Cash flow is obviously important to you, but note that business profitability involves having positive cash flow and making a profit on it. It would be perfectly reasonable to discover in a few years that Amazon is structurally unable to make a profit without giving competitors an easy path to start cannibalising their business.
It is an uncertain scenario at the moment because it does look like Amazon will be one of the rare attempts that can find profits. But they haven't managed to outdo Walmart yet so there are obvious risks.
There are quite a few companies I know that exist for decades now who are living on a (relativly) low margin and cash flow focus. Most of them are retail discounters. And by coincidence these very companies are eating up market share from other retailers.
The whole eCommerce business of Amazon is very supply chain heavy, and here they are among the best (along companies like Apple and McDonalds).
On the other hand I know more than one company with incredible margins who are bleeding money for years now. And they are not doing well. Agreed, Amazon will be facing the challenge of slower growth. Wether they can pull another strategy and execute on it only time will tell. But untill they hit this point Amazon is in very strong position.
Maybe a little anecdote regarding Wal-Mart. Back the day, Wal-Mart invented things like cross-docking. That basically reduced the inventory levels in their warehouses to zero (well, not quite, but in theory items were no longer stocked but transfered from on truck to another). Things like that made Wal-Mart the giant they used to be. And then Amazon recruited a lot of Wal-Marts supply chain and logistics people when they started to built there own network of fullfillment centers.
Regarding the operation of a private fleet of trucks, well back in the 80s it was quite common. But these days are more or less gone. That was replaced by specialised 3rd and even 4th party logistcs providers.
Regarding point 2: These two metrics (cash flow and profit) and as much related as you think. Imagine you sell a product for 100 on day one. Your customer pays you on day 2. And you pay your supplier 80 for that product on day 30. Perfect from a cash-flow perspective, now you can invest without going to a bank.
Profit is a completely different matter now. Imagine your operating cost is 10, then you are cash-flow positive AND profitable. If your operating cost is 30, then you are still cash-flow positive but you are losing money. In theory, a company can live eternally on a positive cash-flow and zero profit (or very low profit). As long as shareholders buy it, that is.
Excuses for the very simple explanation, but I hope the general point more or less came across.
If you look at a company and assume that you can shut the whole thing down except the sales team, usually it'll be profitable in theory. The problems only arise if someone tries that and then they'll discover that there needs to be a bit of a moat around the sales team to make the whole thing work.
Amazon's profits prior to 2017 were laughable. Even now their income is inferior to Walmart - and they have AWS as a business that is a bit of a cheat. Fair enough from a maney making perspective, but it makes it hard to do an apples-to-apples on how well they are running their retail arm.
Retail is a particularly brutal business to turn a profit in and while Amazon looks like it can do it, the proof isn't in yet. Walmart still consistently makes more money than Amazon.
"Oh we could make money at any time!" is one of those claims that is false until the proof is solidly in the rear view mirror. High revenue and 0% margins is a lot easier than middling revenues and a respectable margin.
what matters is the cash flow. Amazon is cash flow positive meaning that their operations are very profitable, but they are reinvesting this profits into the business
Amazons retail business is doing just fine. Grew 20% YoY, give or take, for years. Is cash positive, basically all the time. And the last bit, positive cash flow, is so hard to achieve.
I agree that mixing cash flow and profits is confusing. But that doesn't change the point: not turning a profit means you lose money on every sale (which was not the case of Amazon, the profits were just small compared to the sales volume), it's by definition unsustainable unless there is a very strong plan mid-term (like not "self-driving cars" for example). The question is legitimate, though the word "allow" is maybe not the best choice.
Actually the biggest key is a distinction between profitability and cash flow. Amazon has been cash flow positive since 2001. Sure, it spent huge number of years burning cash building it's revenue from $2 billion in 2001 to $200 billion today, but because they have a structure where they don't have to pay their suppliers until close to 3-4 months after the collect from their customers, they can sustain that without needing to raise outside cash.
That's a huge distinction, if you start having to raise more debt or equity in order to fund your growth it's going to negatively impact the long term free cash flow per share of your business and will make it harder for your to generate outsized returns.
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.
Not having net profits does not mean that parts of your business are not profitable.
You may want to take a closer look at Amazon's financials and see what kind of free cash flow they're generating before they reinvest that cash in expansion and new businesses. Net operating cash flow for 2016 was $16B and the trend is strongly upwards.
Amazon is clearly capable of generating Walmart or Target range profit margins. In 2010 they earned $1.15b on $34b in sales. That's right on par with Walmart's sales to net income ratio, and I believe Amazon accomplished that without much focus on profitability.
The only concern I see about Amazon as a company, is the future stock market returns for the next decade are already baked into the stock. They're currently trading at three times the value of Target (with none of the profit, no dividend, and soon to be comparable sales).
Amazon has been running at a loss or close to 0 profit by design.
They could be profitable if they wanted but the choose to use the revenue to expand their expanding business (e.g. building warehouses, buying a fleet of planes etc.) or fund other businesses (e.g. successful Kindle tablets or failed Kindle phones, or Alexa or opening physical bookstores or opening physical grocery stores).
When they run out of warehouses to build (or crazy ideas to invest in) their costs will drop and that will turn into profit in an instant.
And there's not much competition there (Walmart, maybe) for the kind of ecommerce + physical commerce combination so we can assume that Amazon will grow in that space and other players will, collectively, shrink.
I read an article that Amazon has no profits most years [0]. Maybe that's the financial model they are going after. I share your view on this though, because until they reach that point, they are running a big risk. It will be interesting to see how long they can keep it going.
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.
I'd love to see an analysis of the risk embedded in the future profits that everyone talks about. What these analyses completely ignore is that Amazon's future cash flows are risky, while the current cashflows at the dying business are not.
There are countless examples of giant companies that haven't realized the enormous future cashflows embedded in their stock prices. It is obvious that Amazon generates lots and lots of revenue, no one disagrees with that. What remains an open question is will they be able to ease off of massive infrastructure investment and actually harness the future profitability that everyone seems certain of at this point.
These straw man arguments that profit-less companies have huge market caps so they will turn hugely profitable ignores the actual argument of whether they can actually achieve that. Can profit does not equal will profit.
over the whole life cycle of a company, ok. Not on the exact mumbers but wether wether profits and cash flow are positive or negative. Chancea are that in the worst case the short term effects already killed the company in question, though.
Regarding Amazon, they are profitable enough. Cool thimg is they are building the fullfillment centers by the dozens, payed from free cash flow. And thats pretty amazing I think. But you are right, in the long run Amazon will most likly hit a growzh cieling. When they do they will have to changw strategy.
I was referring to net operating profits based only on their ecommerce operations. Amazon has been selling the 'reinvest' argument for decades, but it would not be solvent without AWS. In fact your link kinda agrees:
>All these investments have led to lines of businesses like AWS cloud computing and advertising that are relatively much more profitable than its e-commerce segment.
I do not claim that Amazon has negative cash flow, and I do not know why you would assume I claimed that.
The growth argument is going to get very weak eventually, because Amazon face resurgent competition at home, and regulatory hurdles & Alibaba abroad. Amazon is riding high on investor confidence, they have very little actually space for growth.
But as a counterpoint, why would anyone build this business? Compare Amazon's profits [0] to Walmart's [1]. Assuming I've got the right chart, and recalling that the profits are coming from AWS (ie, unrelated to the catalog business), is it obvious that a sane management team would want to replicate Amazon?
We're talking two decade of basically no profits. Risk free rate of profit (ie, bonds) was something like 5% for a lot of that period, although there is obviously a lot more to consider. This is longer than long term from an investment standpoint - compare it to jobs who took Apple from "return the money to shareholders" to "most profitable company in the world" in a bit more than a decade.
Other than maybe 2 or 3 years, Amazon has been cash flow positive pretty much throughout its existence (and the negatives in those 3 years added up to less than a couple of millions).
That’s absolutely not true for these companies.
One of the most underrated aspects of Amazon is Bezos’s realization that he didn’t need profits to make a lot of money as long as his cash flow was positive. It gave him tremendous flexibility because he could spend a lot more than his competitors, and as an added bonus, it reduced his tax bill significantly.
It is an uncertain scenario at the moment because it does look like Amazon will be one of the rare attempts that can find profits. But they haven't managed to outdo Walmart yet so there are obvious risks.
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