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Amazon is also the apotheosis of the growth model tech companies build on. I was working in finance in the early 2010s, and it was then fashionable for analysts

Amazon is also the apotheosis of the growth model tech companies build on. I was working in finance in the early 2010s, and it was then fashionable for analysts to point out that Amazon's classic profitability metrics were flashing red. However, the Amazon model (and to a lesser extent the Uber model, etc.) was to continue penetration pricing as well as plowing every dime made over costs into growth. It made the company look overvalued but the share price was in retrospect justified.

Swizec 6y ago
> plowing every dime made over costs into growth Key difference! A lot of these grow fast companies don’t even cover costs.
- N1H1L 6y ago
  Exactly. The difference between Amazon and Uber is immense. Amazon's core business has been comfortably profitable for over a decade now. They invest those profits to diversify their business. However, Uber's core business has never been profitable.
- acheron9383 6y ago
  Yeah, the key is the Amazon still _makes money_ on the services it provides, it just spends it all on some project. Contrast that with even Uber which has some very unhealthy indicators even in mature offerings. It is actually kind of amazing that Uber can't or doesn't make money even while taking a 20% cut of every ride sold. (I assume they must make money in some cities and not in others) That is a substantial margin for a middleman, especially one in a market with only one other real player.
- gbasin 6y ago
  Unit Economics.
vishnugupta 6y ago
> plowing every dime made over costs into growth I've been trying to build a mental model around this i.e., what options do companies have to utilize profit? 1. Distribute to shareholders -- dividends. 2. Distribute amongst employees -- salary increase, bonuses. 3. Add it to their pile of cash. 4. Invest in growing the business. 5. Something else!? Perhaps a combination of all four? I guess Apple does mostly #3 which is how they are now sitting on a huge pile of cash. Perhaps it's a signal that they don't need cash to grow their business or maybe they don't see how to grow either. Whereas Amazon genuinely believe that investing in growth is the best return the cash from profit can earn. I guess it makes sense, e-commerce is still about 10% of retail in US alone. So there's a big room for growth.
- Apocryphon 6y ago
  Some companies also invest in growing other businesses. https://www.cbinsights.com/research/startups-investing-in-startups/ https://www.cbinsights.com/research/startups-investing-in-st... https://www.businessinsider.com/to-4-corporate-venture-capitalist-funds-slack-airbnb-coinbase-stripe-2019-6 https://www.businessinsider.com/to-4-corporate-venture-capit...
  - vishnugupta 6y ago
    Indeed! I think another option is financialization through investment banks wherein the money is used in all sorts of investment vehicles such as forex trading, futures/options, bonds, hedge funds and whatnot. There's been a steady increase of such companies it seems. https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/ https://knowledge.wharton.upenn.edu/article/pitfalls-financi... https://www.scielo.br/scielo.php?pid=S0103-63512018000200549&script=sci_abstract&tlng=en https://www.scielo.br/scielo.php?pid=S0103-63512018000200549... https://www.researchgate.net/publication/308901243_Financialization_of_non-financial_companies_an_insight_in_the_automotive_sector https://www.researchgate.net/publication/308901243_Financial...
- snowwrestler 6y ago
  There's really two options under the first item: 1a. dividends, 1b. stock buybacks. Apple does all of these things. Recently their cash hoard has declined, while they continue to buy back stock, and increased their dividend. They also do acquisitions all the time, but since they usually buy technology and talent, most of those have a small price tag. The biggest exception since NeXT is probably Beats, which was $3 billion. Apple has occasionally used their cash reserves to spur growth by cornering the market on new technologies. The two I can recall are the time they prepurchased almost the entire global supply NAND flash memory while launching the iPod Nano, and buying up almost every new copy of a certain CNC machine when they launched the "unibody" Macbooks.
- nine_k 6y ago
  Imagine you own the company, and the company has an ability to grow. (1) Show profit: distribute it, put it into a bank, etc. You pay the tax on the profit; if you pay yourself a few million, this is taxed at 40-50%. Assume that your shares grow, too. (2) Do not show profit: invest everything! Always be a wee bit in the red. Assuming your company actually grows from the investment, Your market share increases, your cash flow grows. Most likely your shares grow comfortably with that, too, at least in the long term. But you don't pay the tax on the profit. You pay the tax on the capital gains, but it's much lower. You don't pay yourself anything, because you can sell a small bit of shares to get these few millions you need. Now, who in their right mind would show profit if they can show more growth instead? Apple would be happy to do that, too, but they have no room to grow, it seems. Same with Google; though they invest a lot, they don't seem to find another seriously growing niche. Amazon can pull that off, though, and they gladly do. When Amazon becomes predictably profitable, it would mean they ran out of fruitful growth / investment ideas.
Animats 6y ago
Amazon was plowing money into physical assets like huge fulfillment centers (132 of them) and automated systems for them. Uber barely owns anything; they were just buying market share.
addicted 6y ago
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.
- tarsinge 6y ago
  I don't really see how cash flow can stay positive without profits, that's akin to raking up debt no?
  - deleted 6y ago
    [deleted]
theptip 6y ago
> It made the company look overvalued I think this was and still is a common misconception, and the interesting thing is that Bezos has talked for a long time about how they are not (and should not) be optimizing for profit, and that they are looking at free cash flow as their One Metric That Matters. Here's an old shareholder letter from 2004 where Bezos explains his reasoning: https://www.sec.gov/Archives/edgar/data/1018724/000119312505070440/dex991.htm https://www.sec.gov/Archives/edgar/data/1018724/000119312505... A summary on this misconception from Vox: https://www.vox.com/recode/2019/8/21/20826405/amazons-profits-revenue-free-cash-flow-explained-charts https://www.vox.com/recode/2019/8/21/20826405/amazons-profit...

Swizec 6y ago

> plowing every dime made over costs into growth Key difference! A lot of these grow fast companies don’t even cover costs.

N1H1L 6y ago
Exactly. The difference between Amazon and Uber is immense. Amazon's core business has been comfortably profitable for over a decade now. They invest those profits to diversify their business. However, Uber's core business has never been profitable.
acheron9383 6y ago
Yeah, the key is the Amazon still _makes money_ on the services it provides, it just spends it all on some project. Contrast that with even Uber which has some very unhealthy indicators even in mature offerings. It is actually kind of amazing that Uber can't or doesn't make money even while taking a 20% cut of every ride sold. (I assume they must make money in some cities and not in others) That is a substantial margin for a middleman, especially one in a market with only one other real player.
gbasin 6y ago
Unit Economics.

vishnugupta 6y ago

> plowing every dime made over costs into growth I've been trying to build a mental model around this i.e., what options do companies have to utilize profit? 1. Distribute to shareholders -- dividends. 2. Distribute amongst employees -- salary increase, bonuses. 3. Add it to their pile of cash. 4. Invest in growing the business. 5. Something else!? Perhaps a combination of all four? I guess Apple does mostly #3 which is how they are now sitting on a huge pile of cash. Perhaps it's a signal that they don't need cash to grow their business or maybe they don't see how to grow either. Whereas Amazon genuinely believe that investing in growth is the best return the cash from profit can earn. I guess it makes sense, e-commerce is still about 10% of retail in US alone. So there's a big room for growth.

Apocryphon 6y ago
Some companies also invest in growing other businesses. https://www.cbinsights.com/research/startups-investing-in-startups/ https://www.cbinsights.com/research/startups-investing-in-st... https://www.businessinsider.com/to-4-corporate-venture-capitalist-funds-slack-airbnb-coinbase-stripe-2019-6 https://www.businessinsider.com/to-4-corporate-venture-capit...
- vishnugupta 6y ago
  Indeed! I think another option is financialization through investment banks wherein the money is used in all sorts of investment vehicles such as forex trading, futures/options, bonds, hedge funds and whatnot. There's been a steady increase of such companies it seems. https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/ https://knowledge.wharton.upenn.edu/article/pitfalls-financi... https://www.scielo.br/scielo.php?pid=S0103-63512018000200549&script=sci_abstract&tlng=en https://www.scielo.br/scielo.php?pid=S0103-63512018000200549... https://www.researchgate.net/publication/308901243_Financialization_of_non-financial_companies_an_insight_in_the_automotive_sector https://www.researchgate.net/publication/308901243_Financial...
snowwrestler 6y ago
There's really two options under the first item: 1a. dividends, 1b. stock buybacks. Apple does all of these things. Recently their cash hoard has declined, while they continue to buy back stock, and increased their dividend. They also do acquisitions all the time, but since they usually buy technology and talent, most of those have a small price tag. The biggest exception since NeXT is probably Beats, which was $3 billion. Apple has occasionally used their cash reserves to spur growth by cornering the market on new technologies. The two I can recall are the time they prepurchased almost the entire global supply NAND flash memory while launching the iPod Nano, and buying up almost every new copy of a certain CNC machine when they launched the "unibody" Macbooks.
nine_k 6y ago
Imagine you own the company, and the company has an ability to grow. (1) Show profit: distribute it, put it into a bank, etc. You pay the tax on the profit; if you pay yourself a few million, this is taxed at 40-50%. Assume that your shares grow, too. (2) Do not show profit: invest everything! Always be a wee bit in the red. Assuming your company actually grows from the investment, Your market share increases, your cash flow grows. Most likely your shares grow comfortably with that, too, at least in the long term. But you don't pay the tax on the profit. You pay the tax on the capital gains, but it's much lower. You don't pay yourself anything, because you can sell a small bit of shares to get these few millions you need. Now, who in their right mind would show profit if they can show more growth instead? Apple would be happy to do that, too, but they have no room to grow, it seems. Same with Google; though they invest a lot, they don't seem to find another seriously growing niche. Amazon can pull that off, though, and they gladly do. When Amazon becomes predictably profitable, it would mean they ran out of fruitful growth / investment ideas.

Animats 6y ago

Amazon was plowing money into physical assets like huge fulfillment centers (132 of them) and automated systems for them. Uber barely owns anything; they were just buying market share.

addicted 6y ago

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.

tarsinge 6y ago
I don't really see how cash flow can stay positive without profits, that's akin to raking up debt no?
- deleted 6y ago
  [deleted]

theptip 6y ago

> It made the company look overvalued I think this was and still is a common misconception, and the interesting thing is that Bezos has talked for a long time about how they are not (and should not) be optimizing for profit, and that they are looking at free cash flow as their One Metric That Matters. Here's an old shareholder letter from 2004 where Bezos explains his reasoning: https://www.sec.gov/Archives/edgar/data/1018724/000119312505070440/dex991.htm https://www.sec.gov/Archives/edgar/data/1018724/000119312505... A summary on this misconception from Vox: https://www.vox.com/recode/2019/8/21/20826405/amazons-profits-revenue-free-cash-flow-explained-charts https://www.vox.com/recode/2019/8/21/20826405/amazons-profit...