 19-20. Do you really expect Amazon to continue to grow at such a rate that its current P/E is justified?
I completely agree, however, it is still a useful metric. And when a stock has a P/E of 910 the growth rate that the underlying business must grow at in order to justify such a price is astounding.
P/E approaches infinity as you near "break even", so for a company like AMZN with both massive revenues and expenses, P/E is not useful when the two are almost equal. You must dig further and look at things like cash flow, revenue (not earnings) growth, operating margin (not profit margin), etc. These things give a much clearer picture than an odd-looking P/E. If a company with high P/E had operating margins that ware closer to profit margins (not triple, like AMZN) I would be a bit more concerned.
If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively.
All of that being said, there are still plenty of things that could go wrong for AMZN.
Remember: it's the price-to-earnings ratio and not price-to-revenue ratio.
Amazon's stock trades at a P/E of 910 exactly because it's deferring profit to continue growing its revenue. At some point it's going to stop investing its revenue into growth and start realizing a profit on that revenue. At that point the P/E will come down.
Earnings are profits, profits are retained in the company. A simple look at the P/E ratio tells you very little without understanding the broader context.
>> Amazon has perhaps 1% of the US retail market by value.
This isn't surprising considering there isn't much competition (in terms of brick/mortar) in most of the US.
Electronics? Best Buy
Books? Barnes and Noble
DVD's? Best Buy
Video Games? Game Stop, Best Buy
Without much competition in most categories, it's not surprising most people opt for online shopping instead of going to the same place, paying much more and having a crappy in store experience.
This isn't to say other categories probably have much better local options. For myself, I've rarely purchased bike parts on the internet unless I'm completely sure its a good deal. My local bike shops tend to have what I want, or they can special order it for me and its still pretty close to cost.
It'll be interesting to see how their profitability trends as they adjust their prices. I've seen a trend over the past year or more of dramatically higher prices for things I've previously purchased from Amazon. I can do a 1-for-1 comparison on receipts, and see the huge bump. In some cases, those products are more expensive everywhere, but in most cases, I'm able to find those items at a price close-to or better than what I'd originally paid at Amazon if I shop around. It'll be interesting to see if they've trained consumer mindsets enough to retain them as customers if more shoppers notice a similar trend.
The real question is if buyers will stick around once prices go up. I remember, during the bubble, buy.com's strategy was to sell at a loss, grow customer base and then raise prices. The first two parts worked reasonably well, but once they raised prices, everyone left.
At least 50% of Amazon's volume by sales is by 3rd party sellers who most certainly DO NOT sell at a loss! For many Amazon products, prices will never raise appreciably. The post above goes into more detail on other reasons for this.
I think one of the main points of this article is that Amazon doesn't necessarily set the prices on many of their products, rather this is controlled by their 3P sellers.
careful, you might just be seeing a regression to the mean.
i.e. the first time you buy something, you are comparison-shopping, and likely to choose an item that is particularly cheap at that moment.
When you go back a year later, you aren't comparison shopping -- you're looking to replace what you bought last time. And you may well find that whatever made it cheap in the past (promotion, overproduction, market conditions) no longer applies.
In Patrick O'Brian's novels, his captains always try to get upwind of their opponents. If you're upwind, you decide when and if to engage the other ship...
In this case, Amazon is upwind of becoming a giant, profitable company. They could have taken profits earlier but it would have shrunk their overall pie.
Where "becoming a giant, profitable company" is another way of saying "paying their shareholders". Amazon is making money, for all intents and purposes they are profitable. They've just found something more interesting to do with that money than pay dividends. The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon.
It's a very interesting dynamic, certainly not the way i've normally thought of a shareholder-company relationship but one that must apply to many companies.
>The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon.
Take the money away from Amazon? The shareholders are Amazon. It isn't Amazon's money, it's the shareholders. If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it.
Re-investment with subsequent share growth is more efficient mechanism of value distribution than dividend payouts. First, there's no double taxation; second, the recipient can choose the timing and amount of participation as they decide on when to sell the stock.
Do you know how much of Amazon is publicly traded? How much of Amazon is held by the Amazon management team?
You're correct in asserting that the shareholders are entitled to direct the board to do their will. However, you seem to be assuming that the publicly traded shares of Amazon a) have significant voting rights, b) are a large enough share to be significant, and c) are not held in majority by those within the company.
I can't find information on either of these three... so I continue to assume it's entirely possible that Amazon's publicly traded share holders are a minority, with little voting rights.
There's an enormous amount of randomness to what makes it to the front page - I wouldn't read much into the fact that one got traction and the other did not.
TL;DR - No matter how you squint at it, Amazon drives all profits back into growing capacity and market coverage. Amazon alone accounts for around 1% of US retail revenue.
That 1% means nothing without knowing how much of that retail revenue currently goes through e-commerce. But I have sneaking suspicion that there's still a lot of room for growth.
Also, outside of the US Amazon has just barely started to expand beyond books. In most countries online retailers are bracing themselves for the moment Amazon starts eating their lunch.
Unless Bezos suddenly has a change of heart, this growth strategy could go on for many, many years.
> outside of the US Amazon has just barely started to expand beyond books.
Not sure it's correct. For example amazon has a 2-day service across Europe from any amazon warehouse in the continent. But maybe what they do is not enough for Europe?
In general around 10% of all retail happens online I believe. But it's also pretty clear that the offline/online distinction is becoming more and more meaningless in an omni channel world. I went to 3 different warehouse mattress places on the weekend. Turns out the best mattress was at the first place so I came home and bought it online. If the best mattress had been in the last store I would have bought it 'offline" It's just one of many examples of how the barriers are crumbling.
I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. That way, increased competition can actually fuel your growth. The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API.
Likewise, I think Amazon's self-funded retail operations are largely a break-even enterprise. Other businesses have been successful with this -- Costco comes to mind -- but the scope of capabilities Amazon is looking to develop is staggering.
If they can build a completely vertically integrated retail platform from procurement to payment to delivery, basically they're operating a retail enterprise without taking any inventory risk on themselves. Which is what this article means by "capture a significant portion of US retail": if they can provide merchant services to investors, it turns Amazon into basically an investment bank. Amazon takes a retailers money, turns it into inventory, sells it, takes a cut, then returns money. The only inputs and outputs into the Amazon machine are money, and it turns retail operations into an investment product.
As the article points out, they don't. By running the business this way they are constantly building / growing new businesses but during a downturn they just build more slowly (rather than lose money). It is a very different way of operating but one which has provided some interesting benefits for them. Nominally a business uses profits to either pay dividends or fund unexpected opportunities (like buying some small company or what not) Amazon doesn't pay dividends and they invest every dollar they make "extra" back into the business to increase the total number of dollars in the pipes. They don't need to turn a profit, they just need to manage their investment profile to their revenue forecasts.
Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.
It isn't that they don't want a profit, it's just that as long as they feel they can reinvest the profit relatively safely to make even more profit in the future, they will continue doing so.
The other replies to this aside, I think the assumption inherent in your question is myopic.
I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
Since they are a publicly traded company, the ownership can be fluid. As a shareholder you can stay in or cash out whenever you want, if you want to simulate a profit you can sell shares periodically. So the separation between the company's internal finances and the exchange of shares on the stock market is what allows this to happen and still make sense.
Profit in this case is generally a quantity calculated by accounting rules (US GAAP probably) and is a different thing from wealth created. Amazon has produced a lot of wealth for it's shareholders, enough for Bezos to be worth ~$30bn build spacecraft as his hobby. The difference is more obvious with a company like Facebook. Say they spend $1bn building the company from zero to 500m users and at the same time receive $1bn in ad revenue. Their accounting profit is $0 but their wealth is a lot due to the value of the 500m users. There are advantages to keeping the GAAP profit near zero because you pay no corporation tax that way.
Your question could be interpreted in a couple of different ways. Are you implying that profit is the only reason for a company to exist? If so, would you indulge my curiosity, what leads you to think that way?
Because you can sell it for more than you bought it for. Look at Warren Buffet's Berkshire: You would have doubled your money in 4 years if you bought in 2010. They've pretty consistently increased the value of their shares without paying a dividend in 50 years or so.
Absolutely understand what you are saying. But isn't that by definition a hot potato Ponzi scheme?
I mean there are large monster e-commerce giants in other nations, it is a very real possibility that Amazon will have to battle with some company at scale who is also in the razor sharp margin mindframe.
Its not impossible to imagine a world where amazon gets into a war with an Asian e-commerce giant for domination of the worlds e-commerce needs. If this does come to fruition this battle will probably not be resolved until 2020 ish time frame... so its a real possibility that amazon could be in business for 30 years, never return a profit to its investors, and NOT end up ever ruling ecommerce.
But in the meantime, there is money to be made in holding on to it. Look at AMZN speculation like Bitcoin speculation: there's really no intrinsic value of a Bitcoin or AMZN share, except that others want them and there's a finite supply of them, and also there is some underlying (quickly growing) market that they represent, which means that the shares should also grow in value.
Couple that with a nice PR machine ( can't understate the value of people like PMarca writing about how amazing they are ) and you've got a way to reliably grow your portfolio.
There is intrinsic value in a share of AMZN, because unlike the concept of bitcoin, Amazon formally owns assets which the share gives partial ownership of.
I don't think Ponzi scheme applies at all. In this case, the value and price of a share is based on the actual revenue growth of amazon from non-investor provided income. If amazon was taking on new investors to pay out money to old ones, it might apply.
It's certainly possible amazon could end failing and the stock would end be worthing much less than expected. It seems unlikely the name brand, market capture, datacenter and distribution facilities, etc would not end up with amazon being acquired by a walmart or something ala AOL/TW.
It isn't a ponzi scheme because Amazon isn't dependent on new share purchases to keep running. It is a fully functioning operation that is in the black. It just isn't generating any real profits above its costs.
Amazon is worth money right now. Just like a lawn mower doesn't turn a profit on its own, but it is still worth something.
In the long term view, which Amazon definitely takes, this current process is just there to fund the final business. Which is providing infrastructure. It uses its current operations as a way to fund the build out of that infrastructure. The future of Amazon, in my opinion, is not selling books etc, but providing someone with the infrastructure to sell books. Its using its current book sales etc to fund that build out.
I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works.
I dont think Amazon is taking a bad approach but, realistically feel Amazon is not going to produce any other return for its investors for the next ten years until it completely dominates the world market. Couple this with the fact that Amazon is not guaranteed to ever actually completely dominate the world market... its just unusual for a company to never return a profit after 20 years of business and investors are still hungry for the stock.
The big distinction is that Ponzi schemes have no end-game: they inevitably burst. Amazon has a well defined end-game (start to turn a profit), and there is good reason the believe that they will eventually do so. Assuming this eventuality remains reasonable, the stock will have some inherit value because someone will be willing to buy it today for the expected payout of dividends later.
> I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works.
By that definition, literally every investment would be a Ponzi scheme. A savings account would be a Ponzi scheme.
literally every investment would be a Ponzi scheme.
Only the ones that you only expect to turn a dime on by finding a bigger fool to buy it from you. If the investment is something that returns money to you (for example, dividends), you're not expecting to make money by selling it for more. You're expecting to make money because you own a small piece of a business that makes money for its shareholders. I have a number of investments that I expect I will never sell (or at least, am not hoping to sell for more that I paid for it); I'm very happy just being given a nice share of the profits every year.
These investments do not require anyone else to buy in, ever; hardly a Ponzi scheme.
Essentially, there's a philosophy among some CEOs that at current tax rates profitability is something to be avoided, but a healthy EBITDA and reinvesting the capex is the way to increase the shareholder value. The voluntary nature of capital gains tax makes stock buybacks or busines reivestment a more efficient mechanism of delivering value to shareholders.
Berkshire Hathaway holds liquid assets though. It makes perfect sense that a holding company with $1B in liquid assets should have a market cap of $1B, and from there any growth in their holdings translates to a growth in market cap. There's a clear equity/stake relationship. There's even a clear speculative-equity/stake relationship.
Amazon is completely different from that, no? A tremendous amount of their value is in intangibles that produce revenue, rather than have intrinsic value. This is fine when you say "I want to own a piece of that revenue stream for the future profits", but if Amazon by choice will never produce net profits from that stream... do you see what I'm getting at? A goose that lays golden eggs has no value if the eggs are never sold and simply hatched.
Both BRKA and AMZN have a lot of assets that could be sold for something like their market caps. Hence the value in each. Same way a gold bar is worth about as much as a gold bar even if you have no immediate plans to sell it.
It's still worth something. All of these warehouses and data centers are assets if nothing else. You can sell buildings and land. Obviously that value alone doesn't justify the share price, but it does justify > 0 value.
The bet that investors are making is that at some point the revenues and cash flow will be so huge that Amazon won't know what to do with them and at that point they will start showing a profit and perhaps even pay a dividend. It's not entirely unreasonable. Even Apple finally started paying a dividend once they got to 100 billion or so in the bank.
Noticing that Amazon only has 1% of the retail market is pretty crazy. the potential opportunity they have is staggering. It's not unreasonable to think at some point their will be profits to be had.
As others have written downthread, it's probably at least worth the pro-rated value of their assets at fair market value. That said, the classic theoretical valuation of a stock is the net present value of their dividends--i.e. the cash you receive from the company. Obviously this doesn't work very well as a stock pricing proxy for most companies. But if you factor in things like estimated acquisition price, you get closer.
Right, I mean it makes perfect sense if the dividends have some expected future value. But my parent was saying they don't need to make a profit. If they never turn a profit, the expected future value of the dividends is $0.
> So if they will never pay dividends, why is their stock worth anything?
Because stock is a claim against the assets in the event of dissolution, so it should be valuable as long as the company is expected to have a positive net worth.
Dividends are simply a mechanism allowing stockholders to realize value prior to dissolution. Of course, so is simply selling stock.
Further, if Amazon runs out of good opportunities to funnel operating returns into expansion, then it would make sense to start returning some via dividends, its just that its not there yet and that situation isn't even apparent on the horizon -- its not that they'll never pay dividends, its just that it doesn't seem to be the optimum strategy for the foreseeable future.
Its one of those things that's important to understanding the meaning/value of stock, but easy to lose track of in practical terms because, in practice, you almost never see a corporation dissolved in circumtances where the stockholders would see any value, because dissolution, if it happens, usually happens in insolvency, so creditors, with their higher priority claims, leave nothing for stockholders.
But that's because as long as a corporation is solvent, stockholders either expect that it will have greater net value in the future or can find someone else who thinks that, making holding or selling the stock preferable to dissolution. But its the claim against assets in the event of dissolution that supports all that.
"Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce."
I used to work for a strapping start-up. Our competition had a lot more money, and people than us... but it didn't really matter because we were smarter in how we approached building the product.
The future of eCommerce is going to be very heavily dependent on AI & robots. Product Suggestions > inventory management > ware house > packing > delivering.
AI makes your customers buy more, and robots make delivering it cheaper.
As good as Amazon is at creating this infrastructure, google has demonstrated a mastery in AI, and they're purchasing every robot company around. The competition is on, and I wouldn't count them out.
Amazon has actually been better at this kind of stuff than Google. Since their acquisition of Kiva Systems, they have built what is by far the best automated warehousing/logistics platform of any company in the world.
The future of EVERYTHING is going to be very reliant on AI and robots. My view is that the last 20 years have been the Internet revolution. The next 20 are all about AI and robotic automation. Both disciplines have existed for a long time, but they've hit a tipping point where price and effectiveness are putting them within reach of total ubiquity.
Both Amazon and Google are very smart. Amazon seems to have a greedy algorithm with regard to new tech. I mean, Amazon seems to keep automating the least efficient thing - http://www.kivasystems.com/ for example.
Google is much more forward looking, looking for big changes, like self driving cars. I can see google taking over more markets like they did with search. "more wood behind fewer arrows" was the saying.
Amazon is much more broad, if Amazon has something, they'll rent it to you.
Agreed. Google is more likely to be the GE of the future: a lot of great technology, hands in many industries. Amazon, in contrast, is like a cross between Wal-Mart and the old AT&T (there is no good previous analogy for what they are doing, but many are doing the same...see Taobao).
Not really, because your re-investments could be profit-destroying. If you earn 100 dollars of profit and gave to investors, the investors now have $100. If you reinvest $100, the investors have a bet that some time in the future they will have more than $100. Clearly, the two are different.
Think of it as endless stockdividends, so every profit is turned into money that fuels further growth of the machine without having to hit anybody up for capital. As long as there is growth plow the profits back into the engine. Once the growth stops (you'd have to wonder what the implications of that alone would be, I'm not sure I can quite envision how large a vertically integrated company that would run into the limits of geographical expansion would be, planet wide perhaps?) you can start thinking about dividends. Until then the best investment is to re-invest because that is where ultimately you'll make the highest ROI.
It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI.
Yes, in the future you might not be profitable. In the year that you turned a profit, you turned a profit, even if you decided not to pay it out as a dividend.
If all the profit goes back into the company to expand the company, is it somehow not "profit"?
Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further.
Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".
it's not profit in the sense that we assume that amazon investors would be worse at reinvesting cash from existing operations than amazon management. It could very well be true now, but it may also not be as true as you think. That's why it's not really profit in the true sense of the word.
> Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit".
It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.
> The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API.
It's not a "non-technical API". We have name for those things: they're services. Amazon provides services, and that extends to both digital services (with which you interact via APIs — that P stands for Programming, damn it!), and meatspace services.
Right, but the "new economy" twist is that Amazon likely doesn't know most of these companies exist outside of them being in a database somewhere. It's providing services in a self-service, one-size-fits-all kind of way.
Yeah; the talk was to a technical crowd, so I think he was trying to make an analogy as to how a developer should think about them. But Amazon's culture very technical, so it wouldn't surprise me if this actually was the way they think about them.
That's what I'm actually hoping will happen to services - that they will actually become function calls.
For instance, why can't I install a local print shop as a system printer? I do some graphics work, then I click File->Print..., pick the "Printing Company XYZ", alter preconfigured defaults if needed, OK, and the next day a courier brings me my print job, all payments and address information transfer being handled in the background.
Let me order pizza by RPC (we could streamline ordering in our local Hackerspace by voting on toppings on IRC and using a bot to make the order ;)). Let me do shopping by a POST request.
The end result would be that the use of aby service that doesn't require your physical presence could be streamlined, a lot of time wasted on boring paper/legwork could be optimized away, and the system would work smoothly in the background as long as you top up your credit card regularly.
Your print shop dream is basically a reality already - you can install the Fedex Office Printer, click print, and it prints out there. I believe if you get enough printed, they will deliver as well.
dragonwriter, btgeekboy, mindcrime - thanks, I never heard of that (I live outside US).
A few minutes of Googling didn't turn out what I was looking for though. I can see an "upload and print" feature on FedEx website, I can see a dedicated mobile app that apparently can print files via FedEx...
... but what I was looking for is something that pretends to be a normal printer, so when i do File->Print in Word or Photoshop, I can choose it as a destination, much like we used to do with "PDF printers", which were programs that installed as printers but outputed PDF files, back in times when MS Office couldn't do PDF export.
So if I'm missing an obvious hyperlink to that, could you please help me out here and post it? ;).
In general, I don't want print shops to start making mobile apps or (even worse) desktop apps to "streamline the process" (i.e. scare the shit out of the living with crappy UI and "upselling opportunities"). My dream is for them to integrate into the system, like every self-respecting piece of consumer hardware does. In the end, I might even not care at all which print shop is doing the job (much like I don't care where I order Asian cousine - those restaurants are all commoditized - I only care about it to be hot, tasty and delivered on time). In a perfect world, I'd love to have it reduced to a single argument, a drop-down in printer settings dialog (but I'd happily accept a system printer per printing shop for now).
At some point, when you're handling all the customer money, and the merchant money, and the supplier money, you become the ultimate middle man as everyone owes you money and the actual amount of money you need to move gets small and smaller because you're just netting internal accounts. There must be some massive savings (read profit) to be made there, when the entire economy is really just Amazon.
Good point: note that they get the customer's money before they pay the supplier (their accounts payable are a multiple of receivables), and they sell the merchandise before they pay for it (their payables are a multiple of their inventory).
You know what? Amazon, Werner and/or Benedict Evans can spin it anyway they want (like the kid who gets caught with his hand in the cookie jar) but the bottom line is they aren't making money and haven't pinned to a date they plan to do so. (So making arguments as far as one business unit vs. another don't matter many business operate the same way and in sum make money.)
All the long winded explanation of the circumstances (such that Benedict gives in his writeup) hoping that people will be overwhelmed and not want to question what is going on (like a 20 page legal contract that can't easily be deciphered by non lawyers) I mean who even has the time to fully vet even what Benedict has "summarized" (not that it can be called that).
There is a saying in negotiating which is "you can name the price if I can name the terms". In the case of Amazon it's like "Let me name the business model and I will also name the time frame toward profitability".
One thing is for sure. Bezos may prove right in the end or not but there is no question he is operating according to his vision and doesn't look anywhere close to deviating from his (Benedict's words here) "lifestyle" business.
your comment is at best a gross exaggeration. They are making money, but they are re-investing that money at a crazy rate into new businesses. That represents a huge bet, which their shareholders are willing to take on. The alternative would be to pay out cashflow from operations to shareholders in the form of dividends, or grow slower. But look at the stock price over the last 5 years - clearly, investors want to take on the bet
I too am curios about the down voting, but this site is sometimes so polarized, or stifling with political correctness it's nauseating.
Jeff Bezos can do no wrong in this market place; that is
where we have a somewhat growing marketplace for certain
professions. Professions that provide a livable wage, with a few dollars left over after rent in order to spend on Amazon.
Besides Jeff's vanity projects(newspaper, drones, I don't
fell like doing a bunch of research)--his business model
has one glaring flaw. He needs cheap gas. There is good reason why have huge trucks that move a large amount of goods from one location to a more convenient location. Don't get me wrong I like Amazon. I am surprised he hasen't
bought up some of the dirt cheap commercial Realestate and
put in Amazon retail outlets. Outlets that just provide a
place where customers could pick up their packages. Hell--he could automate them, and they could be open 27/7?
There is a saying "ask 10 doctors or lawyers get 10 opinions".
Well this is my opinion based on 35 years of business experience and having graduated from an Ivy business school as well. And reading, operating and observing business from before most HN readers were born. In other words not just reading blogs or online comments or whatever. It's a pattern that I've seen. Having seen bullshit of different types previously.
Sure I could be wrong "ask 10 doctors" but I do have a basis for my thoughts.
Edit: Because of course being in business and making a profit for 35 years means nothing to the younger generation on HN.
Makes me think of Peter Thiel's line: "we like to invest in businesses that aren't making a profit, because they know what to do with their money". Businesses that are paying back profits via dividends/buybacks are communicating that they have more money than they know what to do with (at least Thiel would say so).
There has been a distortion in the markets lately with the value of cash. Over the long term, buying a share of any company (Amazon, Intel, Walmart) has to give a return to the holder of that share. Otherwise, you are trading cash to hold onto a piece of paper and get it returned back as cash when you sell it.
This invalidates the time value of money. In other words, if I am not getting a quarterly/annual dividend (ie a profit payout) on a stock, over the long term there is no incentive to hold onto that stock, because I could get a dividend from a different stock or some other investment in general.
well, you are betting that you will get a dividend at a much later point in the future because of the growth you think you will realize. if Amazon makes $100 it can either give it to you now, or reinvest it and give you the reinvested result much later. It makes sense to give you the $100 now, if they don't see any good investment opportunities. But they think they do, and market agrees with them, hence massive growth in stock price over the last 3-5 years.
If the company can increase the value of your share by spending the money rather than giving it back as a dividend, why would they not? Buffet's Berkshire Hathaway is famous for never having given a dividend. Amazon is still seeing good revenue growth year after year, I see no reason not to continue down that path as long as they can afford the growth.
> but the bottom line is they aren't making money and haven't pinned to a date they plan to do so
They have a healthy EBITDA, they're just choosing to reinvest their earnings, as they deem it's more efficient use of their capital than declaring a profit, paying a corporate profit tax off it, and then keeping the rest of the cash.
> I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors.
This was the game played by John D. Rockefeller. He had so much infrastructure built up by the time they split up Standard Oil, that each new state Standard Oil immediately had everything it needed to keep operations going and the breakup was essentially a bunch of paperwork. As a stockholder in all of the new firms, Rockefeller's net worth tripled, from ~300m to ~900 million.
To make this strategy work, you need mountains of cash. In his salad days, Rockefeller cultivated excellent relationships with bankers, who would stop him on the streets of Cleveland and ask him if he needed money. Eventually he decided to buy up Cleveland's entire refining industry, an event that became known as the Cleveland Massacre.
John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed. He leveraged his extensive railroad connections and infrastructure to bury competitors, for one thing he owned virtually all the oil tank rail cars, without which you couldn't sell your products because you couldn't move them efficiently.
The right choice was to have taken stock, which would have made you fabulously wealthy. If you were any good at the oil business at all, he would also offer you a job, which again would have eventually made you very very rich. He had an insatiable hunger for quality staff. It was never a good idea to bet against Rockefeller.
I read Titan. Interestingly, it documents how SO's market share was declining steadily throughout the anti-trust trial, and Rockefeller was unable to stop it.
It runs against the conventional story of SO being an inevitable monopoly.
Well, at the time, the kerosene market was declining and there was nothing bringing it back. Right after the breakup, Henry Ford finally perfected the automobile, and Standard Oil came right back.
It is meticulously researched, though, and the bibliography is as good a place as any to look for further reading on Rockefeller.
Above and beyond that, simply as a history of the most important substance in all of human history beyond sheer biological necessities, it's utterly fascinating. It's principally through Yergin's work that I came to pretty much diametrically opposite conclusions of the future of energy from his.
Overtly bias portrayals to an extent that it becomes celebratory in nature. While I can understand the need to do so, it has become so ingrained that it is impossible find any historically objective documentary that allows viewers to understand the mindset of the period.
> John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed
... is also a pretty good description of how Microsoft approached anyone they considered competition in the '80s and '90s: you either licensed your software to them ("cash"), sold your company to them ("stock"), or got destroyed by them.
Gates' charitable efforts have earned him a warmer and fuzzier reputation these days (another parallel to Rockefeller?), but back then he was an absolute barracuda.
Hmm, does his charitable efforts these days make up for the pain and suffering he caused back when he was a barracuda? (nice term, btw).
I like to say yes. I think. I mean, he may have destroyed hundreds of people's livelihoods/jobs/companies, but his efforts these days are literally saving peoples lives.
Does anyone have an opinion on this? I'm a firm believer people can change and while this might not be Bill Gates changing, it might simply be him "atoning for his sins" so to speak, not that I'm religious, nor that he is either I think.
> Hmm, does his charitable efforts these days make up for the pain and suffering he caused back when he was a barracuda?
No. Changing doesn't remove your past sins and helping one person doesn't balance your hurting another. To believe so would mean saving a life makes up for taking another life, obviously it doesn't.
Does that mean he should stop and go back to being a barracuda?
It's certainly not fair to make the comparison of saving one life in exchange for taking another. A better comparison would be saving many (millions?) of poor, non-white lives in exchange for stealing money from privileged white men (majority of people in the software industry during his era).
Gates helped make a lot of your "privileged white men" rich by providing a market for compatible software and hardware. He also helped a lot of Asians become rich as well.
In the 1980s, Apple went round Hong Kong, Taiwan and China suing companies for making knockoffs of the Apple II (ie better, faster, more reliable and much cheaper versions of the Apple II). Then along came the PC industry, which welcomed them -- and their innovations -- with open arms.
How do you balance a handful of self-righteous American programmers against the wealth and the millions of jobs generated by Acer, Asus, MSI, Hon Hai, Wistron, Pegatron, Quanta, Compal, Inventec, etc?
What pain and suffering did he cause, other than running his business better and offering a better product to customers than his competitors? He cut the price of kerosene by 90%, which must have vastly improved the quality of life for a lot of people.
I can find one reference to a claim from a Vacuum Oil Company mechanic that he was bribed to sabotage a still which caused a sabotage a still. The website appears to be an online edition of a book, and it looks less than reputable. Is this what you're referring to?
I assume from "these days" that you mean Gates, not Rockefeller.
Microsoft wrote some software that was, I would argue, overall an improvement on the software against which it competed. So Microsoft did some good. However, in the process of extracting value, they actively - and, in my opinion, often unethically - suppressed the efforts of those with whom they competed. I don't pretend to be very knowledgeable on the exact value of these positive and negative effects, but I think it's pretty clear that all of the above effects more or less amounted making a bunch of computer nerds like us a little richer, or a little poorer. Not necessarily in money, but in power... like the power to track business expenses cheaply (which Microsoft enhanced, with Excel), or the power to collaborate on making productive software for ourselves and share it freely with the world (which Microsoft harmed, see the Halloween Documents, or other conspiracy evidence of your choice).
For the most part, this only affects a few dozen million humans, and even interpreted broadly it affects perhaps 10% of humanity. And the effects are small; for almost all of the affected, life gets less than 1% better or 1% worse, due to Microsoft existing. I mean, that's bigger than most companies, but.
I'm less able to give clear magnitudes of the impact of the Bill and Melinda Gates Foundation. My understanding, though, is that they're playing a significant role in the attempts to eradicate polio. Frankly, you can inflict Windows95 on me for the next 50 years, if that's what it takes to save one person from polio. Suppose that it turns out that polio is eradicated, and the B&MGF is due 1% of the credit for that; wouldn't this be more valuable than all the harm ever done by MS, past and future? And then there's their malaria-eradication efforts, their money spent on education, their money spent on sanitation, etc etc.
Bill Gates seems to have stolen a very manageable amount of our first-world wealth, burned a good fraction of in an engine of inefficiency (for example, Ballmer got some money too), and given most of the rest of it where it could do the most good (modulo a small fraction kept for himself, to indulge in fabulous luxury). As far as I can tell, although it astounds and confounds me, Bill Gates is Robin Hood. wtf.
I really like this theory. I guess it turns out that once you put into perspective what part of the world Microsoft affected, it really is fundamentally outweighed by the good the Gates Foundation is doing.
> Does anyone have an opinion on this? I'm a firm believer people can change and while this might not be Bill Gates changing, it might simply be him "atoning for his sins" so to speak, not that I'm religious, nor that he is either I think.
That's absolutely impossible to measure. What parts of Microsofts business can be accurately ascribed to him? What patent trolls are completely Microsoft-owned? What damage do they do?
They did an absolutely unprecedented assault on the Internet on the developer, policy, and user front when they found out they could not compete there, until they turned that policy around. We only see vague results of this today, on that all development of the web itself was put on an 8 year hiatus, and in some of the crazy proprietary formats that still plague us.
But how do you put it in economic terms? How much is the break-ins at RSA, Cisco Google, Valve, and inbetweens unknown worth to the global economy, because bad business practice forced peoples email clients to have the ability to run code?
It's worth reading Ron Chernow's biography of the Rockefellers.
Rockefeller had a strong Christian Soldier belief system, in which he was righteous and most other oilmen were sinners. (The 19th century oil business attracted a lot of hard-drinking, gambling, womanizing types.) He did good works with his money, while many of his competitors would have spent it on vice. Therefore, he was furthering God's plan for the righteous to inherit the earth by beating them in business.
It's a worldview difficult for moderns to relate to, but I think it was authentic for him.
> The right choice was to have taken stock, which would have made you fabulously wealthy. If you were any good at the oil business at all, he would also offer you a job, which again would have eventually made you very very rich. He had an insatiable hunger for quality staff. It was never a good idea to bet against Rockefeller.
Rockefeller was a human hurricane, a truly unique individual. He practically invented the modern corporation. He was also a product of his time. I don't think a comparison to any of today's tech giants could be anything more than laughably superficial.
There are plenty of ruthless people in business even today. But Rockefeller was driven by the belief that cooperation in business, rather than competition, was the way forward for society. The business he built reflected that. Eventually the world learned from his model and now business isn't quite so cutthroat.
But it took Rockefeller to create this new order. Someone so genius at business that there was no stopping him from doing anything he wanted to do. Not even the full might of the federal government could bring him low. Maybe they could have eventually, but the government's position on monopoly softened after it realized what the economies of scale it generated meant for our wartime industrial efficiency. There were other titans in that time period. Rockefeller stands above them all.
What lasting change has Musk effected? The potential is certainly there, but the average person's life isn't much different than it would be had Musk never existed.
SpaceX is conceptually awesome, and it's incredible how far they've come already, and I find myself being unbelievably excited for the future of space travel and exploration whenever they put another Falcon 9 up there. (I'm rubbing my hands in anticipation of tonights/tomorrow morning's AsiaSat launch.)
But. They're not there yet. At the moment, they're currently providing a launch facility that is equivalent to services offered by a number of other vendors, albeit at a slightly lower (currently) price. And the service they're providing really does not directly impact on 99.9% of the lives going on around you.
Yes, their reusable launch system program is way ahead of anything else anyone is doing, but it's still experimental, and isn't yet providing benefits to even their direct customers, let alone anyone else.
Musk hasn't made lasting change yet with SpaceX. I really, really hope he does. Becoming a multiplanetry species would be the biggest thing for Humanity since, well, fire, standing upright, or speech, and Musk seems to be the person best placed to make that happen in the next 20-40-odd years.
Paypal was certainly an important development, but it's not exactly the Model-T of our time. Someone else would've built and funded a similar solution anyway.
Its too early to judge, I think the with the Tesla its really deep connection how the average persons life will change in near future and greater good of the future generation.
Rockefeller built an enterprise that continues on to this day. An empire that has seen nineteen American presidents come and go, watched superpowers rise and fall and is (IMO) the most important company in history.
Exxon still breathes Rockefeller, his imprint can be seen all over that company. To call him a visionary is absolutely appropriate.
Windows is still running on more than 90% of the world's PCs. It provided an openly-licensed standard that enabled hundreds of thousands of companies to enter the hardware and software business -- and some of them became rich. It also delivered huge benefits to the companies that freely adopted Windows to benefit from the massive ecosystem it produced.
It's hard to see how many people suffered who didn't fail thanks mainly to their own mistakes. I'd put DR, IBM (Lotus), Novell and Netscape in that group.
Microsoft's $150MM investment in Apple wasn't necessary for Apple to survive. The commitment it signaled (plus the promise to keep making Office for Mac) might have been, but the money wasn't.
> The day before the announcement Apple had a market cap of $2.46 billion,[58] and had ended its previous quarter with quarterly revenues of US$1.7 billion and cash reserves of US$1.2 billion,[59] making the US$150 million amount of the investment largely symbolic.
Rockefeller was able to do this at a time when building a monopoly was just OK. That is not the case anymore, and anytime Amazon is accused to do something similar they will be destroyed by the government.
In rergard to inventory risk: note that their accounts payable are several times their inventory — their suppliers are financing their inventory (and then some).
That isn't a coincidence. According to[0] "The Everything Store"[1], the latest biography of Amazon, Bezos picked up the model for Amazon retail from Costco founder James Sinegal.
The first aspect was "value trumps everything" - where prices would be slashed and net margins thin. The second was the subscription model - Bezos learned that 70%+ of Costco's profit was from the membership fees. It was easier to charge a membership fee once and offer lower prices than it was to attempt to spread your profit margin across products and into the pricing.
Amazon slashed its prices and adopted the thin margin model in the future and then implemented Amazon Prime.
"The Everything Store" is a decent read, easy to flick through and some interesting cases and anecdotes within it. Ignore the negative reviews and give it a read if you haven't already.
Amazon Prime isn't an idea inspired by Costco's membership model, AFAIK. The idea came during Company's annual "Up the River" conference where Amazonians gather for a two-day brain-storming sessions.
> If they can build a completely vertically integrated retail platform from procurement to payment to delivery...
Amazon has already set this up for books with their Kindle Direct Publishing platform[0]. Writers directly publish on Amazon (cutting out publishers) and their books are electronically delivered to customers' Kindles -> everything stays on Amazon.
I found this fascinating to read but made very difficult in part due to the overuse of commas. Maybe the folks at a16 could have this proof read.
Investors in Amazon typically look to selling their stock for higher than they bought it as the way they "get their money out of their investment" So not sure why the fascination on profits. Profits are important if they become the means to achieving a higher stock price. But lack of profits hasn't hurt AMZN's price over the years or made it an unattractive stock.
In an era (which is coming to an end) of fabulously cheap money though - I suggest you and read the intelligent investor by graham and re think your view that profits an dividends don't matter
It's worth comparing to Apple who's stock price went backward when growth slowed (even though cash was piling up literally by the billions) AMZN could create profits but, unlike Apple, it wants to take every penny and reinvest it directly into new markets.
Great analysis with lots of details.I wonder thought: what percentage of u.s. eCommerce orders are done through amazon's warehouses? and what percentage is using their store(even though it's 3rd party) ?
Reading this article reminded me of Steve Yegge's summary of Amazon's overall strategy: build a platform, not a product[0]. My takeaway here is that Amazon keeps reinvesting in making itself the platform through which sales run (warehouses, media, AWS, third-party storefronts). With the octo-copter idea[1] -- especially in combination with its third-party seller services -- it skirted the surface of becoming a physical delivery platform as well.
Anyways, fascinating post, really enjoyed the different cross sections of perspective presented.
Isn't this similar to Berkshire Hathaway's strategy - never pay dividends, but reinvest everything into growth opportunities? Although Berkshire Hathaway likes to hold a pig pile of cash until the right growth opportunities can be found, while I'm not sure about Amazon's cash reserves.
* Also, this means no capital gains taxes until you sell your shares, because there are no dividend payments.
With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.
Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an amazing unprecedented ride upward, institutional benefiting the most.
I also take umbrage with the idea that Bezos is running Amazon for "fun" as though it is frivolous. Bezos seems to have a grand vision and that is not something that matches with the ridiculously short term and arguably irresponsible thinking of the vast majority of investors.
We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.[1]
[1] This is refuting the broader point that Benedict Evans is making, and does not necessarily apply to Amazon perfectly.
At no point was anyone suggesting that the purpose of Amazon is to tickle Bezos' fancy, and it would require a painfully literal reading of the article in order to think that's what the author was doing.
Perhaps I am dense but how else could you possibly interpret the quote that I cited?
Suggesting - even if lightly - that Bezos is running Amazon for "fun" and as a "lifestyle business", especially in the light of the great analysis done above it, indicates that the author looks at any business that has very long term goals as inferior to those who are solely focused on turning profits back to shareholders.
>Anyone who has invested in Amazon has seen an amazing unprecedented ride upward
Only if they sell to realize those gains, and that can only occur if they can find a buyer who has an even greater expectation of profit in the future.
This concept seems to elude people, but the value of a company that never makes a profit is precisely $0.
Amazon makes a profit, it just invests all of it in itself, returning you a more valuable stock instead of a dividend. Investors let them do it because the investment made with the profit is worth more than the cash would be.
Even with all that, the value of a company that doesn't turn a profit isn't 0, it's the value of it's assets, and Amazon has a lot of those.
>the value of a company that doesn't turn a profit isn't 0, it's the value of it's assets
Touche. They also have liabilities.
I suppose we could be even more precise and say the price is $0 above the expected value of the net assets at the time of liquidation. But my point stands.
Well go and try a hostile take over of amazon where you purchase 100% of the stocks for $1. Given it's worth $0, $1 is infinitely more than they are expecting.
This concept seems to elude people, but the value of a company that never makes a profit is precisely $0.
As others have stated profits = revenue - expenses. In this case they are positive on the right hand, even if slightly, so they are in fact making profits.
Your time horizon is also wrong and assumes that there needs to be a singular point where the top level goal becomes making profit, rather than profit being a byproduct of a top level goal of adding value.
I also disagree with your assertion that value comes solely from profit.
>Your time horizon is also wrong and assumes that there needs to be a singular point where the top level goal becomes making profit
The top level goal is to provide an adequate return to shareholders. Shareholders (of which I am one) allow massive re-investment with the expectation that net earnings in the future will increase.
If you purchase ownership in Amazon (or any other company) for any reason other than to earn a share of their income, that's your prerogative. But you are in a very small minority.
Suppose Amazon were taking all of the profit they pile into capex today, and put cash in the bank. Do you think your share of a growing pile of cash is worthless?
At least in the United States, the dividends are taxed twice - first at the corporate tax level, then at dividend recipient's individual tax level. The nature of the taxation to the recipient is involuntary.
Selling the stock and being taxed on capital gains is a voluntary act that can be planned for accordingly. A company with zero profit also owes zero taxes at the corporate tax level, which makes reinvestments and stock buybacks a more efficient value distribution strategy.
> We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.
The idea is not new, and conglomerates have been around for quite a bit now, with most prominent example being Berkshire Hathaway. Take the profits of a textile company, reinvest them in a new line of business, take the profits from that line of business, reinvest it into a new one.
I've never really thought of it like this – interesting. Are there any other examples of large/popular companies on par with Amazon"re-invest" mentality? I can't think of any off the top of my head but would be interested to look at others. Thanks
Berkshire Hathaway. Microsoft until c. 2006. Apple. Google. Most hedge funds. Standard Oil and U.S. Steel if you go back to the last century.
Basically, it's rational for a company CEO to invest all profits back into the business as long as he expects he can make a better return for them than the market can. Berkshire Hathaway's annual reports go into more detail in this. The trick is in recognizing the size of the market opportunity in front of you, so that you know when to switch from reinvesting profits to distributing them as dividends. Microsoft waited too long for this - they burned (and are still burning) billion on unprofitable business lines. Google has had debatable success - some of their new businesses are brilliant, some are huge flops.
Apple, and even Google, don't seem nearly as similar to Amazon in the question I asked. While they both invest heavily in R&D and other capex's areas, they also store a lot more cash (at least apple) and seem to report a lot more of a "profit" than Amazon. Do they re-invest _all_ profits or just a portion like most companies?
People don't talk about Apple, Google, or Microsoft as companies that failed to become "profitable" in nearly the same way people talk about Amazon, at least from what I see. AMZN still seems like such an outlier...
They have different growth strategies because of their different core competencies, and those get accounted for differently under GAAP.
Google tries to accumulate cash so that when there's an opportunity - say, buying DoubleClick or YouTube or Motorola - they can pounce. Since Google is basically an IP company and tries to avoid having physical assets on the books, these are usually whole other companies, usually technology-related. These opportunities are unpredictable, so they bank the cash on the books, invest it in liquid instruments, and then spend it all at once.
Apple is a mature company now - it pays a dividend. But during their big growth years between the iPod & iMac and the iPad, they suspended the dividend, and ran very close to break even then too.
Think about it this way:
Apple makes profit and stores it away as cash (recently it has given some of that cash back as dividends though). Since its cash, its booked as profit.
Amazon makes profit and immediately finances new warehouses/robots/etc. with it instead. Since this is not cash it is booked as zero profit from an accounting perspective.
Some investors like to complain about the lack of profit because turning it into an asset for the company to use makes it harder to give out to them as cash (dividend) but makes it easier for the company to grow. Many of the same investors use a flawed metric (P/E ratio) to saw that Amazon is effectively worthless, even though it dominates a market with huge revenue growth and a large amount of physical and virtual assets.
Investing in themselves is the right thing to do from a finance perspective as long as they continue to have an overall internal rate of return greater than their cost of capital (IRR > WACC)
according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05%
So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends.
AMZN (WACC 10.05%) net sales growth: 22% (2011-2012) vs 18% (2012-2013)
AAPL (WACC 9.45%) net sales growth: 31% (2011-2012) vs 8% (2012-2013)
From Wikipedia:
"The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere"
"a corporation will evaluate an investment in a new [x] versus an extension of an existing [y] based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital"
that's not entirely correct. this is useful for choosing among internal projects. Do decide whether to invest in growth or pay the shareholders, you need to assume that you can earn greater return than the shareholders could do on their own.
Defending against last man advantage here. The more they self invest the more their competitors will have to invest to compete or enter one of their markets.
Am I the only one shocked that online sales make up only ~8% of US retail activity? I buy everything I can online, and expect to maintain that trend as much as possible. Is this just a case of me being relatively young and affluent, or are there sectors of the economy that will never go online?
I think affluent is a factor? When I go to other areas of the country I'm surprised to see the the huge amount of entrenched poverty. Many of these people don't have access
to debit cards, and any ruined their chances of getting a checking account through a bank(banks have there own credit checking system). I see too many check cashing places, a pawn shop on too many corners, billboards targeting the poor, and naive. Yes--people buy, but it's food at Safeway, or the Dollar store, or Goodwill?
The America that is rich and poor is here. I hope the U.S.
dosen't turn into Mexico; where the wealthy can't leave their house for fear of kidnapping, or worse. I know I casually slip off my watch when traveling to certain areas,
and wouldn't think about buying an expensive road bike again.
This is a familiar argument, but you have to admit there's a lot of wishful thinking involved because Amazon is so opaque about its operations and finances. Bezos is basically saying "Trust me." I don't blame people who do, he's an amazing guy. Still, it's interesting to see how widely views about the company can differ, based on apparently rational analysis of exactly the same financial reports.
While this guy seems to have lost his shirt betting against AMZN over the past couple of years, his bearish analyses of its valuation are quite precisely articulated and make interesting reading.
The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)?
I don't know either way, and I don't want this post to seem like a criticism of Amazon. I know some people who work in upper level management there and they all speak very highly of the way the company is run (very meritocratic). But reinvesting earnings is only a good strategy if those earnings are put to good use, otherwise they should be paid out as a dividend.
Anyways, just something to think about whenever the topic of Amazon's profits/earnings comes up.
> The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)?
I've stopped buying much at all off amazon because I get it all from Aliexpress.
They package up and address individual items in shenzhen/guanzhou, stick them all in big containers, then when they reach the US/europe they deliver them by the cheapest means possible in a totally commoditised fashion. What competitive advantage does amazon.com have now? Why do all those small sellers need to exist? everything they sell is made in china anyway.
That seems a very short-term view IMO - that substantially increasing value should indicate that a company is less successful than it would be if it was giving money away and therefore losing value.
If the net worth is about $40 billion or more and growing (almost tripled since 2009?), and revenues are growing (almost tripled since 2009?), and it's not hugely inefficient (has relatively steady or increasing profits instead of increasing losses) - I don't understand why people think that sounds like failure.
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[ 3.2 ms ] story [ 259 ms ] threada16z touches on this, but it has wider reaching implications than just Amazon's revenue.
$20M annual revenue extremely impressive. Especially for "mom and pop" owned business. Mom and dad are either taking home $1M/annually or they are operating a very successful high dollar, low margin business. Both are highly unlikely.
Contrast this with the fact that an average Walmart does over $100 million a year in revenue (though Walmart's margins are closer to 1%), and it's actually not that huge.
You guys are stretching the phrase "mom and pop" to lengths it has never been before.
http://finance.yahoo.com/q/ks?s=WMT+Key+Statistics
So I thought I'd throw this comment in here in case others were misreading it as I did.
They had employees, but were still entirely owned and managed by a literal "mom and pop" whose children I went to school with.
I was a seller 5 years ago on Amazon and seller support was terrible. They use automated bots to ban your seller account and then offer no recourse or support beyond scripted emails.
I would think that if sellers like me were bringing in that much revenue for Amazon..that they would treat me a little better.
I guess this is the textbook example of why any sort of monopoly is bad.
It doesn't stop people from selling on Amazon though since it's almost a required channel these days.
Compare to eBay, where a fairly recent transaction by my father, buying an iPhone, was a scam, the cellular radio didn't work (rest including WiFi did), and the seller, who officially had a good reputation, knew exactly how to game the system so my father was out > $100.
> Amazon has perhaps 1% of the US retail market by value
> With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.
If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively.
All of that being said, there are still plenty of things that could go wrong for AMZN.
Amazon's stock trades at a P/E of 910 exactly because it's deferring profit to continue growing its revenue. At some point it's going to stop investing its revenue into growth and start realizing a profit on that revenue. At that point the P/E will come down.
This isn't surprising considering there isn't much competition (in terms of brick/mortar) in most of the US.
Electronics? Best Buy
Books? Barnes and Noble
DVD's? Best Buy
Video Games? Game Stop, Best Buy
Without much competition in most categories, it's not surprising most people opt for online shopping instead of going to the same place, paying much more and having a crappy in store experience.
This isn't to say other categories probably have much better local options. For myself, I've rarely purchased bike parts on the internet unless I'm completely sure its a good deal. My local bike shops tend to have what I want, or they can special order it for me and its still pretty close to cost.
1. http://www.reuters.com/article/2011/08/16/us-walmart-idUSTRE...
I that case he's done pretty well delivering ~$150bn in shareholder value accidentally.
i.e. the first time you buy something, you are comparison-shopping, and likely to choose an item that is particularly cheap at that moment.
When you go back a year later, you aren't comparison shopping -- you're looking to replace what you bought last time. And you may well find that whatever made it cheap in the past (promotion, overproduction, market conditions) no longer applies.
In Patrick O'Brian's novels, his captains always try to get upwind of their opponents. If you're upwind, you decide when and if to engage the other ship...
In this case, Amazon is upwind of becoming a giant, profitable company. They could have taken profits earlier but it would have shrunk their overall pie.
It's a very interesting dynamic, certainly not the way i've normally thought of a shareholder-company relationship but one that must apply to many companies.
Take the money away from Amazon? The shareholders are Amazon. It isn't Amazon's money, it's the shareholders. If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it.
In theory, yes. In practice, being an activist shareholder and going against the wishes of management is _hard_.
You're correct in asserting that the shareholders are entitled to direct the board to do their will. However, you seem to be assuming that the publicly traded shares of Amazon a) have significant voting rights, b) are a large enough share to be significant, and c) are not held in majority by those within the company.
I can't find information on either of these three... so I continue to assume it's entirely possible that Amazon's publicly traded share holders are a minority, with little voting rights.
Wonder why that didn't garner any traction. Perhaps it has something to do with the fact that this duplicate link is from a16z?
Also, outside of the US Amazon has just barely started to expand beyond books. In most countries online retailers are bracing themselves for the moment Amazon starts eating their lunch.
Unless Bezos suddenly has a change of heart, this growth strategy could go on for many, many years.
Not sure it's correct. For example amazon has a 2-day service across Europe from any amazon warehouse in the continent. But maybe what they do is not enough for Europe?
This growth strategy HAS gone on for many, many years.
And it's serving Bezos et al very well.
Likewise, I think Amazon's self-funded retail operations are largely a break-even enterprise. Other businesses have been successful with this -- Costco comes to mind -- but the scope of capabilities Amazon is looking to develop is staggering.
If they can build a completely vertically integrated retail platform from procurement to payment to delivery, basically they're operating a retail enterprise without taking any inventory risk on themselves. Which is what this article means by "capture a significant portion of US retail": if they can provide merchant services to investors, it turns Amazon into basically an investment bank. Amazon takes a retailers money, turns it into inventory, sells it, takes a cut, then returns money. The only inputs and outputs into the Amazon machine are money, and it turns retail operations into an investment product.
Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.
I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
I mean there are large monster e-commerce giants in other nations, it is a very real possibility that Amazon will have to battle with some company at scale who is also in the razor sharp margin mindframe.
Its not impossible to imagine a world where amazon gets into a war with an Asian e-commerce giant for domination of the worlds e-commerce needs. If this does come to fruition this battle will probably not be resolved until 2020 ish time frame... so its a real possibility that amazon could be in business for 30 years, never return a profit to its investors, and NOT end up ever ruling ecommerce.
Couple that with a nice PR machine ( can't understate the value of people like PMarca writing about how amazing they are ) and you've got a way to reliably grow your portfolio.
It's certainly possible amazon could end failing and the stock would end be worthing much less than expected. It seems unlikely the name brand, market capture, datacenter and distribution facilities, etc would not end up with amazon being acquired by a walmart or something ala AOL/TW.
Amazon is worth money right now. Just like a lawn mower doesn't turn a profit on its own, but it is still worth something.
In the long term view, which Amazon definitely takes, this current process is just there to fund the final business. Which is providing infrastructure. It uses its current operations as a way to fund the build out of that infrastructure. The future of Amazon, in my opinion, is not selling books etc, but providing someone with the infrastructure to sell books. Its using its current book sales etc to fund that build out.
I dont think Amazon is taking a bad approach but, realistically feel Amazon is not going to produce any other return for its investors for the next ten years until it completely dominates the world market. Couple this with the fact that Amazon is not guaranteed to ever actually completely dominate the world market... its just unusual for a company to never return a profit after 20 years of business and investors are still hungry for the stock.
By that definition, literally every investment would be a Ponzi scheme. A savings account would be a Ponzi scheme.
Only the ones that you only expect to turn a dime on by finding a bigger fool to buy it from you. If the investment is something that returns money to you (for example, dividends), you're not expecting to make money by selling it for more. You're expecting to make money because you own a small piece of a business that makes money for its shareholders. I have a number of investments that I expect I will never sell (or at least, am not hoping to sell for more that I paid for it); I'm very happy just being given a nice share of the profits every year.
These investments do not require anyone else to buy in, ever; hardly a Ponzi scheme.
Many investments do not earn dividends, including ones that are widely considered to not be Ponzi schemes.
Essentially, there's a philosophy among some CEOs that at current tax rates profitability is something to be avoided, but a healthy EBITDA and reinvesting the capex is the way to increase the shareholder value. The voluntary nature of capital gains tax makes stock buybacks or busines reivestment a more efficient mechanism of delivering value to shareholders.
Amazon is completely different from that, no? A tremendous amount of their value is in intangibles that produce revenue, rather than have intrinsic value. This is fine when you say "I want to own a piece of that revenue stream for the future profits", but if Amazon by choice will never produce net profits from that stream... do you see what I'm getting at? A goose that lays golden eggs has no value if the eggs are never sold and simply hatched.
The bet that investors are making is that at some point the revenues and cash flow will be so huge that Amazon won't know what to do with them and at that point they will start showing a profit and perhaps even pay a dividend. It's not entirely unreasonable. Even Apple finally started paying a dividend once they got to 100 billion or so in the bank.
Noticing that Amazon only has 1% of the retail market is pretty crazy. the potential opportunity they have is staggering. It's not unreasonable to think at some point their will be profits to be had.
hedging
diversification
lottery tickets on bezos owning a significant fraction of world commerce
Because stock is a claim against the assets in the event of dissolution, so it should be valuable as long as the company is expected to have a positive net worth.
Dividends are simply a mechanism allowing stockholders to realize value prior to dissolution. Of course, so is simply selling stock.
Further, if Amazon runs out of good opportunities to funnel operating returns into expansion, then it would make sense to start returning some via dividends, its just that its not there yet and that situation isn't even apparent on the horizon -- its not that they'll never pay dividends, its just that it doesn't seem to be the optimum strategy for the foreseeable future.
But that's because as long as a corporation is solvent, stockholders either expect that it will have greater net value in the future or can find someone else who thinks that, making holding or selling the stock preferable to dissolution. But its the claim against assets in the event of dissolution that supports all that.
I used to work for a strapping start-up. Our competition had a lot more money, and people than us... but it didn't really matter because we were smarter in how we approached building the product.
The future of eCommerce is going to be very heavily dependent on AI & robots. Product Suggestions > inventory management > ware house > packing > delivering.
AI makes your customers buy more, and robots make delivering it cheaper.
As good as Amazon is at creating this infrastructure, google has demonstrated a mastery in AI, and they're purchasing every robot company around. The competition is on, and I wouldn't count them out.
The future of EVERYTHING is going to be very reliant on AI and robots. My view is that the last 20 years have been the Internet revolution. The next 20 are all about AI and robotic automation. Both disciplines have existed for a long time, but they've hit a tipping point where price and effectiveness are putting them within reach of total ubiquity.
Google is much more forward looking, looking for big changes, like self driving cars. I can see google taking over more markets like they did with search. "more wood behind fewer arrows" was the saying.
Amazon is much more broad, if Amazon has something, they'll rent it to you.
a bit like Xerox and its PARC
To say otherwise is to confuse the issue, even if technically correct in some contexts.
It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI.
It's a very smart long term strategy.
Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further.
Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".
It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.
It's not a "non-technical API". We have name for those things: they're services. Amazon provides services, and that extends to both digital services (with which you interact via APIs — that P stands for Programming, damn it!), and meatspace services.
For instance, why can't I install a local print shop as a system printer? I do some graphics work, then I click File->Print..., pick the "Printing Company XYZ", alter preconfigured defaults if needed, OK, and the next day a courier brings me my print job, all payments and address information transfer being handled in the background.
Let me order pizza by RPC (we could streamline ordering in our local Hackerspace by voting on toppings on IRC and using a bot to make the order ;)). Let me do shopping by a POST request.
The end result would be that the use of aby service that doesn't require your physical presence could be streamlined, a lot of time wasted on boring paper/legwork could be optimized away, and the system would work smoothly in the background as long as you top up your credit card regularly.
I'm pretty sure that FedEx Office (formerly FedEx/Kinkos) has supported doing that for many years. I suspect they aren't alone.
A few minutes of Googling didn't turn out what I was looking for though. I can see an "upload and print" feature on FedEx website, I can see a dedicated mobile app that apparently can print files via FedEx...
... but what I was looking for is something that pretends to be a normal printer, so when i do File->Print in Word or Photoshop, I can choose it as a destination, much like we used to do with "PDF printers", which were programs that installed as printers but outputed PDF files, back in times when MS Office couldn't do PDF export.
So if I'm missing an obvious hyperlink to that, could you please help me out here and post it? ;).
In general, I don't want print shops to start making mobile apps or (even worse) desktop apps to "streamline the process" (i.e. scare the shit out of the living with crappy UI and "upselling opportunities"). My dream is for them to integrate into the system, like every self-respecting piece of consumer hardware does. In the end, I might even not care at all which print shop is doing the job (much like I don't care where I order Asian cousine - those restaurants are all commoditized - I only care about it to be hot, tasty and delivered on time). In a perfect world, I'd love to have it reduced to a single argument, a drop-down in printer settings dialog (but I'd happily accept a system printer per printing shop for now).
All the long winded explanation of the circumstances (such that Benedict gives in his writeup) hoping that people will be overwhelmed and not want to question what is going on (like a 20 page legal contract that can't easily be deciphered by non lawyers) I mean who even has the time to fully vet even what Benedict has "summarized" (not that it can be called that).
There is a saying in negotiating which is "you can name the price if I can name the terms". In the case of Amazon it's like "Let me name the business model and I will also name the time frame toward profitability".
One thing is for sure. Bezos may prove right in the end or not but there is no question he is operating according to his vision and doesn't look anywhere close to deviating from his (Benedict's words here) "lifestyle" business.
Jeff Bezos can do no wrong in this market place; that is where we have a somewhat growing marketplace for certain professions. Professions that provide a livable wage, with a few dollars left over after rent in order to spend on Amazon.
Besides Jeff's vanity projects(newspaper, drones, I don't fell like doing a bunch of research)--his business model has one glaring flaw. He needs cheap gas. There is good reason why have huge trucks that move a large amount of goods from one location to a more convenient location. Don't get me wrong I like Amazon. I am surprised he hasen't bought up some of the dirt cheap commercial Realestate and put in Amazon retail outlets. Outlets that just provide a place where customers could pick up their packages. Hell--he could automate them, and they could be open 27/7?
Well this is my opinion based on 35 years of business experience and having graduated from an Ivy business school as well. And reading, operating and observing business from before most HN readers were born. In other words not just reading blogs or online comments or whatever. It's a pattern that I've seen. Having seen bullshit of different types previously.
Sure I could be wrong "ask 10 doctors" but I do have a basis for my thoughts.
Edit: Because of course being in business and making a profit for 35 years means nothing to the younger generation on HN.
http://www.amazon.com/gp/help/customer/display.html?nodeId=2...
This invalidates the time value of money. In other words, if I am not getting a quarterly/annual dividend (ie a profit payout) on a stock, over the long term there is no incentive to hold onto that stock, because I could get a dividend from a different stock or some other investment in general.
But I definitely agree with the gold example.
They have a healthy EBITDA, they're just choosing to reinvest their earnings, as they deem it's more efficient use of their capital than declaring a profit, paying a corporate profit tax off it, and then keeping the rest of the cash.
This was the game played by John D. Rockefeller. He had so much infrastructure built up by the time they split up Standard Oil, that each new state Standard Oil immediately had everything it needed to keep operations going and the breakup was essentially a bunch of paperwork. As a stockholder in all of the new firms, Rockefeller's net worth tripled, from ~300m to ~900 million.
To make this strategy work, you need mountains of cash. In his salad days, Rockefeller cultivated excellent relationships with bankers, who would stop him on the streets of Cleveland and ask him if he needed money. Eventually he decided to buy up Cleveland's entire refining industry, an event that became known as the Cleveland Massacre.
John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed. He leveraged his extensive railroad connections and infrastructure to bury competitors, for one thing he owned virtually all the oil tank rail cars, without which you couldn't sell your products because you couldn't move them efficiently.
The right choice was to have taken stock, which would have made you fabulously wealthy. If you were any good at the oil business at all, he would also offer you a job, which again would have eventually made you very very rich. He had an insatiable hunger for quality staff. It was never a good idea to bet against Rockefeller.
It runs against the conventional story of SO being an inevitable monopoly.
Their main competition was from Russia oddly enough.
Above and beyond that, simply as a history of the most important substance in all of human history beyond sheer biological necessities, it's utterly fascinating. It's principally through Yergin's work that I came to pretty much diametrically opposite conclusions of the future of energy from his.
Thanks for the heads-up.
Am curious. What would your nominations be for the Rockefeller of the tech (software/hardware) world? Ever thought about that?
> John offered three choices to rival refiners, cash, Standard Oil stock, or to get crushed
... is also a pretty good description of how Microsoft approached anyone they considered competition in the '80s and '90s: you either licensed your software to them ("cash"), sold your company to them ("stock"), or got destroyed by them.
Gates' charitable efforts have earned him a warmer and fuzzier reputation these days (another parallel to Rockefeller?), but back then he was an absolute barracuda.
I like to say yes. I think. I mean, he may have destroyed hundreds of people's livelihoods/jobs/companies, but his efforts these days are literally saving peoples lives.
Does anyone have an opinion on this? I'm a firm believer people can change and while this might not be Bill Gates changing, it might simply be him "atoning for his sins" so to speak, not that I'm religious, nor that he is either I think.
No. Changing doesn't remove your past sins and helping one person doesn't balance your hurting another. To believe so would mean saving a life makes up for taking another life, obviously it doesn't.
It's certainly not fair to make the comparison of saving one life in exchange for taking another. A better comparison would be saving many (millions?) of poor, non-white lives in exchange for stealing money from privileged white men (majority of people in the software industry during his era).
In the 1980s, Apple went round Hong Kong, Taiwan and China suing companies for making knockoffs of the Apple II (ie better, faster, more reliable and much cheaper versions of the Apple II). Then along came the PC industry, which welcomed them -- and their innovations -- with open arms.
How do you balance a handful of self-righteous American programmers against the wealth and the millions of jobs generated by Acer, Asus, MSI, Hon Hai, Wistron, Pegatron, Quanta, Compal, Inventec, etc?
Of course not.
> It's certainly not fair to make the comparison of saving one life in exchange for taking another.
It's exactly the right example because it makes the moral choice clear and that same choice applies to the lesser scenario.
> A better comparison would be
We don't need a better comparison, it's already been made clear that you can't make up for sins against one by helping another.
http://www.micheloud.com/FXM/so/consolid.htm
Microsoft wrote some software that was, I would argue, overall an improvement on the software against which it competed. So Microsoft did some good. However, in the process of extracting value, they actively - and, in my opinion, often unethically - suppressed the efforts of those with whom they competed. I don't pretend to be very knowledgeable on the exact value of these positive and negative effects, but I think it's pretty clear that all of the above effects more or less amounted making a bunch of computer nerds like us a little richer, or a little poorer. Not necessarily in money, but in power... like the power to track business expenses cheaply (which Microsoft enhanced, with Excel), or the power to collaborate on making productive software for ourselves and share it freely with the world (which Microsoft harmed, see the Halloween Documents, or other conspiracy evidence of your choice).
For the most part, this only affects a few dozen million humans, and even interpreted broadly it affects perhaps 10% of humanity. And the effects are small; for almost all of the affected, life gets less than 1% better or 1% worse, due to Microsoft existing. I mean, that's bigger than most companies, but.
I'm less able to give clear magnitudes of the impact of the Bill and Melinda Gates Foundation. My understanding, though, is that they're playing a significant role in the attempts to eradicate polio. Frankly, you can inflict Windows95 on me for the next 50 years, if that's what it takes to save one person from polio. Suppose that it turns out that polio is eradicated, and the B&MGF is due 1% of the credit for that; wouldn't this be more valuable than all the harm ever done by MS, past and future? And then there's their malaria-eradication efforts, their money spent on education, their money spent on sanitation, etc etc.
Bill Gates seems to have stolen a very manageable amount of our first-world wealth, burned a good fraction of in an engine of inefficiency (for example, Ballmer got some money too), and given most of the rest of it where it could do the most good (modulo a small fraction kept for himself, to indulge in fabulous luxury). As far as I can tell, although it astounds and confounds me, Bill Gates is Robin Hood. wtf.
My candidate explanation, Melinda.
They did an absolutely unprecedented assault on the Internet on the developer, policy, and user front when they found out they could not compete there, until they turned that policy around. We only see vague results of this today, on that all development of the web itself was put on an 8 year hiatus, and in some of the crazy proprietary formats that still plague us.
But how do you put it in economic terms? How much is the break-ins at RSA, Cisco Google, Valve, and inbetweens unknown worth to the global economy, because bad business practice forced peoples email clients to have the ability to run code?
Rockefeller had a strong Christian Soldier belief system, in which he was righteous and most other oilmen were sinners. (The 19th century oil business attracted a lot of hard-drinking, gambling, womanizing types.) He did good works with his money, while many of his competitors would have spent it on vice. Therefore, he was furthering God's plan for the righteous to inherit the earth by beating them in business.
It's a worldview difficult for moderns to relate to, but I think it was authentic for him.
That was eerily reminiscent for me, too.
There are plenty of ruthless people in business even today. But Rockefeller was driven by the belief that cooperation in business, rather than competition, was the way forward for society. The business he built reflected that. Eventually the world learned from his model and now business isn't quite so cutthroat.
But it took Rockefeller to create this new order. Someone so genius at business that there was no stopping him from doing anything he wanted to do. Not even the full might of the federal government could bring him low. Maybe they could have eventually, but the government's position on monopoly softened after it realized what the economies of scale it generated meant for our wartime industrial efficiency. There were other titans in that time period. Rockefeller stands above them all.
Really, you don't see what is happening here?
Who else mounted a private space company able to dock with that of the global governmental effort that is the ISS?
But. They're not there yet. At the moment, they're currently providing a launch facility that is equivalent to services offered by a number of other vendors, albeit at a slightly lower (currently) price. And the service they're providing really does not directly impact on 99.9% of the lives going on around you.
Yes, their reusable launch system program is way ahead of anything else anyone is doing, but it's still experimental, and isn't yet providing benefits to even their direct customers, let alone anyone else.
Musk hasn't made lasting change yet with SpaceX. I really, really hope he does. Becoming a multiplanetry species would be the biggest thing for Humanity since, well, fire, standing upright, or speech, and Musk seems to be the person best placed to make that happen in the next 20-40-odd years.
But he's not done it yet.
http://www.spacex.com/news/2014/07/14/falcon-9-launches-orbc...
http://www.spacex.com/news/2014/08/06/spacex-launches-asiasa...
http://www.teslamotors.com/de_AT/blog/promise-electric-vehic...
If you have low self-esteem maybe. Rockefeller was a piece of shit.
Also a reminder that the term "visionary" is very relative to your horizon.
Exxon still breathes Rockefeller, his imprint can be seen all over that company. To call him a visionary is absolutely appropriate.
AFAIK he wasn't off kicking puppies and punching beggars in his spare time. You can be a ruthless businessman and perfectly good human being.
At its peak Windows was running on 90% of computers and the biggest rival Apple (Steve Jobs) was taking money from Microsoft (Bill G) to survive.
Bill was able to leverage almost all other software companies to create software for Windows to create a lock in fro the customers.
It's hard to see how many people suffered who didn't fail thanks mainly to their own mistakes. I'd put DR, IBM (Lotus), Novell and Netscape in that group.
> The day before the announcement Apple had a market cap of $2.46 billion,[58] and had ended its previous quarter with quarterly revenues of US$1.7 billion and cash reserves of US$1.2 billion,[59] making the US$150 million amount of the investment largely symbolic.
http://en.wikipedia.org/wiki/History_of_Apple_Inc.#1996:_Ret...
That isn't a coincidence. According to[0] "The Everything Store"[1], the latest biography of Amazon, Bezos picked up the model for Amazon retail from Costco founder James Sinegal.
The first aspect was "value trumps everything" - where prices would be slashed and net margins thin. The second was the subscription model - Bezos learned that 70%+ of Costco's profit was from the membership fees. It was easier to charge a membership fee once and offer lower prices than it was to attempt to spread your profit margin across products and into the pricing.
Amazon slashed its prices and adopted the thin margin model in the future and then implemented Amazon Prime.
"The Everything Store" is a decent read, easy to flick through and some interesting cases and anecdotes within it. Ignore the negative reviews and give it a read if you haven't already.
[0] http://bobmorris.biz/what-jeff-bezos-learned-from-jim-sinega...
[1] http://www.amazon.com/The-Everything-Store-Bezos-Amazon-eboo...
Amazon has already set this up for books with their Kindle Direct Publishing platform[0]. Writers directly publish on Amazon (cutting out publishers) and their books are electronically delivered to customers' Kindles -> everything stays on Amazon.
[0] https://kdp.amazon.com/
Investors in Amazon typically look to selling their stock for higher than they bought it as the way they "get their money out of their investment" So not sure why the fascination on profits. Profits are important if they become the means to achieving a higher stock price. But lack of profits hasn't hurt AMZN's price over the years or made it an unattractive stock.
Anyways, fascinating post, really enjoyed the different cross sections of perspective presented.
[0] https://plus.google.com/112678702228711889851/posts/eVeouesv... [1] http://www.amazon.com/b?ie=UTF8&node=8037720011
* Also, this means no capital gains taxes until you sell your shares, because there are no dividend payments.
Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an amazing unprecedented ride upward, institutional benefiting the most.
I also take umbrage with the idea that Bezos is running Amazon for "fun" as though it is frivolous. Bezos seems to have a grand vision and that is not something that matches with the ridiculously short term and arguably irresponsible thinking of the vast majority of investors.
We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.[1]
[1] This is refuting the broader point that Benedict Evans is making, and does not necessarily apply to Amazon perfectly.
Suggesting - even if lightly - that Bezos is running Amazon for "fun" and as a "lifestyle business", especially in the light of the great analysis done above it, indicates that the author looks at any business that has very long term goals as inferior to those who are solely focused on turning profits back to shareholders.
Only if they sell to realize those gains, and that can only occur if they can find a buyer who has an even greater expectation of profit in the future.
This concept seems to elude people, but the value of a company that never makes a profit is precisely $0.
Even with all that, the value of a company that doesn't turn a profit isn't 0, it's the value of it's assets, and Amazon has a lot of those.
Touche. They also have liabilities.
I suppose we could be even more precise and say the price is $0 above the expected value of the net assets at the time of liquidation. But my point stands.
Or admit that your point is absurd.
As others have stated profits = revenue - expenses. In this case they are positive on the right hand, even if slightly, so they are in fact making profits.
Your time horizon is also wrong and assumes that there needs to be a singular point where the top level goal becomes making profit, rather than profit being a byproduct of a top level goal of adding value.
I also disagree with your assertion that value comes solely from profit.
The top level goal is to provide an adequate return to shareholders. Shareholders (of which I am one) allow massive re-investment with the expectation that net earnings in the future will increase.
If you purchase ownership in Amazon (or any other company) for any reason other than to earn a share of their income, that's your prerogative. But you are in a very small minority.
Selling the stock and being taxed on capital gains is a voluntary act that can be planned for accordingly. A company with zero profit also owes zero taxes at the corporate tax level, which makes reinvestments and stock buybacks a more efficient value distribution strategy.
The latter portion of the post was not specifically applicable to Amazon, but was refuting the author's point of view.
The idea is not new, and conglomerates have been around for quite a bit now, with most prominent example being Berkshire Hathaway. Take the profits of a textile company, reinvest them in a new line of business, take the profits from that line of business, reinvest it into a new one.
Basically, it's rational for a company CEO to invest all profits back into the business as long as he expects he can make a better return for them than the market can. Berkshire Hathaway's annual reports go into more detail in this. The trick is in recognizing the size of the market opportunity in front of you, so that you know when to switch from reinvesting profits to distributing them as dividends. Microsoft waited too long for this - they burned (and are still burning) billion on unprofitable business lines. Google has had debatable success - some of their new businesses are brilliant, some are huge flops.
Apple, and even Google, don't seem nearly as similar to Amazon in the question I asked. While they both invest heavily in R&D and other capex's areas, they also store a lot more cash (at least apple) and seem to report a lot more of a "profit" than Amazon. Do they re-invest _all_ profits or just a portion like most companies?
People don't talk about Apple, Google, or Microsoft as companies that failed to become "profitable" in nearly the same way people talk about Amazon, at least from what I see. AMZN still seems like such an outlier...
Google tries to accumulate cash so that when there's an opportunity - say, buying DoubleClick or YouTube or Motorola - they can pounce. Since Google is basically an IP company and tries to avoid having physical assets on the books, these are usually whole other companies, usually technology-related. These opportunities are unpredictable, so they bank the cash on the books, invest it in liquid instruments, and then spend it all at once.
Apple is a mature company now - it pays a dividend. But during their big growth years between the iPod & iMac and the iPad, they suspended the dividend, and ran very close to break even then too.
Amazon makes profit and immediately finances new warehouses/robots/etc. with it instead. Since this is not cash it is booked as zero profit from an accounting perspective.
Some investors like to complain about the lack of profit because turning it into an asset for the company to use makes it harder to give out to them as cash (dividend) but makes it easier for the company to grow. Many of the same investors use a flawed metric (P/E ratio) to saw that Amazon is effectively worthless, even though it dominates a market with huge revenue growth and a large amount of physical and virtual assets.
according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05%
So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends.
AMZN (WACC 10.05%) net sales growth: 22% (2011-2012) vs 18% (2012-2013)
AAPL (WACC 9.45%) net sales growth: 31% (2011-2012) vs 8% (2012-2013)
From Wikipedia: "The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere"
"a corporation will evaluate an investment in a new [x] versus an extension of an existing [y] based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital"
For more info, see sources: http://en.wikipedia.org/wiki/Weighted_average_cost_of_capita... http://thatswacc.com/ http://www.investopedia.com/walkthrough/corporate-finance/4/...
The America that is rich and poor is here. I hope the U.S. dosen't turn into Mexico; where the wealthy can't leave their house for fear of kidnapping, or worse. I know I casually slip off my watch when traveling to certain areas, and wouldn't think about buying an expensive road bike again.
http://seekingalpha.com/author/paulo-santos/articles/symbol/...
While this guy seems to have lost his shirt betting against AMZN over the past couple of years, his bearish analyses of its valuation are quite precisely articulated and make interesting reading.
Alibaba may eat the 3P revenue: http://seekingalpha.com/article/2263623-this-is-amazon-coms-...
Amazon.com's profitability decline is structural and tied to its sales mix: http://seekingalpha.com/article/2169003-the-latest-developme...
I wouldn't short this monster, though, at least not until QE ends.
I don't know either way, and I don't want this post to seem like a criticism of Amazon. I know some people who work in upper level management there and they all speak very highly of the way the company is run (very meritocratic). But reinvesting earnings is only a good strategy if those earnings are put to good use, otherwise they should be paid out as a dividend.
Anyways, just something to think about whenever the topic of Amazon's profits/earnings comes up.
Taxes bias this question.
Amazon is increasing in value, but because they are investing in themselves, on paper (i.e. according to accounting measures) they are not profitable.
All companies have a "book to market" ratio that indicates they are worth more as a company than accounting measures would suggest.
They package up and address individual items in shenzhen/guanzhou, stick them all in big containers, then when they reach the US/europe they deliver them by the cheapest means possible in a totally commoditised fashion. What competitive advantage does amazon.com have now? Why do all those small sellers need to exist? everything they sell is made in china anyway.
If the net worth is about $40 billion or more and growing (almost tripled since 2009?), and revenues are growing (almost tripled since 2009?), and it's not hugely inefficient (has relatively steady or increasing profits instead of increasing losses) - I don't understand why people think that sounds like failure.