They're not "exceptional" they've just managed to find productive ways to reinvest their profits.
The reason their stock is valued so much is partly because if he wanted/needed to, Bezos could wake up one day and cut all programs focused on expansion and return the saved costs / new profits as dividends. The reason this doesn't happen is that the money is (thought to be) better spent on increasing the size of the business. There's no reason other companies couldn't do this, although I expect the main limit to this strategy is the extent to which you can productively reinvest capital. This is a function of foresight/luck (e.g. branching into AWS) but also of the market you're in: to what extent do you begin to experience diminishing returns as you spend more money on improving your product? I think that with logistics, as with Amazon and e.g. Walmart, the returns diminish very slowly, or even increase with money spent (economies of scale).
Amazon is truly exceptional, do not make a rule out of it. Bezos is kinda like Buffett, in their own league of master capital allocators. For example, Amazon got a lot of financial leverage on the "float" between credit card payments and sending the money to merchants. Again, kind of similar to Berkshire which is leveraged on the insurance "float".
Also, heavy CAPEX or any other form of internal reinvestment does not mean there should be no profits. Look at Google, Facebook, Apple, Microsoft - all those companies were bootsrapped mostly through internal cash flow. All of those companies were profitable when IPOing (just look at historic S-1s).
Many think it's overvalued by around 50-500x what the company is worth. From what I've seen they're very good at cash management and continually invest in company facilities, very similar to what Bezos was doing pre-AWS with Amazon's tight margins.
Their businesses are profitable, they just aren't booking profits. Odds are eventually they'll simply use free cash to buy back shares instead of reinvesting it. Which is why Amazon attracts quite a few very sophisticated long-term investors, and why they command a relatively high valuation.
Note that Amazon.com has not proven it can profitably reinvest - just that it can reinvest and keep growing revenue. The question is why so many people believe Bezos when he said there was a plan to eventually become profitable.
(AWS is quite profitable, but retail isn't, and it doesn't have a moat.)
The idea that Amazon isn't profitable is laughable at best. Examine what they're doing. If they stopped constantly creating new business divisions they'd be super profitable. They continue to invest in new businesses, though, so on the whole they're "unprofitable" on a cashflow basis. On a sales basis though? Immensely profitable.
Just because Amazon has ideas about how to reinvest doesn't mean they're only breaking even on their sales or selling at a loss. Starting new businesses every year costs money. Amazon might not have balance sheet profits but the company continues to grow. How could they do that if they were making a loss on everything? They aren't issuing anywhere NEAR enough shares to keep the loss-leader scheme going on investor money: https://ycharts.com/companies/AMZN/shares_outstanding
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.
Making money isn't difficult for Amazon. They earned $1.1 billion on $34b in sales for 2010, without much apparent effort toward profitability. They've demonstrated at various times that they can generate profit at will.
Clearly Bezos believes it's far more valuable here and now to invest into winning market segments like AWS or digital content (eg streaming vs Netflix) or competing in tablets.
With $61b in sales for fiscal 2012, I don't think it would be surprising if they could generate $3 or $4 billion in profit on that basis, with a strict focus on that. They're obviously never going to be a profit machine however, not without Walmart-like scale.
The numbers don't look good for future returns off of the $116 billion market cap. If you assume they have a great decade and reach $150 billion in sales, with 5% margins, that's $7.5 billion in profit - they'd be fairly valued today on a profit projection seven years out. Shareholders can expect exceptionally low returns on average over the coming years.
Amazon has continually reinvested for growth rather than profit. They are able to turn a profit any time they want, Bezos is simply managing the company for growth. Uber is a long way from ever being able to turn a profit.
Amazon is perhaps one of the best executed businesses. Their retail logistics physical footprint is insanely huge and chews billions in capital. They chose to reinvest their profits to stronghold their logistics position.
No? Because if you need tons of capital to make a minuscule profit your company is worth nothing. (A company has to outperform at least the interest people can get on bonds plus some equity premium.)
Amazon could make a significant profit, if Bezos wanted. But that’s a different question.
The Amazon profitability figures are a bit misleading. Amazon adds a very big revenue generating chunk of company every year that has enormous value. That's effectively their profit. One day, they could decide to keep money in their pockets, instead of investing it, but share holders would only demand that if they thought they could do a better job at investing than Amazon. The market has had enough confidence in AMZN for it to go up by 275% in the past 5 years, compared to 125% for the NASDAQ. It's not clear whether this shows that Jeff Bezos is a better investor than the market, or that the market currently believes that he is and this will eventually correct itself, but momentum definitely seems in Bezos' favour.
It is definitely worth noting that Amazon has a shareholder problem. Yes, they have devoured everything large and small but profit margins are razor thin. One of the most brilliant things that Jeff Bezos did was telling his early investors not to see a return for several years, but the market does and will demand returns. Given that Costco makes most of its profit on membership fees it will be interesting to see if the Prime increase is sufficient to both sustain or improve service levels and increase profitability.
> I don't really follow your logic. The point isn't to 'earn money' now. It is to build the economies of scale, over time, so that no one else can hope to compete with them on price in the future. That is when the money will really be earned.
Amazon has had this mythical idiom of "when the market want us to give them profits, we will turn on the spigots". In other words, they can just scale back their future investments, and the money will start rolling in.
However, they have been running losses in general for 20 years. For a few quarters in their history, they made some small profits, but in general, even with all the dramatic scaling and efficiencies, they still regularly run losses. Investors have stuck with them for this long, but unless they really can start raking in the profits, I don't see how their stock can sustain such a high price.
If you look at the financials and business model, Amazon is basically the Walmart of the internet. They are in a low margin business, with high capital costs. However, their stock is still priced as if they are a software company with high gross margins (ie software costs zero to produce each additional copy). Walmart understands the model and is able to produce nice profits, and Amazon either has to follow or hopefully the market will finally figure them out and price them accordingly.
It makes no sense for Amazon to turn a profit. They invest everything back into growth. This way the stock keeps going up, Bezos and co sell their stock and pay long term capital gains tax instead of income tax. This way Bezos can get a better tax rate than his secretary.
There's an argument that Bezos is forgoing short-term profits by re-investing those into growing the business (expanding into AWS, marketplaces, Zappos, Kindle, streaming media, etc, etc) and into aggressively competing on price to not leave much excess oxygen in the room for competitors.
That's very different from the potential profit profile if Amazon were seeking to maximize near-term profit as opposed to maximizing near-term growth, with the expectation that that maximizes long-term profit.
Is Amazon the best example of this? Their retail arm was never long term loss making in the way e.g. Twitter was, if I recall correctly, but rather more like break even because all profits were ploughed into growth. I don't know how much money Amazon raised but back when Bezos started out there weren't the same kinds of insane sums being tossed about by VCs.
Also Amazon's moat isn't really its website, which is mediocre at best, but its backend systems like fulfillment. Plus brand recognition, size, general efficiency etc.
It's not a mystery, it's supply & demand. The stock stays high in part due to who the shareholders are. Bezos and his family control 1/4 of the company directly, and a handful of institutions control another 1/2 of the company. Lack of oversupply of freely available shares at a high valuation, is one reason the stock defies gravity.
The other part of it is the narrative that Amazon sells.
But let's not pretend it has always defied gravity. Besides the obvious dotcom crash, their stock produced essentially a flat return from June 2000 until April 2007, with various ups and downs.
I just don't understand why Amazon.com stock is so high. Bezos has stated time and time again that he intends for Amazon.com to never make a profit and to never pay a dividend, always folding all of the earnings back into the company for future growth. There is no logic to its value.
considering they have a market cap of 137 billion, those are really tiny profits. Obviously the strategy at Amazon is to grow revenues and invest in the business, but that doesn't mean the parent is wrong. Amazon has essentially had no profit to speak of compared with their market cap over their entire company life. People investing in them have done so under the hope/expectation that once they reach their goal of ??? (world domination maybe?) the profits will be really big. That or they are just hoping a greater fool will buy their shares higher at some point in the future.
The reason their stock is valued so much is partly because if he wanted/needed to, Bezos could wake up one day and cut all programs focused on expansion and return the saved costs / new profits as dividends. The reason this doesn't happen is that the money is (thought to be) better spent on increasing the size of the business. There's no reason other companies couldn't do this, although I expect the main limit to this strategy is the extent to which you can productively reinvest capital. This is a function of foresight/luck (e.g. branching into AWS) but also of the market you're in: to what extent do you begin to experience diminishing returns as you spend more money on improving your product? I think that with logistics, as with Amazon and e.g. Walmart, the returns diminish very slowly, or even increase with money spent (economies of scale).
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