The problem with this whole profit "debate" about Amazon is that most people don't understand that public corporations are not like households or small businesses. Generating a profit is not the same as a person's savings. If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit, which is then taxed at 35%, and having either having that cash sit in the bank, buying back stock, or paying it out as a dividend (which then taxes the person receiving the dividend). I'd much prefer a company that has recognized opportunities to invest in then one that inefficiently uses my capital.
Maybe taxes on profits were created so that companies invest their profit instead of hoarding it or giving it to shareholders, creating jobs and infrastructure in the process. As far as I'm concerned, Amazon is using its profits (or lack thereof) exactly as intended.
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.
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.
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.
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
"If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price."
But why should you pay a high price for a stock with no expectation of profits, and, ultimately, dividends?
That's not an investment. It's a baseball card.
We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits, because the stock prices kept going up.
Until they didn't.
Which gets back to the point of the article. Sure, it is good for a company to reinvest revenues in growth, in hope of larger future profits which will one day be paid out in dividends. With Amazon showing growing revenues but flat, small profits over the first 18 years of its existence, it's a legitimate question as to when Amazon might finally give a return to its investors.
When I invest in Amazon or any other company, I expect Amazon to invest in projects that give me a rate of return that exceeds the 4% that I can easily get from Treasury.
If it can't, Amazon better return my money.
Also, Amazon can't hoard employees that aren't being productive. It is better those employees work for startups and other endeavors.
individually, it sucks short-time, but as a nation we are better off with this system. Tech companies not only have generous severance packages
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.
If the point of a business is compensating its employees, that might be a strategy. However, that isn't the point of the business. The point of the business is to generate money for the shareholders. Over the short/medium term, shareholders might be content with growth and revenue. Over the long term, without profits the business has nothing for shareholders.
It really isn't a tax strategy any more than being unemployed with no income is a tax strategy. Amazon's strategy seems to be keeping margins low enough that it's hard for others to compete with them, in the hopes of great long-term profits.
While the stock may be valued on its revenue, that valuation is premised on the idea that Amazon will be making a lot of profits from that high revenue in the future. Investors aren't buying Amazon stock believing that it's avoiding profit as a tax strategy to funnel money to employees. They're buying Amazon stock believing that it's the future of retail and that being the future of retail will come with enormous profits.
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.
It's really not smart to count that against Amazon. Amazon doesn't run a profit because it believes it can better utilize the money to invest in its business. If that's actually true, it's way more valuable than spinning off cash. Being able to reliably convert large sums of money into substantially larger sums of money is an extremely high value talent.
But the original argument was that they're so profitable. Now you're trying to find an explanation for their lack of profit.
Free cash flow isn't profit, and the way you measure whether something is worth investing in is against the opportunity cost. If they expect to invest a dollar in X and get back $1.25 and you say they have a dollar so they could invest it in Y that gets them back $1.03, the only reason for them to do that is out of charity, and the act of doing it would cost them $0.22 on the dollar.
And you're still not solving the problem, you're just moving it somewhere else. You say they could spend money on this instead of investing in something else, like Amazon Basics. Now Amazon Basics doesn't make batteries, or USB cables, or what have you. There is less competition in that market, so people have to pay more for that stuff.
It can't come out of what they're paying to shareholders because they never pay anything to shareholders.
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.
people and companies behind amazon's desicions to keep growing instead of making income are amazons largest shareholders and made billions from amazons stock price going up. if they cant tax revenue then tax the capital gains from soaring stock prices
It’s not hiding profit, it’s reinvesting in growth… Amazon is saying to investors that they think they can give investors a better return on cash by reinvesting it into Amazon than distributing it to investors to put to work elsewhere.
Reinvesting profit doesn't make you not profitable, it just means you've decided to grow with your profit rather than extract it. Amazon doesn't have small profits, they've just plowed their money into growth.
amazon is very profitable but they plow back all profits into new business ventures so they pay 0 taxes because they can report no profit. If you make a billion dollars profit and then immediately spend that building a new datacenter or warehouse whether you need it or not that still counts as a business expenses that is subtracted from profits. Amazon will never stop trying to enter new businesses because they have no plans to ever pay out dividends or hold on to cash profits
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