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Amazon’s Shrinking Profit Sets Off a Seismic Shock to Its Shares

69 points by joshwa 12y ago

hiddencost 12y ago
One implication of this that I think is worth mentioning: if Amazon's stock price falls too much, if I remember correctly, their compensation plan has them grant additional RSUs to employees to make up the difference.
- deegles 12y ago
  As a recent hire, I'm interested in learning more about this...
  - hiddencost 12y ago
    (Disclaimer:I'm not a current employee, and I don't remember how it is supposed to work but,) check out the docs on the ERC pages about RSUs, I think it goes through it there. If I recall precisely, it's actually _performance bonus_ RSUs that are subject to this, not the RSUs from the regular grants. EDIT: thinking more specifically, here's what I recall (I browsed the doc as an intern last summer): I believe that performance bonuses (which vest over a year?) are given a cash-value target in addition to a fixed # of RSUs to be granted. If, at the end of the year, the value of the RSUs (at time of grant) are less than the cash-value target, additional stock units are added to cover the difference. This is the hazy memory of an intern, so, take it fwiw.
    - srdev 12y ago
      As a current employee... its not really a bonus since they're pretty consistent about the value of RSUs you get each year. Otherwise, yep thats pretty accurate. They have a number in mind that they wish to pay you. A portion of that will be in salary, and a portion of that will be in RSU's. At the time of the grant, they'll give a number of RSUs that have a cash value for the remainder that isn't covered by your salary.
- ryanobjc 12y ago
  As a former AMZN'er I find that hard to believe. The company is cheap - it's in the bones. There is no way the company would ever agree to give more of it's loot over to employees if it wasn't forced to via regulation. Now, Google's "GSU" programme does have an adjustment that is based on company, personal and stock performance via a magical formula that only HR/management knows.
  - hiddencost 12y ago
    See my response to the other responder for further specification. I'm an extremely questionable source. Amazon's "Frugal" was certainly everywhere, which is why I remember being surprised by seeing those terms in the performance bonuses.
tvladeck 12y ago
The stock is down from when it was up, but it's still up from when it was down!! In all seriousness, 8-10% is a big move, but definitely not "seismic", especially after an earnings release. Apple went up that much yesterday. Today YELP fell 8% and TWTR fell over 7%.
- r00fus 12y ago
  It's not the move per-se, just that AMZN has previously been impervious to (or even benefited from) unprofitable quarters and missed wall st. estimates. Unless there's another reason for this sell-off, it means perhaps Amazon's teflon-coating when it comes to it's profit-aversion might be wearing a bit thin. That's a shift.
  - spacehome 12y ago
    Earnings don't miss estimates; estimates miss earnings.
    - wpietri 12y ago
      Possibly the most ignored fact in finance and management.
- jeffers_hanging 12y ago
  Seismic shift inside Amazon. S-team now emphasizing making money on the previous "strategic" projects. Dismissing directors and restructuring projects currently scored unprofitable. Project I was worked on is reevaluated to maybe not launch. Other project worked on replaced management team and using new engineering teams from Bangalore and Chennai.
frade33 12y ago
As a Sales Director, I would often tell my guys, a six-month old can capture the market., if you would eliminate your profit. But that is not what you are hired for. or in our local phrase 'neither we will play nor we let any'. I love Amazon as a consumer, but as a sales person myself I know, what they are. They offer 40% wholesale margin to a retail customer for books. How many wholesalers and retailers they brought to death? but the even more tragic part is, they didn't earn any money themselves. They obviously succeeded in capturing the entire market, but so could my six month old too. My experience tells me which is no brainer, death (exit) of such a company is only matter of time, and when such a vendor dies, rest of the market lives on as they were living before this episode.
- bequanna 12y ago
  >but the even more tragic part is, they didn't earn any money themselves. 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. As for Amazon not being profitable, it is a illusion. From what I understand, they have pretty high plowback. If mgmt observes great opportunities for investment, shouldn't they do that instead of paying out dividends? >My experience tells me which is no brainer, death (exit) of such a company is only matter of time, and when such a vendor dies, rest of the market lives on as they were living before this episode. Maybe if they were competing on price alone for a single product. This isn't one CRM product vs another. They are competitive on EVERY product. Few online retailers can compete with them on pricing/shipping/experience.
  - frade33 12y ago
    >That is when the money will really be earned. That time is never going to come, others are not sitting idly either. :) - since I am not american I don't know the precise terms to define such situation. But as we would say 'more clients, more profits' but in the end, you start losing customers, when you charge even pennies more, and you become a victim of your own. >They are competitive on EVERY product This is the misconception, they are not being competitive at all. :) they are only being arsehole :) as I would call such competitor in my own industry. Being competitive means, they quote prices which has profit, however they blow away the competition by virtue of either their skills or costs.
smackfu 12y ago
I don't think the analysts have any idea how to predict what AMZN is going to do.
- MichaelGG 12y ago
  You could have ended your sentence after predict.
3pt14159 12y ago
Seismic is 40 or 50% loss. Catastrophic is 70 or 80%. Complete sell off is 90%. 8% is one major mutual fund that needs its stocks to have certain ratios and profit margins had to do a sell off and technical traders went with the falling knife.
- encoderer 12y ago
  Amazon has lost 30% of its value between the last 2 earnings reports.
fletchowns 12y ago
So revenue is growing but they have an operating loss because of a lot of investments. Isn't this a good thing that should cause people to want to buy more Amazon stock?
- jeffers_hanging 12y ago
  Figures would look even worse but selling Korean unit exception padded result.
- tdees40 12y ago
  Investments get booked as assets, so they have no impact on profits. This mistake gets made frequently with respect to Amazon.
  - eigenvalue 12y ago
    Many assets have a useful life and must be depreciated, which certainly does reduce accounting profits.
    - tdees40 12y ago
      Sure, but I don't think that's what most people are thinking about here.
everettForth 12y ago
As a general rule, I think that stock fluxuation news should stay off of HN. However, in this case, we're currently looking at a 9.88% decrease in AMZN. That's roughly a $14Billion change in the company that nearly every startup uses as some kind of hosting provider. To put it in perspective, that's very close to the size of the Whatsapp deal. I think this is relevant to startups in this special case.
- arbuge 12y ago
  Why is it relevant exactly? Amazon's hosting services are in no way dependent on Amazon's exact stock price.
- heroh 12y ago
  >that's very close to the size of the Whatsapp deal. it's very close the MarketCap of LinkedIn -- more reason why $19 billion for an App that generates $20million in revenue is/was ridiculous.
adwf 12y ago
The funny thing for me is that everyone has always said that Amazon's share price is justified because eventually "they'll turn on the profit tap" and up their margins once the market is captive. Yet, how do you tell when Amazon are about to do that? I would've thought they'd do it when revenue growth starts slowing. ie. When the strategy of spending money to make money starts being less effective, as there is steadily harder gains to be got from it. That's when I'd turn on the tap. So just as Amazon are about to do this (potentially anyway), that's when people sell? I'd say this is by far the best time to buy...
- maratd 12y ago
  > Yet, how do you tell when Amazon are about to do that? Amazon will never do that, because it can't. It's in retail. Retail is and always will be a low margin business. Is there an example of a large retailer that doesn't manufacture its own goods that has profits in the double digits?
  - adwf 12y ago
    Normally true, but if Amazon trade in high enough volume (which they do), turning up the price by pennies across the board will generate quite a large bump in profit. And whilst they are definitely in the low margin, price sensitive business, programs like Amazon Prime generate quite a bit of stickiness to their brand, regardless of price. I know that I find it a pain to shop elsewhere now, not just because of price, but because I've grown so used to the reliable delivery times of Amazon/Prime. I know almost to the hour when my packages are going to arrive. That's a killer feature worth at least a moderate bump in price before I'd shop elsewhere.
  - jasontsui 12y ago
    “We believe in the long term, but the long term also has to come,” says Bezos, explaining that periodically Amazon wants to “check in” with its ability to make money. Thus, in 2007, Amazon more than doubled its profit, to $476 million, on a 38% increase in sales to almost $15 billion. http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/ http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amaz...
chris_mahan 12y ago
And if amazon starts hemorrhaging cash like mad, will people scramble to get off AWS?
petersouth 12y ago
Maybe Amazon is just a massive float machine for Bezos. Sorta like insurance companies for Buffet.
- DonGateley 12y ago
  My thought too except I can't see what he is doing or might do with the float except fund promotion to leverage growth.
ghshephard 12y ago
If we're going to be talking about "Seismic Stock moves" as being 8%, then AAPL, on the same day, had an 8.5% bump (525 to 570). Do we consider that a Seismic Shock as well?
drpre 12y ago
I'm guessing that the lowered income projection is due in part to Amazon dropping its cloud prices. Surprised the article didn't mention that.
midas007 12y ago
Seems like a bump in the road, but it's something Bezos has to stay on top of to not be too long term to lose investor interest. FedEx/UPS + Amazon merger would still be a good move and lock up last-mile distribution that only WalMart would be able to touch, but then WM would have to pay a premium for whichever chair would be left.
- wpietri 12y ago
  Nah. They're building their own distribution network. FedEx is great at being FedEx, but Amazon wants to be able to do same-day delivery with multiple time-slots per day. They also want local warehouses, which minimizes wasteful shipping.
  - midas007 12y ago
    Amazon is missing the entire last-mile delivery pipeline apart from some shared boxes and jokes about quadcopter delivery. Also, Google Express is way ahead given the number of trucks and cars going about from Costco and other local merchants, which is coming at Amazon from the other side. Building it would effectively be starting from scratch and competing with FedEx, UPS, DHL and everyone else. And if it doesn't work, they'll be stuck with capital tied up in it. Further, it's going to take a long time and a LOT of capital, and it still might not work AND still not be any better/cheaper, whereas FedEx is a known quantity that works. FedEx has a lot more experience than just delivery: it does lot of logistics and emergency logistics outsourcing for a lot of companies... and it would still be viable revenue if Amazon controlled them.
    - wpietri 12y ago
      I take it your city doesn't have Amazon Fresh vans all over the place yet?
      - midas007 12y ago
        Mountain View (for obvious reasons I guess): Google Express. But really, what difference is there over just extracting the functionality of local courier into a stand-alone global service with an web presence, API, support, backoffice fleet management/dispatching and so forth? All FedEx and UPS have to do to compete with this is send drivers into stores.

69 points by joshwa 12y ago

One implication of this that I think is worth mentioning: if Amazon's stock price falls too much, if I remember correctly, their compensation plan has them grant additional RSUs to employees to make up the difference.

deegles 12y ago
As a recent hire, I'm interested in learning more about this...
- hiddencost 12y ago
  (Disclaimer:I'm not a current employee, and I don't remember how it is supposed to work but,) check out the docs on the ERC pages about RSUs, I think it goes through it there. If I recall precisely, it's actually _performance bonus_ RSUs that are subject to this, not the RSUs from the regular grants. EDIT: thinking more specifically, here's what I recall (I browsed the doc as an intern last summer): I believe that performance bonuses (which vest over a year?) are given a cash-value target in addition to a fixed # of RSUs to be granted. If, at the end of the year, the value of the RSUs (at time of grant) are less than the cash-value target, additional stock units are added to cover the difference. This is the hazy memory of an intern, so, take it fwiw.
  - srdev 12y ago
    As a current employee... its not really a bonus since they're pretty consistent about the value of RSUs you get each year. Otherwise, yep thats pretty accurate. They have a number in mind that they wish to pay you. A portion of that will be in salary, and a portion of that will be in RSU's. At the time of the grant, they'll give a number of RSUs that have a cash value for the remainder that isn't covered by your salary.
ryanobjc 12y ago
As a former AMZN'er I find that hard to believe. The company is cheap - it's in the bones. There is no way the company would ever agree to give more of it's loot over to employees if it wasn't forced to via regulation. Now, Google's "GSU" programme does have an adjustment that is based on company, personal and stock performance via a magical formula that only HR/management knows.
- hiddencost 12y ago
  See my response to the other responder for further specification. I'm an extremely questionable source. Amazon's "Frugal" was certainly everywhere, which is why I remember being surprised by seeing those terms in the performance bonuses.

tvladeck 12y ago

The stock is down from when it was up, but it's still up from when it was down!! In all seriousness, 8-10% is a big move, but definitely not "seismic", especially after an earnings release. Apple went up that much yesterday. Today YELP fell 8% and TWTR fell over 7%.

r00fus 12y ago
It's not the move per-se, just that AMZN has previously been impervious to (or even benefited from) unprofitable quarters and missed wall st. estimates. Unless there's another reason for this sell-off, it means perhaps Amazon's teflon-coating when it comes to it's profit-aversion might be wearing a bit thin. That's a shift.
- spacehome 12y ago
  Earnings don't miss estimates; estimates miss earnings.
  - wpietri 12y ago
    Possibly the most ignored fact in finance and management.
jeffers_hanging 12y ago
Seismic shift inside Amazon. S-team now emphasizing making money on the previous "strategic" projects. Dismissing directors and restructuring projects currently scored unprofitable. Project I was worked on is reevaluated to maybe not launch. Other project worked on replaced management team and using new engineering teams from Bangalore and Chennai.

frade33 12y ago

As a Sales Director, I would often tell my guys, a six-month old can capture the market., if you would eliminate your profit. But that is not what you are hired for. or in our local phrase 'neither we will play nor we let any'. I love Amazon as a consumer, but as a sales person myself I know, what they are. They offer 40% wholesale margin to a retail customer for books. How many wholesalers and retailers they brought to death? but the even more tragic part is, they didn't earn any money themselves. They obviously succeeded in capturing the entire market, but so could my six month old too. My experience tells me which is no brainer, death (exit) of such a company is only matter of time, and when such a vendor dies, rest of the market lives on as they were living before this episode.

bequanna 12y ago
>but the even more tragic part is, they didn't earn any money themselves. 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. As for Amazon not being profitable, it is a illusion. From what I understand, they have pretty high plowback. If mgmt observes great opportunities for investment, shouldn't they do that instead of paying out dividends? >My experience tells me which is no brainer, death (exit) of such a company is only matter of time, and when such a vendor dies, rest of the market lives on as they were living before this episode. Maybe if they were competing on price alone for a single product. This isn't one CRM product vs another. They are competitive on EVERY product. Few online retailers can compete with them on pricing/shipping/experience.
- frade33 12y ago
  >That is when the money will really be earned. That time is never going to come, others are not sitting idly either. :) - since I am not american I don't know the precise terms to define such situation. But as we would say 'more clients, more profits' but in the end, you start losing customers, when you charge even pennies more, and you become a victim of your own. >They are competitive on EVERY product This is the misconception, they are not being competitive at all. :) they are only being arsehole :) as I would call such competitor in my own industry. Being competitive means, they quote prices which has profit, however they blow away the competition by virtue of either their skills or costs.

smackfu 12y ago

I don't think the analysts have any idea how to predict what AMZN is going to do.

MichaelGG 12y ago
You could have ended your sentence after predict.

3pt14159 12y ago

Seismic is 40 or 50% loss. Catastrophic is 70 or 80%. Complete sell off is 90%. 8% is one major mutual fund that needs its stocks to have certain ratios and profit margins had to do a sell off and technical traders went with the falling knife.

encoderer 12y ago
Amazon has lost 30% of its value between the last 2 earnings reports.

fletchowns 12y ago

So revenue is growing but they have an operating loss because of a lot of investments. Isn't this a good thing that should cause people to want to buy more Amazon stock?

jeffers_hanging 12y ago
Figures would look even worse but selling Korean unit exception padded result.
tdees40 12y ago
Investments get booked as assets, so they have no impact on profits. This mistake gets made frequently with respect to Amazon.
- eigenvalue 12y ago
  Many assets have a useful life and must be depreciated, which certainly does reduce accounting profits.
  - tdees40 12y ago
    Sure, but I don't think that's what most people are thinking about here.

everettForth 12y ago

As a general rule, I think that stock fluxuation news should stay off of HN. However, in this case, we're currently looking at a 9.88% decrease in AMZN. That's roughly a $14Billion change in the company that nearly every startup uses as some kind of hosting provider. To put it in perspective, that's very close to the size of the Whatsapp deal. I think this is relevant to startups in this special case.

arbuge 12y ago
Why is it relevant exactly? Amazon's hosting services are in no way dependent on Amazon's exact stock price.
heroh 12y ago
>that's very close to the size of the Whatsapp deal. it's very close the MarketCap of LinkedIn -- more reason why $19 billion for an App that generates $20million in revenue is/was ridiculous.

adwf 12y ago

The funny thing for me is that everyone has always said that Amazon's share price is justified because eventually "they'll turn on the profit tap" and up their margins once the market is captive. Yet, how do you tell when Amazon are about to do that? I would've thought they'd do it when revenue growth starts slowing. ie. When the strategy of spending money to make money starts being less effective, as there is steadily harder gains to be got from it. That's when I'd turn on the tap. So just as Amazon are about to do this (potentially anyway), that's when people sell? I'd say this is by far the best time to buy...

maratd 12y ago
> Yet, how do you tell when Amazon are about to do that? Amazon will never do that, because it can't. It's in retail. Retail is and always will be a low margin business. Is there an example of a large retailer that doesn't manufacture its own goods that has profits in the double digits?
- adwf 12y ago
  Normally true, but if Amazon trade in high enough volume (which they do), turning up the price by pennies across the board will generate quite a large bump in profit. And whilst they are definitely in the low margin, price sensitive business, programs like Amazon Prime generate quite a bit of stickiness to their brand, regardless of price. I know that I find it a pain to shop elsewhere now, not just because of price, but because I've grown so used to the reliable delivery times of Amazon/Prime. I know almost to the hour when my packages are going to arrive. That's a killer feature worth at least a moderate bump in price before I'd shop elsewhere.
- jasontsui 12y ago
  “We believe in the long term, but the long term also has to come,” says Bezos, explaining that periodically Amazon wants to “check in” with its ability to make money. Thus, in 2007, Amazon more than doubled its profit, to $476 million, on a 38% increase in sales to almost $15 billion. http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amazon/ http://management.fortune.cnn.com/2012/11/16/jeff-bezos-amaz...

chris_mahan 12y ago

And if amazon starts hemorrhaging cash like mad, will people scramble to get off AWS?

petersouth 12y ago

Maybe Amazon is just a massive float machine for Bezos. Sorta like insurance companies for Buffet.

DonGateley 12y ago
My thought too except I can't see what he is doing or might do with the float except fund promotion to leverage growth.

ghshephard 12y ago

If we're going to be talking about "Seismic Stock moves" as being 8%, then AAPL, on the same day, had an 8.5% bump (525 to 570). Do we consider that a Seismic Shock as well?

drpre 12y ago

I'm guessing that the lowered income projection is due in part to Amazon dropping its cloud prices. Surprised the article didn't mention that.

midas007 12y ago

Seems like a bump in the road, but it's something Bezos has to stay on top of to not be too long term to lose investor interest. FedEx/UPS + Amazon merger would still be a good move and lock up last-mile distribution that only WalMart would be able to touch, but then WM would have to pay a premium for whichever chair would be left.

wpietri 12y ago
Nah. They're building their own distribution network. FedEx is great at being FedEx, but Amazon wants to be able to do same-day delivery with multiple time-slots per day. They also want local warehouses, which minimizes wasteful shipping.
- midas007 12y ago
  Amazon is missing the entire last-mile delivery pipeline apart from some shared boxes and jokes about quadcopter delivery. Also, Google Express is way ahead given the number of trucks and cars going about from Costco and other local merchants, which is coming at Amazon from the other side. Building it would effectively be starting from scratch and competing with FedEx, UPS, DHL and everyone else. And if it doesn't work, they'll be stuck with capital tied up in it. Further, it's going to take a long time and a LOT of capital, and it still might not work AND still not be any better/cheaper, whereas FedEx is a known quantity that works. FedEx has a lot more experience than just delivery: it does lot of logistics and emergency logistics outsourcing for a lot of companies... and it would still be viable revenue if Amazon controlled them.
  - wpietri 12y ago
    I take it your city doesn't have Amazon Fresh vans all over the place yet?
    - midas007 12y ago
      Mountain View (for obvious reasons I guess): Google Express. But really, what difference is there over just extracting the functionality of local courier into a stand-alone global service with an web presence, API, support, backoffice fleet management/dispatching and so forth? All FedEx and UPS have to do to compete with this is send drivers into stores.