6 ms·

Profitless Prosperity

62 points by _pius 13y ago

curiouslurker 13y ago
How about Twitter, which Fred is an investor in? How sure are the future profits?
7Figures2Commas 13y ago
> Amazon is not the only company that is plowing back all of its incremental profits into growing its business. This is very common for enterprise software companies as well. Salesforce has made or lost a small amount of money every year for the past four years but it has grown its revenue from $1.3bn to over $3bn in those four years. And its market value has gone from $12bn to $32bn in the same time frame. Workday hasn't made any profits in the last four years, in fact the net losses have been increasing. But the stock has doubled in the past year and the Company is now worth almost $14bn. It's amazing to me that folks in the Silicon Valley/VC world continue to look at the performance of publicly-traded tech companies and for some reason never seem to consider that, as deserving of premium valuations as some of these companies may be, much of the crazy price action of the past several years has been driven by the Fed. You can't seriously look at the charts of companies like Netflix and Tesla and believe that this is the result of DCF analysis. > If you believe, as Amazon management does, that the future growth is going to be there for Amazon, then you ignore the current P&L and think about what a future P&L might look like. > If you think that Salesforce and Workday can continue to grow their revenues at or near their current growth rates, then you ignore the current P&L and think about what a future P&L might look like. How about this: if the Fed balance sheet continues to go up and to the right, ignore fundamentals, pick momentum stocks and think about what their future charts might look like. It doesn't take a lot of imagination: up and to the right. Of course, when the fun ends, "profitless prosperity" will indeed be profitless for the folks who didn't cash out in time.
- oscargrouch 13y ago
  Is that sort of party where only the big sharks win, and all the others small fish lose? "Dont run small fishs, they dont know what they are saying, they are lunatics, stay with us and put your money here, we know better"
- tbarbugli 13y ago
  I am not sure I really get what you say (probably due to my ignorance in this matter), could you elaborate bit more the 'driven by the Fed' part ?
  - 001sky 13y ago
    The present value of future cash flows are driven by a maths formula. In essence, NPV= FCF/(1+R)^t. R is being driven to zero by the fed. As R->0, NPV goes up. This is true for all levels of FCF.
    - yetanotherphd 13y ago
      Are you really claiming that investors are implicitly assuming that the current interest rates will continue forever when they value companies which promise high future cash flows?
      - 001sky 13y ago
        Not relevant. http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf
        yetanotherphd 13y ago
        I should probably just ignore such a dismissive reply, but here goes: It is relevant because your claim is that investors are over-valuing the future cash flow of companies like Amazon, because they are using the current 0% interest rate to compute the NPV of these companies. However, a smart investor would, like you, predict that the current interest rates will not last forever, and so will not use a formula for NPV that implicitly assumes the current interest rate will last forever. You can't just point to the "standard" definition of NPV and somehow claim that this automatically leads to wrong valuations by investors. please give future comments as arguments, not links. While my PhD is in economics, not finance, I'm familiar with the mainstream literature. I'm not saying I'm 100% right all the time, but if there is disagreement between us, it isn't because I lack basic education in the field.
- nrao123 13y ago
  Are you suggesting that if Fed stopped QE1/2/3 , then discount rates would go up & therefore the DCF valuation will come down? But- if one did a sensitivity analysis for changing discount rates & valuation - it wouldn't be the key driver for high growth companies like Facebook & Tesla. Damodaran has done a somewhat detailed analysis on TSLA & FB & changing discount rates don't seem to be a big factor in valuation. http://aswathdamodaran.blogspot.com/2013/09/valuation-of-week-1-tesla-test.html?m=1 http://aswathdamodaran.blogspot.com/2013/09/valuation-of-wee...
  - adventured 13y ago
    The stock market would crash if the Fed stopped QE. Every time there has been even the mere talk of tapering or an end to QE coming - no actual tapering has ever occurred - the stock market tanks. Wall Street parties every time they get confirmation QE is going to continue. Every headline on CNBC et al. tends to track specifically what the Fed is going to do regarding their debt monetization and housing inflation programs. Immediately after it's confirmed the Fed will continue to devalue the dollar and inflate assets with low interest rates and QE, the stock market spikes higher. This has been the pattern for years now.
- yetanotherphd 13y ago
  There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to all stock prices, and in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying.
  - 7Figures2Commas 13y ago
    > There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.
    - yetanotherphd 13y ago
      If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.
- pbreit 13y ago
  I think you need to explain, or at least mention, how the Fed's behavior is significantly responsible for the charts of companies like Neflix and Tesla. I'm not sure I see why/how this is the case.
  - gbrindisi 13y ago
    Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
  - gbrindisi 13y ago
    Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
  - gbrindisi 13y ago
    Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
  - gbrindisi 13y ago
    Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
  - gbrindisi 13y ago
    Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
  - adventured 13y ago
    Tesla and Netflix, as two examples, are high risk, high valuation, low fundamental stocks, with a classic technology bent (tech companies often get the benefit of a high valuation because it's believed by investors that they produce very outsized profit results eventually). When money is cheap, it pursues high risk investments for outsized returns. Institutional investors in fact push for such, in a race to keep up with the returns their peers are seeing during periods of very large stock market gains. Investment funds pursue ever higher risk investments for higher returns, in a competition for capital. For the most part, all money and all investments compete in a global market place. Very few investors have the will power to sit on the sidelines while others are making fortunes riding bubbles (eg the late 1990s, 2004 > 2007). The Fed's policies are specifically aimed at making money cheap right now (and they've succeeded; see corporations issuing debt at almost zero cost, such as AAPL and MSFT). Whether we're talking the cost of a mortgage, or the POMO shots boosting the stock market, or the indirect asset bubble effect from money chasing risk to compensate for the lack of interest yielded from cash, and on and on it goes.
nonchalance 13y ago
This all makes sense under QE and other easy money programs (which have a general tendency of inflating P/E multiples) but what happens if/when the programs stop? If 1999-2000 is any indication, those companies could easily see a 90% haircut and still be overvalued under traditional analyses (AMZN P/E is currently 1286.56, for example)
- adventured 13y ago
  Well the stronger companies will survive and thrive, with their competitors destroyed. Amazon benefited from that survival effect coming out of the dotcom bubble and crash. These Fed driven asset bubble waves are a huge wealth give-away to the biggest companies. They tend to be able to ride out the ups and downs, while their smaller competitors who get caught up in it as well, do not tend to survive the extreme down-turn (take Sun Microsystems for example: they modified their business to ride the exaggerated dotcom boom, their stock was worth $200+ billion at the peak, and their sales grew massively, and then it all imploded and nearly destroy Sun on the way down, and some would argue it did in fact; meanwhile Microsoft rode it all out just fine). Lesson being, some companies get caught up in the exuberance, and they roughly speaking get destroyed, while their competitors thrive in the post-bubble period when the stock market & private markets aren't willing to fund competition any longer.
drinkzima 13y ago
I'd love to see an analysis of the risk embedded in the future profits that everyone talks about. What these analyses completely ignore is that Amazon's future cash flows are risky, while the current cashflows at the dying business are not. There are countless examples of giant companies that haven't realized the enormous future cashflows embedded in their stock prices. It is obvious that Amazon generates lots and lots of revenue, no one disagrees with that. What remains an open question is will they be able to ease off of massive infrastructure investment and actually harness the future profitability that everyone seems certain of at this point. These straw man arguments that profit-less companies have huge market caps so they will turn hugely profitable ignores the actual argument of whether they can actually achieve that. Can profit does not equal will profit.
- tbarbugli 13y ago
  amen
- gfodor 13y ago
  Yup. It really boils down to human nature. Which is sexier, a stock whose cash flows and business are well understood, or a stock like Amazon whose "potential" could possibly take over the world? It's hard to let your imagination run wild about the potential upside of an investment in a boring blue chip that is in the business of making regular profits, but whose margins, market, competition, and overall arc of the business are well established. But in an environment where the stock market is at an all time high, people are ready to believe that Amazon is just a few knobs being turned away from world domination.
cs702 13y ago
Bezos could turn Amazon into a money-making machine overnight. All it would take is raising prices across the board by just a little bit. Amazon has more than $70 billion in annual sales, so a 1% average increase in prices would bring in more than $700 million in annual pretax profits. A 10% average increase would bring in over $7 billion more a year. In fact, if Bezos were to ask his executives to go through Amazon's entire portfolio of products and services to figure out how, when, and where they could raise prices the most to maximize present profits, the company would quickly become one of the world's most profitable businesses. Customers -- particularly Amazon Prime members who've gotten used to clicking a button and ordering for free delivery almost everything they need -- will not suddenly change their buying habits if, say, the price of light bulbs on Amazon.com goes from $0.79 to $0.89 per unit. So I agree with Wilson: Amazon's lack of profits today could be a very good thing. It all depends on WHY Bezos is holding back from taking all those easy profits already available to the company.
- pbreit 13y ago
  It could even make a lot of profits without raising prices simply by dialing back investment.
- millstone 13y ago
  $7 billion in profit would be about $15 per share, yielding a P/E around 24. That's on the high end, but not absurd, so I think your analysis is a good justification for the valuation. A key question is whether that 10% price increase would be absorbed by customers with no change in sales. There's an argument it goes the other way: customers trade the immediacy of brick-and-mortar for Amazon's low prices. But if the online prices are no better, then Amazon provides no benefit, and a 10% price increase could result in a much larger drop in sales. This played out in my own household: we used to buy diapers exclusively through Amazon, but completely stopped following their diaper price increase.
  - csomar 13y ago
    Depends on how expensive your commute to the shop. I don't use Amazon because it's not available in my country. However, if it was, I'd probably use it even if it's expensive. You spend lots of time in shopping + gas + car. Delivery is a nice thing.
bobx11 13y ago
I'm in love with the idea of a profitless company for the reason that this company passes on all the value to employees and contractors providing the services instead of extracting that value their employees create for the benefit of shareholders.
- gfodor 13y ago
  What you say here doesn't make any sense. Shareholder value is increased by effective use of capital by the company. Plowing your margin back into your business if it can result in growth is good for shareholders, since the stock will rise, whereas plowing that profit into ill-advised acquisitions and executive bonuses is probably less so. At the same time, issuing a direct dividend to shareholders when there is little use for that capital for future growth is (obviously) good for shareholders, but issuing the same dividend when that money could have been used to increase the market cap of the business through growth is bad. In other words, the specific mechanism of how a company uses profit (or more specifically, free cash flow) does not have any inherent value to shareholders (dividends, buybacks, paying down debt, or re-investment.) It's only in the context of the opportunity cost of how that capital could have been used elsewhere that you can measure the value for shareholders.
- yetanotherphd 13y ago
  If only potential shareholders (at the time of the IPO) were equally in love with this idea.
- pjc50 13y ago
  Amazon primarily passes value to customers, and squeezes its lower employees and suppliers.
- PilateDeGuerre 13y ago
  >passes on all the value to employees and contractors...instead of extracting that value their employees create I was surprised to read your analysis of the situation. I must say that you're just flatly wrong. Amazon is not a good place to work if you value your life outside of its value for your employer. Everyone from warehouse employees to the knowledge workers are sweated for everything they are worth. Recall that Amazon runs their warehouses like prisons and they have the lawsuits to show for it[1]. [1] http://www.mcall.com/news/breaking/mc-amazon-integrity-wage-lawsuit-20131007,0,2581276.story http://www.mcall.com/news/breaking/mc-amazon-integrity-wage-...
001sky 13y ago
The lesson here is that you can't just value a company by taking its current performance into account. You really need to have a view towards its future performance. And you need to understand why the company is not currently profitable. Just co-incidently, TWTR is going through its IPO. This is just a little nudge to remeber that profits don't matter, and you should just go buy some stock. =D
postitnotecode 13y ago
While this analysis, and the many others moving their way up HNews make sense, I can't help but wonder if Amazon has started to back itself into a corner. If I as an investor find value because I think they'll keep plowing money back in future R&D, what should I think whenever they do start transitioning to booking profit? Wouldn't I then be worried that taking the profit is a sign that Amazon no longer has grandiose plans or visions for the future and instead is starting a (very) long coast towards decline?
avty 13y ago
It's a bubble.
adventured 13y ago
"Workday hasn't made any profits in the last four years, in fact the net losses have been increasing. But the stock has doubled in the past year and the Company is now worth almost $14bn." I can hardly believe how much this sounds like the same voodoo justifications I was reading in 1998. Saying it's deja vu wouldn't do it justice. Arguing for making long term investments, has nothing to do with whether $14 billion for a company that has never made money (has lost a ton of money) and only has $273m in sales - is a reasonable valuation. 51 times sales? Well what you don't do, is buy Amazon in 1999 for $85 / share, you wait for the inevitable crash and buy it for $6 or $8. And you don't buy Amazon for $363 after a parabolic run, you buy it for $40 or $50 after the 2008 crash. Workday and all the others will follow this pattern, some will live, some will die. If you think a company has long term value to offer, you buy it cheap when a lot less people want it; you don't buy it when everybody wants it during an epic stock market run; and you don't assume a bubble valuation has any correlation to its future prosperity (or lack thereof). The last two bubbles should have demonstrated that in spectacular fashion.

62 points by _pius 13y ago

How about Twitter, which Fred is an investor in? How sure are the future profits?

> Amazon is not the only company that is plowing back all of its incremental profits into growing its business. This is very common for enterprise software companies as well. Salesforce has made or lost a small amount of money every year for the past four years but it has grown its revenue from $1.3bn to over $3bn in those four years. And its market value has gone from $12bn to $32bn in the same time frame. Workday hasn't made any profits in the last four years, in fact the net losses have been increasing. But the stock has doubled in the past year and the Company is now worth almost $14bn. It's amazing to me that folks in the Silicon Valley/VC world continue to look at the performance of publicly-traded tech companies and for some reason never seem to consider that, as deserving of premium valuations as some of these companies may be, much of the crazy price action of the past several years has been driven by the Fed. You can't seriously look at the charts of companies like Netflix and Tesla and believe that this is the result of DCF analysis. > If you believe, as Amazon management does, that the future growth is going to be there for Amazon, then you ignore the current P&L and think about what a future P&L might look like. > If you think that Salesforce and Workday can continue to grow their revenues at or near their current growth rates, then you ignore the current P&L and think about what a future P&L might look like. How about this: if the Fed balance sheet continues to go up and to the right, ignore fundamentals, pick momentum stocks and think about what their future charts might look like. It doesn't take a lot of imagination: up and to the right. Of course, when the fun ends, "profitless prosperity" will indeed be profitless for the folks who didn't cash out in time.

oscargrouch 13y ago
Is that sort of party where only the big sharks win, and all the others small fish lose? "Dont run small fishs, they dont know what they are saying, they are lunatics, stay with us and put your money here, we know better"
tbarbugli 13y ago
I am not sure I really get what you say (probably due to my ignorance in this matter), could you elaborate bit more the 'driven by the Fed' part ?
- 001sky 13y ago
  The present value of future cash flows are driven by a maths formula. In essence, NPV= FCF/(1+R)^t. R is being driven to zero by the fed. As R->0, NPV goes up. This is true for all levels of FCF.
  - yetanotherphd 13y ago
    Are you really claiming that investors are implicitly assuming that the current interest rates will continue forever when they value companies which promise high future cash flows?
    - 001sky 13y ago
      Not relevant. http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf http://finance.wharton.upenn.edu/~acmack/Chapter_05_app.pdf
      - yetanotherphd 13y ago
        I should probably just ignore such a dismissive reply, but here goes: It is relevant because your claim is that investors are over-valuing the future cash flow of companies like Amazon, because they are using the current 0% interest rate to compute the NPV of these companies. However, a smart investor would, like you, predict that the current interest rates will not last forever, and so will not use a formula for NPV that implicitly assumes the current interest rate will last forever. You can't just point to the "standard" definition of NPV and somehow claim that this automatically leads to wrong valuations by investors. please give future comments as arguments, not links. While my PhD is in economics, not finance, I'm familiar with the mainstream literature. I'm not saying I'm 100% right all the time, but if there is disagreement between us, it isn't because I lack basic education in the field.
nrao123 13y ago
Are you suggesting that if Fed stopped QE1/2/3 , then discount rates would go up & therefore the DCF valuation will come down? But- if one did a sensitivity analysis for changing discount rates & valuation - it wouldn't be the key driver for high growth companies like Facebook & Tesla. Damodaran has done a somewhat detailed analysis on TSLA & FB & changing discount rates don't seem to be a big factor in valuation. http://aswathdamodaran.blogspot.com/2013/09/valuation-of-week-1-tesla-test.html?m=1 http://aswathdamodaran.blogspot.com/2013/09/valuation-of-wee...
- adventured 13y ago
  The stock market would crash if the Fed stopped QE. Every time there has been even the mere talk of tapering or an end to QE coming - no actual tapering has ever occurred - the stock market tanks. Wall Street parties every time they get confirmation QE is going to continue. Every headline on CNBC et al. tends to track specifically what the Fed is going to do regarding their debt monetization and housing inflation programs. Immediately after it's confirmed the Fed will continue to devalue the dollar and inflate assets with low interest rates and QE, the stock market spikes higher. This has been the pattern for years now.
yetanotherphd 13y ago
There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. Providing easy money should give a boost to all stock prices, and in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying.
- 7Figures2Commas 13y ago
  > There is no reason why the Fed's actions would particularly benefit the stock price of Amazon, Netflix and Tesla. These are not the only stocks benefiting, but they're great examples. > Providing easy money should give a boost to all stock prices... I don't know when you last checked, but the S&P just hit a new all-time high this past week, and the Dow achieved a new all-time high last month. The NASDAQ is within striking distance of 4,000, a level last seen in 2000. So yes, easy money has boosted all stock prices. > ...in fact the Feds actions should give the biggest boost to low risk investments since they are the closest substitutes for what the Fed is buying. No, that is not how this works. The Fed's actions encourage (if "force" is too strong a word for your liking) investors to bid up riskier assets because it's damn near impossible to find returns anywhere else.
  - yetanotherphd 13y ago
    If I'm right that all stocks benefit equally, then it makes no sense to pick certain companies as "examples". Certainly we wouldn't expect a large differential impact on share prices, and so only a small portion of Amazon's excessive wealth can be explained by the Fed's actions. Furthermore, it's very hard to separate the direct effect of low interest rates, from improvements in the economy in general. You cite the current price of stocks as an example, but the Fed has had low interest rates since the financial crisis, so you to explain why now in particular is a bubble caused by low interest rates. On the final point, I am correct about the mechanics of which stocks benefit the most. Suppose instead of high risk stocks, low risk stocks, and bonds, we had apples, oranges and mandarins. When the Fed buys lots of mandarins, it creates excessive demand for mandarins, and so the price increases. This causes people who were buying mandarins to buy oranges and apples, instead but the total demand for mandarins has still risen. We would expected the biggest price increases to be in mandarins, then oranges, and then apples. Similarly the biggest price change is in the bond market (which the Fed effectively has complete control over), and then in low risk stocks, and then high risk stocks. The effect you observe - people being driven from the low-risk to high risk markets by low interest rates - is ignoring the initial price increase that caused this shift.
pbreit 13y ago
I think you need to explain, or at least mention, how the Fed's behavior is significantly responsible for the charts of companies like Neflix and Tesla. I'm not sure I see why/how this is the case.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- gbrindisi 13y ago
  Looks like FED is funding companies in strategic sectors, like IT, to destroy worldwide competition.
- adventured 13y ago
  Tesla and Netflix, as two examples, are high risk, high valuation, low fundamental stocks, with a classic technology bent (tech companies often get the benefit of a high valuation because it's believed by investors that they produce very outsized profit results eventually). When money is cheap, it pursues high risk investments for outsized returns. Institutional investors in fact push for such, in a race to keep up with the returns their peers are seeing during periods of very large stock market gains. Investment funds pursue ever higher risk investments for higher returns, in a competition for capital. For the most part, all money and all investments compete in a global market place. Very few investors have the will power to sit on the sidelines while others are making fortunes riding bubbles (eg the late 1990s, 2004 > 2007). The Fed's policies are specifically aimed at making money cheap right now (and they've succeeded; see corporations issuing debt at almost zero cost, such as AAPL and MSFT). Whether we're talking the cost of a mortgage, or the POMO shots boosting the stock market, or the indirect asset bubble effect from money chasing risk to compensate for the lack of interest yielded from cash, and on and on it goes.

nonchalance 13y ago

This all makes sense under QE and other easy money programs (which have a general tendency of inflating P/E multiples) but what happens if/when the programs stop? If 1999-2000 is any indication, those companies could easily see a 90% haircut and still be overvalued under traditional analyses (AMZN P/E is currently 1286.56, for example)

adventured 13y ago
Well the stronger companies will survive and thrive, with their competitors destroyed. Amazon benefited from that survival effect coming out of the dotcom bubble and crash. These Fed driven asset bubble waves are a huge wealth give-away to the biggest companies. They tend to be able to ride out the ups and downs, while their smaller competitors who get caught up in it as well, do not tend to survive the extreme down-turn (take Sun Microsystems for example: they modified their business to ride the exaggerated dotcom boom, their stock was worth $200+ billion at the peak, and their sales grew massively, and then it all imploded and nearly destroy Sun on the way down, and some would argue it did in fact; meanwhile Microsoft rode it all out just fine). Lesson being, some companies get caught up in the exuberance, and they roughly speaking get destroyed, while their competitors thrive in the post-bubble period when the stock market & private markets aren't willing to fund competition any longer.

drinkzima 13y ago

I'd love to see an analysis of the risk embedded in the future profits that everyone talks about. What these analyses completely ignore is that Amazon's future cash flows are risky, while the current cashflows at the dying business are not. There are countless examples of giant companies that haven't realized the enormous future cashflows embedded in their stock prices. It is obvious that Amazon generates lots and lots of revenue, no one disagrees with that. What remains an open question is will they be able to ease off of massive infrastructure investment and actually harness the future profitability that everyone seems certain of at this point. These straw man arguments that profit-less companies have huge market caps so they will turn hugely profitable ignores the actual argument of whether they can actually achieve that. Can profit does not equal will profit.

tbarbugli 13y ago
amen
gfodor 13y ago
Yup. It really boils down to human nature. Which is sexier, a stock whose cash flows and business are well understood, or a stock like Amazon whose "potential" could possibly take over the world? It's hard to let your imagination run wild about the potential upside of an investment in a boring blue chip that is in the business of making regular profits, but whose margins, market, competition, and overall arc of the business are well established. But in an environment where the stock market is at an all time high, people are ready to believe that Amazon is just a few knobs being turned away from world domination.

cs702 13y ago

Bezos could turn Amazon into a money-making machine overnight. All it would take is raising prices across the board by just a little bit. Amazon has more than $70 billion in annual sales, so a 1% average increase in prices would bring in more than $700 million in annual pretax profits. A 10% average increase would bring in over $7 billion more a year. In fact, if Bezos were to ask his executives to go through Amazon's entire portfolio of products and services to figure out how, when, and where they could raise prices the most to maximize present profits, the company would quickly become one of the world's most profitable businesses. Customers -- particularly Amazon Prime members who've gotten used to clicking a button and ordering for free delivery almost everything they need -- will not suddenly change their buying habits if, say, the price of light bulbs on Amazon.com goes from $0.79 to $0.89 per unit. So I agree with Wilson: Amazon's lack of profits today could be a very good thing. It all depends on WHY Bezos is holding back from taking all those easy profits already available to the company.

pbreit 13y ago
It could even make a lot of profits without raising prices simply by dialing back investment.
millstone 13y ago
$7 billion in profit would be about $15 per share, yielding a P/E around 24. That's on the high end, but not absurd, so I think your analysis is a good justification for the valuation. A key question is whether that 10% price increase would be absorbed by customers with no change in sales. There's an argument it goes the other way: customers trade the immediacy of brick-and-mortar for Amazon's low prices. But if the online prices are no better, then Amazon provides no benefit, and a 10% price increase could result in a much larger drop in sales. This played out in my own household: we used to buy diapers exclusively through Amazon, but completely stopped following their diaper price increase.
- csomar 13y ago
  Depends on how expensive your commute to the shop. I don't use Amazon because it's not available in my country. However, if it was, I'd probably use it even if it's expensive. You spend lots of time in shopping + gas + car. Delivery is a nice thing.

bobx11 13y ago

I'm in love with the idea of a profitless company for the reason that this company passes on all the value to employees and contractors providing the services instead of extracting that value their employees create for the benefit of shareholders.

gfodor 13y ago
What you say here doesn't make any sense. Shareholder value is increased by effective use of capital by the company. Plowing your margin back into your business if it can result in growth is good for shareholders, since the stock will rise, whereas plowing that profit into ill-advised acquisitions and executive bonuses is probably less so. At the same time, issuing a direct dividend to shareholders when there is little use for that capital for future growth is (obviously) good for shareholders, but issuing the same dividend when that money could have been used to increase the market cap of the business through growth is bad. In other words, the specific mechanism of how a company uses profit (or more specifically, free cash flow) does not have any inherent value to shareholders (dividends, buybacks, paying down debt, or re-investment.) It's only in the context of the opportunity cost of how that capital could have been used elsewhere that you can measure the value for shareholders.
yetanotherphd 13y ago
If only potential shareholders (at the time of the IPO) were equally in love with this idea.
pjc50 13y ago
Amazon primarily passes value to customers, and squeezes its lower employees and suppliers.
PilateDeGuerre 13y ago
>passes on all the value to employees and contractors...instead of extracting that value their employees create I was surprised to read your analysis of the situation. I must say that you're just flatly wrong. Amazon is not a good place to work if you value your life outside of its value for your employer. Everyone from warehouse employees to the knowledge workers are sweated for everything they are worth. Recall that Amazon runs their warehouses like prisons and they have the lawsuits to show for it[1]. [1] http://www.mcall.com/news/breaking/mc-amazon-integrity-wage-lawsuit-20131007,0,2581276.story http://www.mcall.com/news/breaking/mc-amazon-integrity-wage-...

001sky 13y ago

The lesson here is that you can't just value a company by taking its current performance into account. You really need to have a view towards its future performance. And you need to understand why the company is not currently profitable. Just co-incidently, TWTR is going through its IPO. This is just a little nudge to remeber that profits don't matter, and you should just go buy some stock. =D

postitnotecode 13y ago

While this analysis, and the many others moving their way up HNews make sense, I can't help but wonder if Amazon has started to back itself into a corner. If I as an investor find value because I think they'll keep plowing money back in future R&D, what should I think whenever they do start transitioning to booking profit? Wouldn't I then be worried that taking the profit is a sign that Amazon no longer has grandiose plans or visions for the future and instead is starting a (very) long coast towards decline?

avty 13y ago

It's a bubble.

adventured 13y ago

"Workday hasn't made any profits in the last four years, in fact the net losses have been increasing. But the stock has doubled in the past year and the Company is now worth almost $14bn." I can hardly believe how much this sounds like the same voodoo justifications I was reading in 1998. Saying it's deja vu wouldn't do it justice. Arguing for making long term investments, has nothing to do with whether $14 billion for a company that has never made money (has lost a ton of money) and only has $273m in sales - is a reasonable valuation. 51 times sales? Well what you don't do, is buy Amazon in 1999 for $85 / share, you wait for the inevitable crash and buy it for $6 or $8. And you don't buy Amazon for $363 after a parabolic run, you buy it for $40 or $50 after the 2008 crash. Workday and all the others will follow this pattern, some will live, some will die. If you think a company has long term value to offer, you buy it cheap when a lot less people want it; you don't buy it when everybody wants it during an epic stock market run; and you don't assume a bubble valuation has any correlation to its future prosperity (or lack thereof). The last two bubbles should have demonstrated that in spectacular fashion.