4 ms·

It's a bit of a simplification to call Amazon a low profit margin business -- Amazon is a lot of different businesses each with their own margin considerations.

by xkjkls 9y ago

It's a bit of a simplification to call Amazon a low profit margin business -- Amazon is a lot of different businesses each with their own margin considerations. And most of Amazon's businesses we won't know the real margins they'll deliver until maturity a number of years out. There's only a few categories on Amazon (books, digital media, etc) that have already reached maturity and won't see any margin expansion over the next ten years.

nabla9 9y ago
Most of Amazons business is retail oriented. Retail is very low margin business. Another main area for Amazon is Amazon Web Services. It will be extremely low margin business as the dust settles. Just like phone and telecom services or personal computers turned into low margin business, large scale Web services will be very low margin bulk and extremely competitive.
- lsc 9y ago
  Maybe? I can tell you that Amazon has huge pricing power on bandwidth. You need to have serious sales chops to change anything like what Amazon does, and then you probably are left with a high touch customer. I do think that this might change next downturn, but this is yet to be seen.
- xkjkls 9y ago
  Depends on how you define "most", "retail", and "business". Sure, Retail is generally a low margin business, but there are many caveats to that. Selling toilet paper isn't exactly going to give you double digit margins, but selling fashion might, or digital media. Amazon's retail business is also structured differently than almost all of their comparables. With 90 million Prime members each paying $100 a year, that's $9 billion in free cash flow. And I think it's probably foolish to think that AWS is going to end up being a low margin business. It definitely currently isn't, and it has a lot of the standard makings of a software business that can sustain high margins like Oracle or Microsoft. The Amazon offerings aren't just a set of simple web services, it's a extremely complicated suite of offerings that can be used as parts to write software tools in alot of different businesses. And given the amount of capital required to write a suite similar to that and the costs of a company would have to actually switch business applications off of something like AWS, I don't see why this wouldn't be a highly lucrative business.
  - nabla9 9y ago
    >Prime members each paying $100 a year, that's $9 billion in free cash flow. Massive cash flow and very low margin is the name of the business in retail and logistics. Amazon will not be the one reaping profits from selling fashion.
    - xkjkls 9y ago
      There's a lot of reasons one could expect Amazon bucks many of these trends. Prime subscriptions, Amazon Marketplace, and Fulfillment by Amazon are all them leveraging their infrastructure for selling additional bottom-line contributions. Amazon also participates in a huge number of specialty retail businesses that have higher margins as well, like automotive products, beauty products, digital music, games, and video. I don't think there's any wall street Analyst who would predict Amazon's businesses in maturity wouldn't beat the 3-4% margins you might see at Walmart or Target.
      - nabla9 9y ago
        Amazon can only grow if it encompasses almost all market segments. Picking retail margins by sub-sector is not helping there will be reversion to mean. Overall retail margins are very low. 0.5 to 3.5 percent for web-only depending on the sector.
    - civilitty 9y ago
      I thought retail, where businesses have to expend tons of capital on inventory (or get large lines of credit), is the definition of a low cash flow business. If the majority of your cash flow is entirely spoken for by debt servicing costs (aka, avoiding certain death by default), then it's not really a large free cash flow.
  - innagadadavida 9y ago
    Amazons fakes problem - Fashion brands distrust Amazon a lot as they’ve been burnt badly by amazon selling fakes. Amazon excels at selling cheap stuff that need to be ordered repeatedly or hard to find parts and knickknacks.
- petra 9y ago
  >> Retail is very low margin business. Retail is a complicated beast. Walmart has a operating margin of 2% but return-on-invested-capital of 11.5% , reasonable. Which is more meaningful ? And Amazon has similar math on it's side. Or let's consider Amazon's 3rd party retail business: the marketplace which probably has healthy margins, combined with fullfilment which is pretty differentiated: 1-day shipping, prime eligibility, largest warehouse network, etc. So maybe decent margins.
  - nabla9 9y ago
    Do the math. 1. How much Amazon must make profit per year to justify current market cap If you want 10% ROI? 2. If Amazon has 4% profit margin(2X Walmart), how much it hast to make revenue to get the profits you calculated in phase #1. 3. Consider that world global GDP is around $100 trillion and US GDP is $19 trillion. Do you think that any one company is allowed to grow until it makes 10 percent of US GDP or 1-2 percent of the world GDP? Do you think any company can grow that much?
    - petra 9y ago
      Let's see: the reason Walmart gets such high returns on low-margims, is because it knows how to rapidly sell hoods and thus reuse cash. And that is half of current retail sales. But when Amazon let's someone else sell on it's platform, it gets a nice margin(today it's maybe 15%!) on money that it didn't even spent! And sure building warehouses is expensive. But those are fixed costs. Or that Amazon may kill brands and than own brands at scale, i.e private labels - which some think may be the next AWS. There are maybe some other types of that stuff going around, so idk if you can judge Amazon as regular retail.
      - nabla9 9y ago
        My original argument was: >The stock price of __good__ tech companies will not collapse because they stop making profits, gaining market share or growing. It collapses because they are overvalued. >People simply refuse to understand that great companies can't escape massive over-valuation just because they are great companies. You are arguing that Amazon is a good company with good business model, just like I predicted people will do. What you must do is to take the current market cap of Amazon and then calculate how big it's market share must be to justify it's current valuation. Then you must make a sanity check and compare it to total markets in US and OECD and think if that king of growth is possible.

by xkjkls 9y ago

nabla9 9y ago

Most of Amazons business is retail oriented. Retail is very low margin business. Another main area for Amazon is Amazon Web Services. It will be extremely low margin business as the dust settles. Just like phone and telecom services or personal computers turned into low margin business, large scale Web services will be very low margin bulk and extremely competitive.

lsc 9y ago
Maybe? I can tell you that Amazon has huge pricing power on bandwidth. You need to have serious sales chops to change anything like what Amazon does, and then you probably are left with a high touch customer. I do think that this might change next downturn, but this is yet to be seen.
xkjkls 9y ago
Depends on how you define "most", "retail", and "business". Sure, Retail is generally a low margin business, but there are many caveats to that. Selling toilet paper isn't exactly going to give you double digit margins, but selling fashion might, or digital media. Amazon's retail business is also structured differently than almost all of their comparables. With 90 million Prime members each paying $100 a year, that's $9 billion in free cash flow. And I think it's probably foolish to think that AWS is going to end up being a low margin business. It definitely currently isn't, and it has a lot of the standard makings of a software business that can sustain high margins like Oracle or Microsoft. The Amazon offerings aren't just a set of simple web services, it's a extremely complicated suite of offerings that can be used as parts to write software tools in alot of different businesses. And given the amount of capital required to write a suite similar to that and the costs of a company would have to actually switch business applications off of something like AWS, I don't see why this wouldn't be a highly lucrative business.
- nabla9 9y ago
  >Prime members each paying $100 a year, that's $9 billion in free cash flow. Massive cash flow and very low margin is the name of the business in retail and logistics. Amazon will not be the one reaping profits from selling fashion.
  - xkjkls 9y ago
    There's a lot of reasons one could expect Amazon bucks many of these trends. Prime subscriptions, Amazon Marketplace, and Fulfillment by Amazon are all them leveraging their infrastructure for selling additional bottom-line contributions. Amazon also participates in a huge number of specialty retail businesses that have higher margins as well, like automotive products, beauty products, digital music, games, and video. I don't think there's any wall street Analyst who would predict Amazon's businesses in maturity wouldn't beat the 3-4% margins you might see at Walmart or Target.
    - nabla9 9y ago
      Amazon can only grow if it encompasses almost all market segments. Picking retail margins by sub-sector is not helping there will be reversion to mean. Overall retail margins are very low. 0.5 to 3.5 percent for web-only depending on the sector.
  - civilitty 9y ago
    I thought retail, where businesses have to expend tons of capital on inventory (or get large lines of credit), is the definition of a low cash flow business. If the majority of your cash flow is entirely spoken for by debt servicing costs (aka, avoiding certain death by default), then it's not really a large free cash flow.
- innagadadavida 9y ago
  Amazons fakes problem - Fashion brands distrust Amazon a lot as they’ve been burnt badly by amazon selling fakes. Amazon excels at selling cheap stuff that need to be ordered repeatedly or hard to find parts and knickknacks.
petra 9y ago
>> Retail is very low margin business. Retail is a complicated beast. Walmart has a operating margin of 2% but return-on-invested-capital of 11.5% , reasonable. Which is more meaningful ? And Amazon has similar math on it's side. Or let's consider Amazon's 3rd party retail business: the marketplace which probably has healthy margins, combined with fullfilment which is pretty differentiated: 1-day shipping, prime eligibility, largest warehouse network, etc. So maybe decent margins.
- nabla9 9y ago
  Do the math. 1. How much Amazon must make profit per year to justify current market cap If you want 10% ROI? 2. If Amazon has 4% profit margin(2X Walmart), how much it hast to make revenue to get the profits you calculated in phase #1. 3. Consider that world global GDP is around $100 trillion and US GDP is $19 trillion. Do you think that any one company is allowed to grow until it makes 10 percent of US GDP or 1-2 percent of the world GDP? Do you think any company can grow that much?
  - petra 9y ago
    Let's see: the reason Walmart gets such high returns on low-margims, is because it knows how to rapidly sell hoods and thus reuse cash. And that is half of current retail sales. But when Amazon let's someone else sell on it's platform, it gets a nice margin(today it's maybe 15%!) on money that it didn't even spent! And sure building warehouses is expensive. But those are fixed costs. Or that Amazon may kill brands and than own brands at scale, i.e private labels - which some think may be the next AWS. There are maybe some other types of that stuff going around, so idk if you can judge Amazon as regular retail.
    - nabla9 9y ago
      My original argument was: >The stock price of __good__ tech companies will not collapse because they stop making profits, gaining market share or growing. It collapses because they are overvalued. >People simply refuse to understand that great companies can't escape massive over-valuation just because they are great companies. You are arguing that Amazon is a good company with good business model, just like I predicted people will do. What you must do is to take the current market cap of Amazon and then calculate how big it's market share must be to justify it's current valuation. Then you must make a sanity check and compare it to total markets in US and OECD and think if that king of growth is possible.