"It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception."
Only if you sold the stock at that price.
OK, Amazon is clearly not Pets.com. It has growing revenues and some profits.
But Amazon famously has a higher P/E than many other technology and Internet companies. This is only justified if Amazon has a clear path to greater profits and dividends than those other companies in its future. The article points out its not clear what this path for Amazon might look like.
This also makes me think of Facebook. As we waited for Facebook to go public, many speculated that Facebook was still in the stage of rapid growth, and it didn't matter that revenue and profits were low because eventually huge profits were guaranteed with so many users. Facebook is a profitable company, but since it's gone public, revenue and profits haven't grown the way people thought, and the stock is still below its IPO price.
My point is lots of users, lots of customers, and lots of revenue are necessary preconditions for a company to be worth investing in. But at some point, growing profits has to be a concern, too.
Maybe the best way I can phrase it: Do you want to be Apple or Amazon? Apple found a path to high profit margins, high growth, and a business generating lots of cash, and now they are both buying back stock and paying dividends to share holders. With Amazon, the profits, cash, and dividends seem always in the future, yet Amazon has usually had a higher P/E than Apple. Which do you think is the better model?
"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.
> Keep in mind that Amazon consistently lost money for its first several years as a public company. It first reported a quarterly profit in the fourth quarter of 2001 [...]
"> Amazon, has returned less in profits in its 17-year life as a public company than cloud competitors ... earn in a single quarter."
Another way of writing this is, "Amazon has focussed on continual growth over the last 17 years, and had demonstrated that is willing to put all of it's assets, revenue, and cash to chasing that growth. It's public cloud competitors, hamstrung by the expectations of wall-street, are unable to provide that same level of focus, and must instead return profits to shareholders in the form of share buybacks, and dividends - restrictions that Amazon has so far been able to avoid."
Amazon is a ruthless, relentless company. They certainly aren't taking those profits and sending them to their employees/executives in the form of perks and boondoggles. Everything they do is to pursue growth, at any costs.
Amazon has been profitable for many years now. YCharts showing profitability by quarter: http://j.mp/13zx97Z for the last 5 years.
Also, note that Amazon's initial business plan was such that it would not turn profitable for quite a few years, instead focusing on sales-growth. IIRC, they turned profitable around 2002.
> 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.
Summary: This is an opinion piece, not an objective article. The authors seem to think that Amazon investors are morons who don’t understand that the success of Amazon Web Services is “puffing up” Amazon’s overall financial picture.
"Any company can theoretically choose to not be profitable, by reinvesting all of its profits, and investors typically don’t care if their value is returned via growth or dividends. " - the Amazon model for its first 20 years :).
The track record shows that Amazon has been good at investing in their business. That's something that doesn't show up in accounting profits or cash flows, but over time in the growth of the business.
As for all these comments, sure there are companies that squandered vast sums in misguided attempts to invest in their business. And there are companies that admitted they had no idea how to invest in their business and sat on the cash. Neither of those examples are of any use in determining whether Amazon is investing wisely or foolishly.
Some analysts think that Amazon doesn't actually make money, others think they invest but invest poorly, others think they are brilliant geniuses who invest perfectly. Most of whom are at least a little bit wrong. Which goes to show that even the "experts" don't really know.
> Amazon famously operated (may still, couldn't care less) at a loss.
What's wrong with that? Companies trying to get started and establish themselves operate at a loss, burning their investors' capital. Most companies take many years before eking out a profit.
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 makes TONS of money. They aren't currently returning any of it to shareholders as profits, they're continuously reinvesting it in the company.
The difference between gross profit and net profit is how much Amazon is spending on building new businesses that after a few years start grossing $10b a year in sales like AWS. That got funded out of the gross profits from regular Amazon retail operations.
I'm not sure that Amazon is an outlier, but rather that as you say, other companies fear they would get raided if they tried to reinvest all their profits (what most companies probably ought to do a lot more of IMO) instead of issuing them as dividends and/or taking the money off-shore.
Given that Jeff Bezos cut his teeth at D.E. Shaw, I'll bet he went into this with his eyes wide open as opposed to the usual lucky and wet behind the ears ivy-league hipster willing to sign away 90+% of his/her idea's net worth from the get-go just to get a shot to pursue it.
Jeff Bezos was the right guy in the right place at the right time. That doesn't mean Amazon can't be taken out, it just means that someone needs to enter the space with a background capable of competing with him rather than creating another pets.com.
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.
This is an unconvincing statement. Amazon is known for reinvesting all their revenue back into the company. That’s why their stock price was low for so long.
There's significantly more information in 2018 or even 2008 to indicate Amazon was worth that valuation. A companies potential has to be adjusted by risk if you want a good valuation, and in 1999 there just wan't enough evidence. This is validated by it dropping dramatically after the bubble popping.
In fact they were only saved because he had secured financing mere months before the collapse, had that not happened Amazon would be listed among the likes of Pets.com.
If you have positive return on cash invested people will be happy to keep giving you more money for decades even if you plough all your profits back into expansion. Amazon has had the option of returning profits for decades and has always aimed to just barely make a profit.
> Amazon was founded in 1994, first traded publicly in 1997, and didn’t turn a profit until 2001.
This is silly. Amazon has real revenue that is growing at a fantastic rate. Pets.com and it's ilk did not.
"when Amazon might finally give a return to its investors."
It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception.
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