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Why Amazon Has No Profits and Why It Works

633 points by taylorbuley 12y ago

aeturnum 12y ago
Am I the only one shocked that online sales make up only ~8% of US retail activity? I buy everything I can online, and expect to maintain that trend as much as possible. Is this just a case of me being relatively young and affluent, or are there sectors of the economy that will never go online?
- ewoodrich 12y ago
  Does that figure include durable goods? That, combined with clothing and grocery wouldn't make 8% too surprising.
- marincounty 12y ago
  I think affluent is a factor? When I go to other areas of the country I'm surprised to see the the huge amount of entrenched poverty. Many of these people don't have access to debit cards, and any ruined their chances of getting a checking account through a bank(banks have there own credit checking system). I see too many check cashing places, a pawn shop on too many corners, billboards targeting the poor, and naive. Yes--people buy, but it's food at Safeway, or the Dollar store, or Goodwill? The America that is rich and poor is here. I hope the U.S. dosen't turn into Mexico; where the wealthy can't leave their house for fear of kidnapping, or worse. I know I casually slip off my watch when traveling to certain areas, and wouldn't think about buying an expensive road bike again.
johnrob 12y ago
From: http://paulgraham.com/good.html http://paulgraham.com/good.html: In Patrick O'Brian's novels, his captains always try to get upwind of their opponents. If you're upwind, you decide when and if to engage the other ship... In this case, Amazon is upwind of becoming a giant, profitable company. They could have taken profits earlier but it would have shrunk their overall pie.
- idlewords 12y ago
  That would certainly explain the smell.
- deleted 12y ago
  [deleted]
- notatoad 12y ago
  Where "becoming a giant, profitable company" is another way of saying "paying their shareholders". Amazon is making money, for all intents and purposes they are profitable. They've just found something more interesting to do with that money than pay dividends. The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon. It's a very interesting dynamic, certainly not the way i've normally thought of a shareholder-company relationship but one that must apply to many companies.
  - hnnewguy 12y ago
    >The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon. Take the money away from Amazon? The shareholders are Amazon. It isn't Amazon's money, it's the shareholders. If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it.
    - prostoalex 12y ago
      Re-investment with subsequent share growth is more efficient mechanism of value distribution than dividend payouts. First, there's no double taxation; second, the recipient can choose the timing and amount of participation as they decide on when to sell the stock.
    - eru 12y ago
      > If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it. In theory, yes. In practice, being an activist shareholder and going against the wishes of management is _hard_.
cm2012 12y ago
Interesting note: Over 50% of the volume and driving force of Amazon's huge merchandise growth mentioned in the article is from small ($100k - $20m a year) mom and pop businesses around the country selling on Amazon. I wrote a blog post about it a while ago - http://www.kevinlordbarry.com/amazons-little-known-world-changing-good-deed.html http://www.kevinlordbarry.com/amazons-little-known-world-cha.... a16z touches on this, but it has wider reaching implications than just Amazon's revenue.
- jacquesm 12y ago
  $20m / year is a mom & pop business?
  - cm2012 12y ago
    They are family owned and operated, yes! In almost all the cases I know of. I may be using the term wrong though.
    - deleted 12y ago
      [deleted]
    - moggflunkies 12y ago
      Laughing at that. $20M annual revenue extremely impressive. Especially for "mom and pop" owned business. Mom and dad are either taking home $1M/annually or they are operating a very successful high dollar, low margin business. Both are highly unlikely.
  - idlewords 12y ago
    Momma's got needs!
  - ctdonath 12y ago
    A million dollars ain't what it used to be.
  - exelius 12y ago
    In retail, yes. Retail margins are usually less than 3%; so $20m/yr in revenue would give you less than $600k/yr in profit. Not bad money by any means; but certainly not enough to need a bunch of shareholders. Contrast this with the fact that an average Walmart does over $100 million a year in revenue (though Walmart's margins are closer to 1%), and it's actually not that huge.
philip1209 12y ago
Excellent analysis. > Amazon has perhaps 1% of the US retail market by value > With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.
- shill 12y ago
  My AMZN shares are in a Roth IRA. I can wait.
  - jeffreyrogers 12y ago
    Amazon stock trades at a P/E of 910. S&P 500 average is currently around 19-20. Do you really expect Amazon to continue to grow at such a rate that its current P/E is justified?
    - crucifiction 12y ago
      Or perhaps P/E is not the end-all-be-all of metrics for judging value?
      - jeffreyrogers 12y ago
        I completely agree, however, it is still a useful metric. And when a stock has a P/E of 910 the growth rate that the underlying business must grow at in order to justify such a price is astounding.
        apostate 12y ago
        P/E approaches infinity as you near "break even", so for a company like AMZN with both massive revenues and expenses, P/E is not useful when the two are almost equal. You must dig further and look at things like cash flow, revenue (not earnings) growth, operating margin (not profit margin), etc. These things give a much clearer picture than an odd-looking P/E. If a company with high P/E had operating margins that ware closer to profit margins (not triple, like AMZN) I would be a bit more concerned. If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively. All of that being said, there are still plenty of things that could go wrong for AMZN.
uptown 12y ago
It'll be interesting to see how their profitability trends as they adjust their prices. I've seen a trend over the past year or more of dramatically higher prices for things I've previously purchased from Amazon. I can do a 1-for-1 comparison on receipts, and see the huge bump. In some cases, those products are more expensive everywhere, but in most cases, I'm able to find those items at a price close-to or better than what I'd originally paid at Amazon if I shop around. It'll be interesting to see if they've trained consumer mindsets enough to retain them as customers if more shoppers notice a similar trend.
- tdees40 12y ago
  The real question is if buyers will stick around once prices go up. I remember, during the bubble, buy.com's strategy was to sell at a loss, grow customer base and then raise prices. The first two parts worked reasonably well, but once they raised prices, everyone left.
  - toomuchtodo 12y ago
    With great information (Internet), any product is a commodity as long as there is no single supplier.
  - cm2012 12y ago
    At least 50% of Amazon's volume by sales is by 3rd party sellers who most certainly DO NOT sell at a loss! For many Amazon products, prices will never raise appreciably. The post above goes into more detail on other reasons for this.
  - WalterBright 12y ago
    That's why the conventional wisdom of sell at a loss, drive everyone else out of business, raise prices to monopoly levels doesn't work.
- Zombieball 12y ago
  I think one of the main points of this article is that Amazon doesn't necessarily set the prices on many of their products, rather this is controlled by their 3P sellers.
tinkerrr 12y ago
Original: https://news.ycombinator.com/item?id=8274319 https://news.ycombinator.com/item?id=8274319 Wonder why that didn't garner any traction. Perhaps it has something to do with the fact that this duplicate link is from a16z?
- scott_s 12y ago
  There's an enormous amount of randomness to what makes it to the front page - I wouldn't read much into the fact that one got traction and the other did not.
ctdonath 12y ago
TL;DR - No matter how you squint at it, Amazon drives all profits back into growing capacity and market coverage. Amazon alone accounts for around 1% of US retail revenue.
- Chronic29 12y ago
  1% is an extremely disappointing number seeing that Amazon has been around since before Google. (1994 vs 1998)
- bowlofpetunias 12y ago
  That 1% means nothing without knowing how much of that retail revenue currently goes through e-commerce. But I have sneaking suspicion that there's still a lot of room for growth. Also, outside of the US Amazon has just barely started to expand beyond books. In most countries online retailers are bracing themselves for the moment Amazon starts eating their lunch. Unless Bezos suddenly has a change of heart, this growth strategy could go on for many, many years.
  - pinkyand 12y ago
    > outside of the US Amazon has just barely started to expand beyond books. Not sure it's correct. For example amazon has a 2-day service across Europe from any amazon warehouse in the continent. But maybe what they do is not enough for Europe?
    - eru 12y ago
      Asia is a bit less well served. Australia not at all apart from digital goods.
  - jusben1369 12y ago
    In general around 10% of all retail happens online I believe. But it's also pretty clear that the offline/online distinction is becoming more and more meaningless in an omni channel world. I went to 3 different warehouse mattress places on the weekend. Turns out the best mattress was at the first place so I came home and bought it online. If the best mattress had been in the last store I would have bought it 'offline" It's just one of many examples of how the barriers are crumbling.
exelius 12y ago
I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. That way, increased competition can actually fuel your growth. The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API. Likewise, I think Amazon's self-funded retail operations are largely a break-even enterprise. Other businesses have been successful with this -- Costco comes to mind -- but the scope of capabilities Amazon is looking to develop is staggering. If they can build a completely vertically integrated retail platform from procurement to payment to delivery, basically they're operating a retail enterprise without taking any inventory risk on themselves. Which is what this article means by "capture a significant portion of US retail": if they can provide merchant services to investors, it turns Amazon into basically an investment bank. Amazon takes a retailers money, turns it into inventory, sells it, takes a cut, then returns money. The only inputs and outputs into the Amazon machine are money, and it turns retail operations into an investment product.
- macspoofing 12y ago
  That's all great but at some point they still need to turn a profit.
  - bequanna 12y ago
    Yes. But only when there are no longer attractive opportunities for them to invest in expansion.
  - ChuckMcM 12y ago
    As the article points out, they don't. By running the business this way they are constantly building / growing new businesses but during a downturn they just build more slowly (rather than lose money). It is a very different way of operating but one which has provided some interesting benefits for them. Nominally a business uses profits to either pay dividends or fund unexpected opportunities (like buying some small company or what not) Amazon doesn't pay dividends and they invest every dollar they make "extra" back into the business to increase the total number of dollars in the pipes. They don't need to turn a profit, they just need to manage their investment profile to their revenue forecasts. Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.
deleted 12y ago
[deleted]
mck- 12y ago
Can't see the graphs on mobile :(
jusben1369 12y ago
I found this fascinating to read but made very difficult in part due to the overuse of commas. Maybe the folks at a16 could have this proof read. Investors in Amazon typically look to selling their stock for higher than they bought it as the way they "get their money out of their investment" So not sure why the fascination on profits. Profits are important if they become the means to achieving a higher stock price. But lack of profits hasn't hurt AMZN's price over the years or made it an unattractive stock.
- walshemj 12y ago
  In an era (which is coming to an end) of fabulously cheap money though - I suggest you and read the intelligent investor by graham and re think your view that profits an dividends don't matter
  - jusben1369 12y ago
    It's worth comparing to Apple who's stock price went backward when growth slowed (even though cash was piling up literally by the billions) AMZN could create profits but, unlike Apple, it wants to take every penny and reinvest it directly into new markets.
pinkyand 12y ago
Great analysis with lots of details.I wonder thought: what percentage of u.s. eCommerce orders are done through amazon's warehouses? and what percentage is using their store(even though it's 3rd party) ?
hoprocker 12y ago
Reading this article reminded me of Steve Yegge's summary of Amazon's overall strategy: build a platform, not a product[0]. My takeaway here is that Amazon keeps reinvesting in making itself the platform through which sales run (warehouses, media, AWS, third-party storefronts). With the octo-copter idea[1] -- especially in combination with its third-party seller services -- it skirted the surface of becoming a physical delivery platform as well. Anyways, fascinating post, really enjoyed the different cross sections of perspective presented. [0] https://plus.google.com/112678702228711889851/posts/eVeouesvaVX https://plus.google.com/112678702228711889851/posts/eVeouesv... [1] http://www.amazon.com/b?ie=UTF8&node=8037720011 http://www.amazon.com/b?ie=UTF8&node=8037720011
clamprecht 12y ago
Isn't this similar to Berkshire Hathaway's strategy - never pay dividends, but reinvest everything into growth opportunities? Although Berkshire Hathaway likes to hold a pig pile of cash until the right growth opportunities can be found, while I'm not sure about Amazon's cash reserves. * Also, this means no capital gains taxes until you sell your shares, because there are no dividend payments.
AndrewKemendo 12y ago
With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon. Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an amazing unprecedented ride upward, institutional benefiting the most. I also take umbrage with the idea that Bezos is running Amazon for "fun" as though it is frivolous. Bezos seems to have a grand vision and that is not something that matches with the ridiculously short term and arguably irresponsible thinking of the vast majority of investors. We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.[1] [1] This is refuting the broader point that Benedict Evans is making, and does not necessarily apply to Amazon perfectly.
- redthrowaway 12y ago
  At no point was anyone suggesting that the purpose of Amazon is to tickle Bezos' fancy, and it would require a painfully literal reading of the article in order to think that's what the author was doing.
  - AndrewKemendo 12y ago
    Perhaps I am dense but how else could you possibly interpret the quote that I cited? Suggesting - even if lightly - that Bezos is running Amazon for "fun" and as a "lifestyle business", especially in the light of the great analysis done above it, indicates that the author looks at any business that has very long term goals as inferior to those who are solely focused on turning profits back to shareholders.
    - benedictevans 12y ago
      To paraphrase, "this prompts the suggestion that X is the case. However, it is not". It's a rhetorical question.
- 12y ago
pbreit 12y ago
So basically, companies that switch to profit-making are indicating that they no longer know how to generate new acceptable returns on investment.
- pmarca 12y ago
  Bingo.
  - mikeg8 12y ago
    I've never really thought of it like this – interesting. Are there any other examples of large/popular companies on par with Amazon"re-invest" mentality? I can't think of any off the top of my head but would be interested to look at others. Thanks
    - pbreit 12y ago
      Salesforce comes to mind.
    - nostrademons 12y ago
      Berkshire Hathaway. Microsoft until c. 2006. Apple. Google. Most hedge funds. Standard Oil and U.S. Steel if you go back to the last century. Basically, it's rational for a company CEO to invest all profits back into the business as long as he expects he can make a better return for them than the market can. Berkshire Hathaway's annual reports go into more detail in this. The trick is in recognizing the size of the market opportunity in front of you, so that you know when to switch from reinvesting profits to distributing them as dividends. Microsoft waited too long for this - they burned (and are still burning) billion on unprofitable business lines. Google has had debatable success - some of their new businesses are brilliant, some are huge flops.
      - mikeg8 12y ago
        Thanks for your reply. Apple, and even Google, don't seem nearly as similar to Amazon in the question I asked. While they both invest heavily in R&D and other capex's areas, they also store a lot more cash (at least apple) and seem to report a lot more of a "profit" than Amazon. Do they re-invest _all_ profits or just a portion like most companies? People don't talk about Apple, Google, or Microsoft as companies that failed to become "profitable" in nearly the same way people talk about Amazon, at least from what I see. AMZN still seems like such an outlier...
bengali3 12y ago
Investing in themselves is the right thing to do from a finance perspective as long as they continue to have an overall internal rate of return greater than their cost of capital (IRR > WACC) according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05% So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends. AMZN (WACC 10.05%) net sales growth: 22% (2011-2012) vs 18% (2012-2013) AAPL (WACC 9.45%) net sales growth: 31% (2011-2012) vs 8% (2012-2013) From Wikipedia: "The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere" "a corporation will evaluate an investment in a new [x] versus an extension of an existing [y] based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital" For more info, see sources: http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital http://en.wikipedia.org/wiki/Weighted_average_cost_of_capita... http://thatswacc.com/ http://thatswacc.com/ http://www.investopedia.com/walkthrough/corporate-finance/4/npv-irr/internal-rate-return.aspx http://www.investopedia.com/walkthrough/corporate-finance/4/...
- vasilipupkin 12y ago
  that's not entirely correct. this is useful for choosing among internal projects. Do decide whether to invest in growth or pay the shareholders, you need to assume that you can earn greater return than the shareholders could do on their own.
jaunkst 12y ago
Defending against last man advantage here. The more they self invest the more their competitors will have to invest to compete or enter one of their markets.
jgalt212 12y ago
Software is eating Andressen Horowitz's brain.
Estragon 12y ago
This is a familiar argument, but you have to admit there's a lot of wishful thinking involved because Amazon is so opaque about its operations and finances. Bezos is basically saying "Trust me." I don't blame people who do, he's an amazing guy. Still, it's interesting to see how widely views about the company can differ, based on apparently rational analysis of exactly the same financial reports. http://seekingalpha.com/author/paulo-santos/articles/symbol/amzn http://seekingalpha.com/author/paulo-santos/articles/symbol/... While this guy seems to have lost his shirt betting against AMZN over the past couple of years, his bearish analyses of its valuation are quite precisely articulated and make interesting reading. Alibaba may eat the 3P revenue: http://seekingalpha.com/article/2263623-this-is-amazon-coms-d-day-and-the-alibaba-troops-are-disembarking http://seekingalpha.com/article/2263623-this-is-amazon-coms-... Amazon.com's profitability decline is structural and tied to its sales mix: http://seekingalpha.com/article/2169003-the-latest-developments-in-the-amazon-com-saga http://seekingalpha.com/article/2169003-the-latest-developme... I wouldn't short this monster, though, at least not until QE ends.
notastartup 12y ago
This part worries me a lot With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. It kind of sounds like never.
jeffreyrogers 12y ago
The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)? I don't know either way, and I don't want this post to seem like a criticism of Amazon. I know some people who work in upper level management there and they all speak very highly of the way the company is run (very meritocratic). But reinvesting earnings is only a good strategy if those earnings are put to good use, otherwise they should be paid out as a dividend. Anyways, just something to think about whenever the topic of Amazon's profits/earnings comes up.
- eru 12y ago
  > The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)? Taxes bias this question.
QuantumChaos 12y ago
At the risk of being boring, Amazon's "no profit" model works because profit is an accounting measure, not an economic measure. Amazon is increasing in value, but because they are investing in themselves, on paper (i.e. according to accounting measures) they are not profitable. All companies have a "book to market" ratio that indicates they are worth more as a company than accounting measures would suggest.
- eru 12y ago
  In general, yes. In practice, some companies have a subpar book to market ratio.
toasted 12y ago
I've stopped buying much at all off amazon because I get it all from Aliexpress. They package up and address individual items in shenzhen/guanzhou, stick them all in big containers, then when they reach the US/europe they deliver them by the cheapest means possible in a totally commoditised fashion. What competitive advantage does amazon.com have now? Why do all those small sellers need to exist? everything they sell is made in china anyway.
known 12y ago
$20 million income is generating $160 billion market capitalization which is very high IMO
- Falkon1313 12y ago
  That seems a very short-term view IMO - that substantially increasing value should indicate that a company is less successful than it would be if it was giving money away and therefore losing value. If the net worth is about $40 billion or more and growing (almost tripled since 2009?), and revenues are growing (almost tripled since 2009?), and it's not hugely inefficient (has relatively steady or increasing profits instead of increasing losses) - I don't understand why people think that sounds like failure.
stuaxo 12y ago
While they pay so little tax, their smaller competitors that do, effectively subsidise them.
arbuge 12y ago
The fly in the ointment that I see is that if shareholders become disillusioned and decide to return Amazon stock to a more reasonable valuation, alot of things could come apart in a company which bases a significant portion of its employee compensation on stock/stock options, as Amazon does.
dmourati 12y ago
Check out Simon Wardley for some insight into what games Amazon may be playing, specifically on cloud. http://www.infoq.com/interviews/Cloud-Landscape-Simon-Wardley http://www.infoq.com/interviews/Cloud-Landscape-Simon-Wardle... "This is a model known as ILC, which stands for innovate leverage commoditize. The model is pretty simple: what you do is you provide a commodity service, you enable everybody else to innovate on top of it. They are actually your research and development group. You do not bother to do it yourself, you get everybody else to build on your services. Anything which is successful and starts to spread in your ecosystem, you can identify through consumption information, so you can leverage the ecosystem to spot successful development and then you commoditize these new components."
Hacktor69 12y ago
that makes a lot of scenes, but all of this will surely be turned into profit one day. ofcore they can not do all of this with no profit.

633 points by taylorbuley 12y ago

Am I the only one shocked that online sales make up only ~8% of US retail activity? I buy everything I can online, and expect to maintain that trend as much as possible. Is this just a case of me being relatively young and affluent, or are there sectors of the economy that will never go online?

ewoodrich 12y ago
Does that figure include durable goods? That, combined with clothing and grocery wouldn't make 8% too surprising.
marincounty 12y ago
I think affluent is a factor? When I go to other areas of the country I'm surprised to see the the huge amount of entrenched poverty. Many of these people don't have access to debit cards, and any ruined their chances of getting a checking account through a bank(banks have there own credit checking system). I see too many check cashing places, a pawn shop on too many corners, billboards targeting the poor, and naive. Yes--people buy, but it's food at Safeway, or the Dollar store, or Goodwill? The America that is rich and poor is here. I hope the U.S. dosen't turn into Mexico; where the wealthy can't leave their house for fear of kidnapping, or worse. I know I casually slip off my watch when traveling to certain areas, and wouldn't think about buying an expensive road bike again.

johnrob 12y ago

From: http://paulgraham.com/good.html http://paulgraham.com/good.html: In Patrick O'Brian's novels, his captains always try to get upwind of their opponents. If you're upwind, you decide when and if to engage the other ship... In this case, Amazon is upwind of becoming a giant, profitable company. They could have taken profits earlier but it would have shrunk their overall pie.

idlewords 12y ago
That would certainly explain the smell.
deleted 12y ago
[deleted]
notatoad 12y ago
Where "becoming a giant, profitable company" is another way of saying "paying their shareholders". Amazon is making money, for all intents and purposes they are profitable. They've just found something more interesting to do with that money than pay dividends. The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon. It's a very interesting dynamic, certainly not the way i've normally thought of a shareholder-company relationship but one that must apply to many companies.
- hnnewguy 12y ago
  >The opponent in this scenario is the shareholders, they're the ones who want to take the money away from Amazon. Take the money away from Amazon? The shareholders are Amazon. It isn't Amazon's money, it's the shareholders. If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it.
  - prostoalex 12y ago
    Re-investment with subsequent share growth is more efficient mechanism of value distribution than dividend payouts. First, there's no double taxation; second, the recipient can choose the timing and amount of participation as they decide on when to sell the stock.
  - eru 12y ago
    > If/when they want dividends instead of re-investment (which doesn't seem to be the case yet), they are entitled to it. In theory, yes. In practice, being an activist shareholder and going against the wishes of management is _hard_.

cm2012 12y ago

Interesting note: Over 50% of the volume and driving force of Amazon's huge merchandise growth mentioned in the article is from small ($100k - $20m a year) mom and pop businesses around the country selling on Amazon. I wrote a blog post about it a while ago - http://www.kevinlordbarry.com/amazons-little-known-world-changing-good-deed.html http://www.kevinlordbarry.com/amazons-little-known-world-cha.... a16z touches on this, but it has wider reaching implications than just Amazon's revenue.

jacquesm 12y ago
$20m / year is a mom & pop business?
- cm2012 12y ago
  They are family owned and operated, yes! In almost all the cases I know of. I may be using the term wrong though.
  - deleted 12y ago
    [deleted]
  - moggflunkies 12y ago
    Laughing at that. $20M annual revenue extremely impressive. Especially for "mom and pop" owned business. Mom and dad are either taking home $1M/annually or they are operating a very successful high dollar, low margin business. Both are highly unlikely.
- idlewords 12y ago
  Momma's got needs!
- ctdonath 12y ago
  A million dollars ain't what it used to be.
- exelius 12y ago
  In retail, yes. Retail margins are usually less than 3%; so $20m/yr in revenue would give you less than $600k/yr in profit. Not bad money by any means; but certainly not enough to need a bunch of shareholders. Contrast this with the fact that an average Walmart does over $100 million a year in revenue (though Walmart's margins are closer to 1%), and it's actually not that huge.

philip1209 12y ago

Excellent analysis. > Amazon has perhaps 1% of the US retail market by value > With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.

shill 12y ago
My AMZN shares are in a Roth IRA. I can wait.
- jeffreyrogers 12y ago
  Amazon stock trades at a P/E of 910. S&P 500 average is currently around 19-20. Do you really expect Amazon to continue to grow at such a rate that its current P/E is justified?
  - crucifiction 12y ago
    Or perhaps P/E is not the end-all-be-all of metrics for judging value?
    - jeffreyrogers 12y ago
      I completely agree, however, it is still a useful metric. And when a stock has a P/E of 910 the growth rate that the underlying business must grow at in order to justify such a price is astounding.
      - apostate 12y ago
        P/E approaches infinity as you near "break even", so for a company like AMZN with both massive revenues and expenses, P/E is not useful when the two are almost equal. You must dig further and look at things like cash flow, revenue (not earnings) growth, operating margin (not profit margin), etc. These things give a much clearer picture than an odd-looking P/E. If a company with high P/E had operating margins that ware closer to profit margins (not triple, like AMZN) I would be a bit more concerned. If capital expenditures are reduced just a bit, or if margins are improved slightly, the E part of the fraction will jump and P/E will fall massively. All of that being said, there are still plenty of things that could go wrong for AMZN.

uptown 12y ago

It'll be interesting to see how their profitability trends as they adjust their prices. I've seen a trend over the past year or more of dramatically higher prices for things I've previously purchased from Amazon. I can do a 1-for-1 comparison on receipts, and see the huge bump. In some cases, those products are more expensive everywhere, but in most cases, I'm able to find those items at a price close-to or better than what I'd originally paid at Amazon if I shop around. It'll be interesting to see if they've trained consumer mindsets enough to retain them as customers if more shoppers notice a similar trend.

tdees40 12y ago
The real question is if buyers will stick around once prices go up. I remember, during the bubble, buy.com's strategy was to sell at a loss, grow customer base and then raise prices. The first two parts worked reasonably well, but once they raised prices, everyone left.
- toomuchtodo 12y ago
  With great information (Internet), any product is a commodity as long as there is no single supplier.
- cm2012 12y ago
  At least 50% of Amazon's volume by sales is by 3rd party sellers who most certainly DO NOT sell at a loss! For many Amazon products, prices will never raise appreciably. The post above goes into more detail on other reasons for this.
- WalterBright 12y ago
  That's why the conventional wisdom of sell at a loss, drive everyone else out of business, raise prices to monopoly levels doesn't work.
Zombieball 12y ago
I think one of the main points of this article is that Amazon doesn't necessarily set the prices on many of their products, rather this is controlled by their 3P sellers.

tinkerrr 12y ago

Original: https://news.ycombinator.com/item?id=8274319 https://news.ycombinator.com/item?id=8274319 Wonder why that didn't garner any traction. Perhaps it has something to do with the fact that this duplicate link is from a16z?

scott_s 12y ago
There's an enormous amount of randomness to what makes it to the front page - I wouldn't read much into the fact that one got traction and the other did not.

ctdonath 12y ago

TL;DR - No matter how you squint at it, Amazon drives all profits back into growing capacity and market coverage. Amazon alone accounts for around 1% of US retail revenue.

Chronic29 12y ago
1% is an extremely disappointing number seeing that Amazon has been around since before Google. (1994 vs 1998)
bowlofpetunias 12y ago
That 1% means nothing without knowing how much of that retail revenue currently goes through e-commerce. But I have sneaking suspicion that there's still a lot of room for growth. Also, outside of the US Amazon has just barely started to expand beyond books. In most countries online retailers are bracing themselves for the moment Amazon starts eating their lunch. Unless Bezos suddenly has a change of heart, this growth strategy could go on for many, many years.
- pinkyand 12y ago
  > outside of the US Amazon has just barely started to expand beyond books. Not sure it's correct. For example amazon has a 2-day service across Europe from any amazon warehouse in the continent. But maybe what they do is not enough for Europe?
  - eru 12y ago
    Asia is a bit less well served. Australia not at all apart from digital goods.
- jusben1369 12y ago
  In general around 10% of all retail happens online I believe. But it's also pretty clear that the offline/online distinction is becoming more and more meaningless in an omni channel world. I went to 3 different warehouse mattress places on the weekend. Turns out the best mattress was at the first place so I came home and bought it online. If the best mattress had been in the last store I would have bought it 'offline" It's just one of many examples of how the barriers are crumbling.

exelius 12y ago

I listened to a talk by Amazon's CTO, Werner Vogels, where he was explaining that Amazon's entire strategy is to build an infrastructure for itself, then rent that infrastructure out to its competitors. That way, increased competition can actually fuel your growth. The talk was about APIs, but Amazon views APIs as a general term: "Fulfilled by Amazon" is an example of a non-technical API. Likewise, I think Amazon's self-funded retail operations are largely a break-even enterprise. Other businesses have been successful with this -- Costco comes to mind -- but the scope of capabilities Amazon is looking to develop is staggering. If they can build a completely vertically integrated retail platform from procurement to payment to delivery, basically they're operating a retail enterprise without taking any inventory risk on themselves. Which is what this article means by "capture a significant portion of US retail": if they can provide merchant services to investors, it turns Amazon into basically an investment bank. Amazon takes a retailers money, turns it into inventory, sells it, takes a cut, then returns money. The only inputs and outputs into the Amazon machine are money, and it turns retail operations into an investment product.

macspoofing 12y ago
That's all great but at some point they still need to turn a profit.
- bequanna 12y ago
  Yes. But only when there are no longer attractive opportunities for them to invest in expansion.
- ChuckMcM 12y ago
  As the article points out, they don't. By running the business this way they are constantly building / growing new businesses but during a downturn they just build more slowly (rather than lose money). It is a very different way of operating but one which has provided some interesting benefits for them. Nominally a business uses profits to either pay dividends or fund unexpected opportunities (like buying some small company or what not) Amazon doesn't pay dividends and they invest every dollar they make "extra" back into the business to increase the total number of dollars in the pipes. They don't need to turn a profit, they just need to manage their investment profile to their revenue forecasts. Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce.

deleted 12y ago

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mck- 12y ago

Can't see the graphs on mobile :(

jusben1369 12y ago

I found this fascinating to read but made very difficult in part due to the overuse of commas. Maybe the folks at a16 could have this proof read. Investors in Amazon typically look to selling their stock for higher than they bought it as the way they "get their money out of their investment" So not sure why the fascination on profits. Profits are important if they become the means to achieving a higher stock price. But lack of profits hasn't hurt AMZN's price over the years or made it an unattractive stock.

walshemj 12y ago
In an era (which is coming to an end) of fabulously cheap money though - I suggest you and read the intelligent investor by graham and re think your view that profits an dividends don't matter
- jusben1369 12y ago
  It's worth comparing to Apple who's stock price went backward when growth slowed (even though cash was piling up literally by the billions) AMZN could create profits but, unlike Apple, it wants to take every penny and reinvest it directly into new markets.

pinkyand 12y ago

Great analysis with lots of details.I wonder thought: what percentage of u.s. eCommerce orders are done through amazon's warehouses? and what percentage is using their store(even though it's 3rd party) ?

hoprocker 12y ago

Reading this article reminded me of Steve Yegge's summary of Amazon's overall strategy: build a platform, not a product[0]. My takeaway here is that Amazon keeps reinvesting in making itself the platform through which sales run (warehouses, media, AWS, third-party storefronts). With the octo-copter idea[1] -- especially in combination with its third-party seller services -- it skirted the surface of becoming a physical delivery platform as well. Anyways, fascinating post, really enjoyed the different cross sections of perspective presented. [0] https://plus.google.com/112678702228711889851/posts/eVeouesvaVX https://plus.google.com/112678702228711889851/posts/eVeouesv... [1] http://www.amazon.com/b?ie=UTF8&node=8037720011 http://www.amazon.com/b?ie=UTF8&node=8037720011

clamprecht 12y ago

Isn't this similar to Berkshire Hathaway's strategy - never pay dividends, but reinvest everything into growth opportunities? Although Berkshire Hathaway likes to hold a pig pile of cash until the right growth opportunities can be found, while I'm not sure about Amazon's cash reserves. * Also, this means no capital gains taxes until you sell your shares, because there are no dividend payments.

AndrewKemendo 12y ago

With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon. Sorry but that is ridiculous. Look at the stock price for Amazon. Anyone who has invested in Amazon has seen an amazing unprecedented ride upward, institutional benefiting the most. I also take umbrage with the idea that Bezos is running Amazon for "fun" as though it is frivolous. Bezos seems to have a grand vision and that is not something that matches with the ridiculously short term and arguably irresponsible thinking of the vast majority of investors. We collectively need to get away from the idea that the only valid fiduciary duty for a for-profit organization is to make profit for their shareholders instead of creating value for humanity.[1] [1] This is refuting the broader point that Benedict Evans is making, and does not necessarily apply to Amazon perfectly.

redthrowaway 12y ago
At no point was anyone suggesting that the purpose of Amazon is to tickle Bezos' fancy, and it would require a painfully literal reading of the article in order to think that's what the author was doing.
- AndrewKemendo 12y ago
  Perhaps I am dense but how else could you possibly interpret the quote that I cited? Suggesting - even if lightly - that Bezos is running Amazon for "fun" and as a "lifestyle business", especially in the light of the great analysis done above it, indicates that the author looks at any business that has very long term goals as inferior to those who are solely focused on turning profits back to shareholders.
  - benedictevans 12y ago
    To paraphrase, "this prompts the suggestion that X is the case. However, it is not". It's a rhetorical question.
12y ago

pbreit 12y ago

So basically, companies that switch to profit-making are indicating that they no longer know how to generate new acceptable returns on investment.

pmarca 12y ago
Bingo.
- mikeg8 12y ago
  I've never really thought of it like this – interesting. Are there any other examples of large/popular companies on par with Amazon"re-invest" mentality? I can't think of any off the top of my head but would be interested to look at others. Thanks
  - pbreit 12y ago
    Salesforce comes to mind.
  - nostrademons 12y ago
    Berkshire Hathaway. Microsoft until c. 2006. Apple. Google. Most hedge funds. Standard Oil and U.S. Steel if you go back to the last century. Basically, it's rational for a company CEO to invest all profits back into the business as long as he expects he can make a better return for them than the market can. Berkshire Hathaway's annual reports go into more detail in this. The trick is in recognizing the size of the market opportunity in front of you, so that you know when to switch from reinvesting profits to distributing them as dividends. Microsoft waited too long for this - they burned (and are still burning) billion on unprofitable business lines. Google has had debatable success - some of their new businesses are brilliant, some are huge flops.
    - mikeg8 12y ago
      Thanks for your reply. Apple, and even Google, don't seem nearly as similar to Amazon in the question I asked. While they both invest heavily in R&D and other capex's areas, they also store a lot more cash (at least apple) and seem to report a lot more of a "profit" than Amazon. Do they re-invest _all_ profits or just a portion like most companies? People don't talk about Apple, Google, or Microsoft as companies that failed to become "profitable" in nearly the same way people talk about Amazon, at least from what I see. AMZN still seems like such an outlier...

bengali3 12y ago

Investing in themselves is the right thing to do from a finance perspective as long as they continue to have an overall internal rate of return greater than their cost of capital (IRR > WACC) according to thatswacc.com, AMZNs Weighted avg Cost of Capital is 10.05% So until their overall growth slows down to less than 10% per year they will have less pressure to return dividends. AMZN (WACC 10.05%) net sales growth: 22% (2011-2012) vs 18% (2012-2013) AAPL (WACC 9.45%) net sales growth: 31% (2011-2012) vs 8% (2012-2013) From Wikipedia: "The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere" "a corporation will evaluate an investment in a new [x] versus an extension of an existing [y] based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company's cost of capital" For more info, see sources: http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital http://en.wikipedia.org/wiki/Weighted_average_cost_of_capita... http://thatswacc.com/ http://thatswacc.com/ http://www.investopedia.com/walkthrough/corporate-finance/4/npv-irr/internal-rate-return.aspx http://www.investopedia.com/walkthrough/corporate-finance/4/...

vasilipupkin 12y ago
that's not entirely correct. this is useful for choosing among internal projects. Do decide whether to invest in growth or pay the shareholders, you need to assume that you can earn greater return than the shareholders could do on their own.

jaunkst 12y ago

Defending against last man advantage here. The more they self invest the more their competitors will have to invest to compete or enter one of their markets.

jgalt212 12y ago

Software is eating Andressen Horowitz's brain.

Estragon 12y ago

This is a familiar argument, but you have to admit there's a lot of wishful thinking involved because Amazon is so opaque about its operations and finances. Bezos is basically saying "Trust me." I don't blame people who do, he's an amazing guy. Still, it's interesting to see how widely views about the company can differ, based on apparently rational analysis of exactly the same financial reports. http://seekingalpha.com/author/paulo-santos/articles/symbol/amzn http://seekingalpha.com/author/paulo-santos/articles/symbol/... While this guy seems to have lost his shirt betting against AMZN over the past couple of years, his bearish analyses of its valuation are quite precisely articulated and make interesting reading. Alibaba may eat the 3P revenue: http://seekingalpha.com/article/2263623-this-is-amazon-coms-d-day-and-the-alibaba-troops-are-disembarking http://seekingalpha.com/article/2263623-this-is-amazon-coms-... Amazon.com's profitability decline is structural and tied to its sales mix: http://seekingalpha.com/article/2169003-the-latest-developments-in-the-amazon-com-saga http://seekingalpha.com/article/2169003-the-latest-developme... I wouldn't short this monster, though, at least not until QE ends.

notastartup 12y ago

This part worries me a lot With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. It kind of sounds like never.

jeffreyrogers 12y ago

The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)? I don't know either way, and I don't want this post to seem like a criticism of Amazon. I know some people who work in upper level management there and they all speak very highly of the way the company is run (very meritocratic). But reinvesting earnings is only a good strategy if those earnings are put to good use, otherwise they should be paid out as a dividend. Anyways, just something to think about whenever the topic of Amazon's profits/earnings comes up.

eru 12y ago
> The real question is this: does the dollar of earnings Amazon retains generate more than a dollar of value for owners of the company (i.e. shareholders)? Taxes bias this question.

QuantumChaos 12y ago

At the risk of being boring, Amazon's "no profit" model works because profit is an accounting measure, not an economic measure. Amazon is increasing in value, but because they are investing in themselves, on paper (i.e. according to accounting measures) they are not profitable. All companies have a "book to market" ratio that indicates they are worth more as a company than accounting measures would suggest.

eru 12y ago
In general, yes. In practice, some companies have a subpar book to market ratio.

toasted 12y ago

I've stopped buying much at all off amazon because I get it all from Aliexpress. They package up and address individual items in shenzhen/guanzhou, stick them all in big containers, then when they reach the US/europe they deliver them by the cheapest means possible in a totally commoditised fashion. What competitive advantage does amazon.com have now? Why do all those small sellers need to exist? everything they sell is made in china anyway.

known 12y ago

$20 million income is generating $160 billion market capitalization which is very high IMO

Falkon1313 12y ago
That seems a very short-term view IMO - that substantially increasing value should indicate that a company is less successful than it would be if it was giving money away and therefore losing value. If the net worth is about $40 billion or more and growing (almost tripled since 2009?), and revenues are growing (almost tripled since 2009?), and it's not hugely inefficient (has relatively steady or increasing profits instead of increasing losses) - I don't understand why people think that sounds like failure.

stuaxo 12y ago

While they pay so little tax, their smaller competitors that do, effectively subsidise them.

arbuge 12y ago

The fly in the ointment that I see is that if shareholders become disillusioned and decide to return Amazon stock to a more reasonable valuation, alot of things could come apart in a company which bases a significant portion of its employee compensation on stock/stock options, as Amazon does.

dmourati 12y ago

Check out Simon Wardley for some insight into what games Amazon may be playing, specifically on cloud. http://www.infoq.com/interviews/Cloud-Landscape-Simon-Wardley http://www.infoq.com/interviews/Cloud-Landscape-Simon-Wardle... "This is a model known as ILC, which stands for innovate leverage commoditize. The model is pretty simple: what you do is you provide a commodity service, you enable everybody else to innovate on top of it. They are actually your research and development group. You do not bother to do it yourself, you get everybody else to build on your services. Anything which is successful and starts to spread in your ecosystem, you can identify through consumption information, so you can leverage the ecosystem to spot successful development and then you commoditize these new components."

Hacktor69 12y ago

that makes a lot of scenes, but all of this will surely be turned into profit one day. ofcore they can not do all of this with no profit.