5 ms·

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 expe

by alehul 9y ago

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.

deleted 9y ago
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jgalt212 9y ago
perhaps, but AWS is so profitable even AMZN cannot reinvest all its proceeds.
kgwgk 9y ago
> prefers to expense everything off What does that mean?
- alexbeloi 9y ago
  There are different accounting strategies for when you recognize income/expenses. Say you land a long term contract to provide a service for 5 years and you need to buy extra hardware to fulfill this service, you can choose to expense the hardware immediately in the first year while you let the earnings come in over the next 5 years. In the first year you would be taking a huge loss (on paper), and in the following four years you would see larger than average profits (on paper). Alternatively, you could acknowledge the full value of the contract immediately. Or another alternative is to expense the hardware over time. I'm not an accountant, but this analogy is my basic understanding of the flexibility that companies have.
  - URSpider94 9y ago
    Companies don’t actually have flexibility on this. There are Generally Acceptable Accounting Principles (GAAP) that govern how you must handle various kind of expense or profit. In the case you provided, the revenue must be booked when it is payable under the contract - if it’s invoices in yearly installments, then it comes onto the books at that point. The capital expense for the equipment must be depreciated over its useful life, not when it is purchased.
- adventured 9y ago
  I think the parent means, they prefer to aggressively spend their cash flow on growth rather than produce a nice taxable income figure. It's an odd way to phrase it, one wouldn't use "expense everything off" in that way normally.
- alehul 9y ago
  The sibling comment regarding avoiding a taxable income is correct. When a company makes a profit, it pays taxes on that income. The dividends are then either 1. distributed proportionally to the shareholders, or 2. reinvested into the company. The general idea is that reinvestment will generate more profit in the long term. In this case, the company reinvests the income into operations and growth during the next fiscal period and onwards. This method of reinvestment, however, still requires some taxes to be paid on the income. As an alternative, a company can fill their income statement each quarter with expenses that will ~match their income. This way, they're essentially reinvesting in their operations and growth just the same, however they don't have to pay the taxes if the expenses are generated in the same quarter. This method makes the company look unprofitable, but in reality is merely an accounting choice (and arguably, a good one). A random article I found that explains some of the strategy: http://www.businessinsider.com/analysts-wrong-about-amazon-profit-2015-1 http://www.businessinsider.com/analysts-wrong-about-amazon-p...
  - kgwgk 9y ago
    Good luck getting the IRS to accept that "good" accounting choice. In fact the reported statements can be different from those used to calculate the actual taxes paid. But even if the SEC is more flexible, there are still limits on what can be done. They are still reporting capex much higher than net income, if they expensed everything off they would be reporting billions in losses every quarter.
    - alehul 9y ago
      You're right that Amazon has higher capex than income, however this has been intentional; I haven't been in finance for a while, and apparently this is how they're doing it now, but the main point holds true of purposely avoiding income. From an a16z partner: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. Source: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
samfisher83 9y ago
You can't just expense stuff like that. For example you buy a warehouse you can't depreciate it all in one year. Retail is a competitive low margin business. Amazon has always had crazy P/E ratio. I could never really understand it. Maybe I could understand aws, but I can't understand the valuation of the core amazon business. Suppose amazon grows to the size of walmart. Walmart is only worth 260B, and they generate a ton more cash than amazon.
- alehul 9y ago
  You're right that it's a more complicated process than it sounds, but it's been a common trick for ages. Apparently, however, in recent years, it has been focused on capex while still retaining the same fundamental idea. In the words of an a16z partner[1]: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. [1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
- alehul 9y ago
  Also, as a separate comment, I understand the crazy appearance of Amazon's valuation but I think it's one of the most justified giants in terms of market cap. They're positioning themselves as a monopsony for the modern world, even expanding into groceries and now, evidently, pharmacies. Imagine one company serving as an access point for so many of our goods, while wielding dubious control behind the scenes to extract profit and move vertically through the supply chain. It's easy to imagine a future where we simply buy the cheapest, reliable goods whenever in need, and end up with Amazon lightbulbs that power our Amazon TV stick, etc, etc, etc. It's scary to just see how many cities are bending over backwards to try to be the location of Amazon's HQ2. Their move with the Echo has gained them another critical access point in the future: smart homes. In the same way we require mobile phones for our apps, we'll require a hub for our IoT devices, preferably voice-activated, and that will be the Echo. It's hard to even sum up all of their advantages, but as someone who has competed with them in one industry before: it's a damn nightmare.
deleted 9y ago
[deleted]

by alehul 9y ago

deleted 9y ago

[deleted]

jgalt212 9y ago

perhaps, but AWS is so profitable even AMZN cannot reinvest all its proceeds.

kgwgk 9y ago

> prefers to expense everything off What does that mean?

alexbeloi 9y ago
There are different accounting strategies for when you recognize income/expenses. Say you land a long term contract to provide a service for 5 years and you need to buy extra hardware to fulfill this service, you can choose to expense the hardware immediately in the first year while you let the earnings come in over the next 5 years. In the first year you would be taking a huge loss (on paper), and in the following four years you would see larger than average profits (on paper). Alternatively, you could acknowledge the full value of the contract immediately. Or another alternative is to expense the hardware over time. I'm not an accountant, but this analogy is my basic understanding of the flexibility that companies have.
- URSpider94 9y ago
  Companies don’t actually have flexibility on this. There are Generally Acceptable Accounting Principles (GAAP) that govern how you must handle various kind of expense or profit. In the case you provided, the revenue must be booked when it is payable under the contract - if it’s invoices in yearly installments, then it comes onto the books at that point. The capital expense for the equipment must be depreciated over its useful life, not when it is purchased.
adventured 9y ago
I think the parent means, they prefer to aggressively spend their cash flow on growth rather than produce a nice taxable income figure. It's an odd way to phrase it, one wouldn't use "expense everything off" in that way normally.
alehul 9y ago
The sibling comment regarding avoiding a taxable income is correct. When a company makes a profit, it pays taxes on that income. The dividends are then either 1. distributed proportionally to the shareholders, or 2. reinvested into the company. The general idea is that reinvestment will generate more profit in the long term. In this case, the company reinvests the income into operations and growth during the next fiscal period and onwards. This method of reinvestment, however, still requires some taxes to be paid on the income. As an alternative, a company can fill their income statement each quarter with expenses that will ~match their income. This way, they're essentially reinvesting in their operations and growth just the same, however they don't have to pay the taxes if the expenses are generated in the same quarter. This method makes the company look unprofitable, but in reality is merely an accounting choice (and arguably, a good one). A random article I found that explains some of the strategy: http://www.businessinsider.com/analysts-wrong-about-amazon-profit-2015-1 http://www.businessinsider.com/analysts-wrong-about-amazon-p...
- kgwgk 9y ago
  Good luck getting the IRS to accept that "good" accounting choice. In fact the reported statements can be different from those used to calculate the actual taxes paid. But even if the SEC is more flexible, there are still limits on what can be done. They are still reporting capex much higher than net income, if they expensed everything off they would be reporting billions in losses every quarter.
  - alehul 9y ago
    You're right that Amazon has higher capex than income, however this has been intentional; I haven't been in finance for a while, and apparently this is how they're doing it now, but the main point holds true of purposely avoiding income. From an a16z partner: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. Source: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

samfisher83 9y ago

You can't just expense stuff like that. For example you buy a warehouse you can't depreciate it all in one year. Retail is a competitive low margin business. Amazon has always had crazy P/E ratio. I could never really understand it. Maybe I could understand aws, but I can't understand the valuation of the core amazon business. Suppose amazon grows to the size of walmart. Walmart is only worth 260B, and they generate a ton more cash than amazon.

alehul 9y ago
You're right that it's a more complicated process than it sounds, but it's been a common trick for ages. Apparently, however, in recent years, it has been focused on capex while still retaining the same fundamental idea. In the words of an a16z partner[1]: > So, though we can’t be sure, it looks like the capex is not going up because Amazon’s existing business has become more expensive to run, but because Amazon is investing the growing pool of operation cash flow into the future. All of this brings us back to the beginning - Amazon’s business is delivering very rapid revenue growth but not accumulating any surplus cash or profits, because every penny of cash is being ploughed back into expanding the business further. But, this is not because any given business runs permanently at a loss - it is because the profits from what is already there are spent on making new businesses. In the past, that was mostly in operations, but in recent years the investment firehose has again been pointed at capex. [1] http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...
alehul 9y ago
Also, as a separate comment, I understand the crazy appearance of Amazon's valuation but I think it's one of the most justified giants in terms of market cap. They're positioning themselves as a monopsony for the modern world, even expanding into groceries and now, evidently, pharmacies. Imagine one company serving as an access point for so many of our goods, while wielding dubious control behind the scenes to extract profit and move vertically through the supply chain. It's easy to imagine a future where we simply buy the cheapest, reliable goods whenever in need, and end up with Amazon lightbulbs that power our Amazon TV stick, etc, etc, etc. It's scary to just see how many cities are bending over backwards to try to be the location of Amazon's HQ2. Their move with the Echo has gained them another critical access point in the future: smart homes. In the same way we require mobile phones for our apps, we'll require a hub for our IoT devices, preferably voice-activated, and that will be the Echo. It's hard to even sum up all of their advantages, but as someone who has competed with them in one industry before: it's a damn nightmare.

deleted 9y ago

[deleted]