Correct me if I'm wrong, but isn't that just due to their accounting preferences?
Amazon has had the capability of making profit for years, but prefers to expense everything off in an effort to grow rather than pay increased taxes.
Their skyrocketing market cap hasn't been due to a change in the company's direction so much as investors gradually realizing this strategy and the raw growth potential of where Amazon has positioned itself.
Profitably has never been the most pressing concern for these growth companies. Amazon went 20 years before turning a consistent profit, so it's not like there is a well-defined upper-limit where profitability is mandatory. Amazon made a trade-off choosing revenue over profitability, and that's what investors want.
Investors care less about actual profits than the ability to prove profits can be generated. Once it's demonstrated/proven that profits can be attained, investors become extremely patient. As long as potential profits keep rising, the enterprise value will rise, and investors will be happy. This is not the Warren Buffett approach, obviously, but that doesn't make it necessarily wrong or invalid. It's consistent within the theory of rational expectations.
Profit and growth go together. In Amazon's case lots of profit is what fueled their growth: at each point they made far more money than needed to sustain, so they bought growth instead of paying out to shareholders.
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.
I'd say 'because the market still has confidence in Amazon', which is reflected by their market cap. While market cap has no relation whatsoever to the profitability of a company, it does allow Amazon to keep investing in expanding into all the directions they are expanding in. At current valuations, they only have to add ~5M shares (on a current total of ~450M outstanding) to raise around ~$1B. This is not a free ride though, they _will_ have to be able to jack up their profits somewhere in the future, otherwise the stock will sink and they will have a hard time to keep up their strategy of expansion.
I'm quite surprised they have been able to keep up this game for so long myself, but it's not totally crazy. Online shopping is has been growing like crazy for since Amazon started, the market today is probably at least a 100 times larger than ~10 years ago. Some day though, growth will start to level off, and looking at Amazon's earnings releases over the last 2 years or so, it seems like we're almost there. It's going to be very interesting to see what happens to Amazon when they cannot keep growing any bigger.
I think they invest massively in accounting and legal and corrupt arrangements to avoid taxes, so it must simply be their desire. Their tax paperwork didn't accidentally end up $129m up instead of $3b down.
It's a while since they didn't make a profit, in large part because of AWS growing to currently north of a million an hour net profit on margins their retail side can't replicate.
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.
Amazon appears to be able to ramp of profit at will via controlling expenditures and promotions. Review this years numbers vs the prior years. I think they wanted to show a investor what it looks like when they 'wanted' to turn a profit instead of plowing money back into everything imaginable.
If I'm wrong and they are still plowing money back into everything and are still throwing off numbers like this (compared to the past) ~ that's simply amazing.
even after thinking through that defense - a 191 P/E is above my understanding. I think their technology and software revenues are seen a hyper growth
The explanation can only be that investors expect Amazon to continue to grow revenue and profits at a high rate. How reasonable is this expectation?
I've always thought that the intense competition in the on-line retail world would eventually result in lower profit margin for everyone including Amazon, but I hesitate to bet against such a well run firm.
I think Amazon is simply reinvesting in growth while avoiding corporate income taxes. Since they tend to move into proven industries, they are not likely to lose any of the re-invested money.
They are effectively taking profit in the form of Amazon equity (via increased stock price) and not paying any taxes.
Amazon obviously has an interest in turning a profit. The main different is incentives.
A private company is generally structured better to remain competitive and efficient as things change.
Think Amazon is getting too big to remain agile? They basically aren't making a profit (they are continually reinvesting instead), as you say. Reinvesting in new strategies is probably the best evidence that a company IS competitive.
It’s speculative to say that “Amazon can start turning on major retail profits at any time it chooses.” Amazon has not done it yet, so there’s really no proof that it would be so easy, or even possible.
I know the party line, which is that Amazon chooses not to take retail profits because they would rather invest in growth.
But invert that statement to understand it a different way: it implies that when they choose to take retail profits, their growth will slow. (If they could take profits and keep growing they would already be doing that.) How will investors like an Amazon that’s not growing anymore?
Personally I think that the way Amazon’s retail side runs today is the only way it knows how to run, and is how it will always run. The expectation of massive retail profits will always dangle out there in the future like a carrot for investors to chase.
Worth noting that Amazon had mostly profitable quarters during its entire history. And Amazon was, as far as I remember, always cash positive. Combined with basically growing 20% YoY for decades can justify quite high an evaluation.
Amazon is the exception so, not the rule. And not every company prioritizing growth over profits will end up where Amazon is.
They're not making profits. Most quarters they are only slightly profitable. Current P/E is 582, which is astronomically high. E.g. for comparison Apple's P/E is 13.
But that's been Amazon's strategy for almost two decades. Their goal is to instead grow their business. Currently they are at $74 Billion / year in revenue, and still increasing. Once they stop their massive spending on growth, they will (presumably) be able to increase their profits.
Both companies are profitable. This is simply a lack of understanding of business and accounting. Both companies are re-investing all of their profit in massive capital expenditures to support business growth - that's not a money losing endeavour, that's the same strategy that made Amazon into the behemoth it is today. It's also the logical strategy if you have a long time horizon for investment - which is arguably much better than companies which have short-time horizons.
One thing that is said about Amazon a lot is it sinks its profits into growing the business. That makes it more attractive as a growth stock since they are actively expanding their business into new areas, but affects their current bottom line with all the R&D overhead.
Amazon has had the capability of making profit for years, but prefers to expense everything off in an effort to grow rather than pay increased taxes.
Their skyrocketing market cap hasn't been due to a change in the company's direction so much as investors gradually realizing this strategy and the raw growth potential of where Amazon has positioned itself.
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