7 ms·

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.
- mkaziz 12y ago
  If they don't want a profit, what's their motivation for existing?
  - amaks 12y ago
    They do want the profit, they just keep reinvesting it to capex.
  - RaptorJ 12y ago
    "Amazon" isn't a thing that has wants or feelings. You can not make a profit and still pay your executives a bundle of money.
  - zaidf 12y ago
    It isn't that they don't want a profit, it's just that as long as they feel they can reinvest the profit relatively safely to make even more profit in the future, they will continue doing so.
  - AndrewKemendo 12y ago
    The other replies to this aside, I think the assumption inherent in your question is myopic. I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
  - gatehouse 12y ago
    Since they are a publicly traded company, the ownership can be fluid. As a shareholder you can stay in or cash out whenever you want, if you want to simulate a profit you can sell shares periodically. So the separation between the company's internal finances and the exchange of shares on the stock market is what allows this to happen and still make sense.
  - tim333 12y ago
    Profit in this case is generally a quantity calculated by accounting rules (US GAAP probably) and is a different thing from wealth created. Amazon has produced a lot of wealth for it's shareholders, enough for Bezos to be worth ~$30bn build spacecraft as his hobby. The difference is more obvious with a company like Facebook. Say they spend $1bn building the company from zero to 500m users and at the same time receive $1bn in ad revenue. Their accounting profit is $0 but their wealth is a lot due to the value of the 500m users. There are advantages to keeping the GAAP profit near zero because you pay no corporation tax that way.
    - wodenokoto 12y ago
      But in the end that wealth is based on people's belief that 500m users can be turned into a profit.
  - Twirrim 12y ago
    Your question could be interpreted in a couple of different ways. Are you implying that profit is the only reason for a company to exist? If so, would you indulge my curiosity, what leads you to think that way?
  - auxbuss 12y ago
    You might be confusing profit with margin. You need margin, in general, but you don't necessarily need profit.
- sliverstorm 12y ago
  So if they will never pay dividends, why is their stock worth anything?
  - superuser2 12y ago
    Because you can sell it?
  - jmccree 12y ago
    Because you can sell it for more than you bought it for. Look at Warren Buffet's Berkshire: You would have doubled your money in 4 years if you bought in 2010. They've pretty consistently increased the value of their shares without paying a dividend in 50 years or so.
    - apalmer 12y ago
      Absolutely understand what you are saying. But isn't that by definition a hot potato Ponzi scheme? I mean there are large monster e-commerce giants in other nations, it is a very real possibility that Amazon will have to battle with some company at scale who is also in the razor sharp margin mindframe. Its not impossible to imagine a world where amazon gets into a war with an Asian e-commerce giant for domination of the worlds e-commerce needs. If this does come to fruition this battle will probably not be resolved until 2020 ish time frame... so its a real possibility that amazon could be in business for 30 years, never return a profit to its investors, and NOT end up ever ruling ecommerce.
      - cellis 12y ago
        But in the meantime, there is money to be made in holding on to it. Look at AMZN speculation like Bitcoin speculation: there's really no intrinsic value of a Bitcoin or AMZN share, except that others want them and there's a finite supply of them, and also there is some underlying (quickly growing) market that they represent, which means that the shares should also grow in value. Couple that with a nice PR machine ( can't understate the value of people like PMarca writing about how amazing they are ) and you've got a way to reliably grow your portfolio.
- swalsh 12y ago
  "Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce." I used to work for a strapping start-up. Our competition had a lot more money, and people than us... but it didn't really matter because we were smarter in how we approached building the product. The future of eCommerce is going to be very heavily dependent on AI & robots. Product Suggestions > inventory management > ware house > packing > delivering. AI makes your customers buy more, and robots make delivering it cheaper. As good as Amazon is at creating this infrastructure, google has demonstrated a mastery in AI, and they're purchasing every robot company around. The competition is on, and I wouldn't count them out.
  - exelius 12y ago
    Amazon has actually been better at this kind of stuff than Google. Since their acquisition of Kiva Systems, they have built what is by far the best automated warehousing/logistics platform of any company in the world. The future of EVERYTHING is going to be very reliant on AI and robots. My view is that the last 20 years have been the Internet revolution. The next 20 are all about AI and robotic automation. Both disciplines have existed for a long time, but they've hit a tipping point where price and effectiveness are putting them within reach of total ubiquity.
  - jfoutz 12y ago
    Both Amazon and Google are very smart. Amazon seems to have a greedy algorithm with regard to new tech. I mean, Amazon seems to keep automating the least efficient thing - http://www.kivasystems.com/ http://www.kivasystems.com/ for example. Google is much more forward looking, looking for big changes, like self driving cars. I can see google taking over more markets like they did with search. "more wood behind fewer arrows" was the saying. Amazon is much more broad, if Amazon has something, they'll rent it to you.
    - seanmcdirmid 12y ago
      Agreed. Google is more likely to be the GE of the future: a lot of great technology, hands in many industries. Amazon, in contrast, is like a cross between Wal-Mart and the old AT&T (there is no good previous analogy for what they are doing, but many are doing the same...see Taobao).
SilasX 12y ago
If you reinvest all profits, you're still turning a profit. To say otherwise is to confuse the issue, even if technically correct in some contexts.
- vasilipupkin 12y ago
  Not really, because your re-investments could be profit-destroying. If you earn 100 dollars of profit and gave to investors, the investors now have $100. If you reinvest $100, the investors have a bet that some time in the future they will have more than $100. Clearly, the two are different.
  - jacquesm 12y ago
    Think of it as endless stockdividends, so every profit is turned into money that fuels further growth of the machine without having to hit anybody up for capital. As long as there is growth plow the profits back into the engine. Once the growth stops (you'd have to wonder what the implications of that alone would be, I'm not sure I can quite envision how large a vertically integrated company that would run into the limits of geographical expansion would be, planet wide perhaps?) you can start thinking about dividends. Until then the best investment is to re-invest because that is where ultimately you'll make the highest ROI. It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI. It's a very smart long term strategy.
  - SilasX 12y ago
    Yes, in the future you might not be profitable. In the year that you turned a profit, you turned a profit, even if you decided not to pay it out as a dividend.
Pxtl 12y ago
If all the profit goes back into the company to expand the company, is it somehow not "profit"? Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further. Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".
- vasilipupkin 12y ago
  it's not profit in the sense that we assume that amazon investors would be worse at reinvesting cash from existing operations than amazon management. It could very well be true now, but it may also not be as true as you think. That's why it's not really profit in the true sense of the word.
- baddox 12y ago
  > Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.
MaysonL 12y ago
They're turning a profit continuously: it's just that they're turning that profit into warehouses rather than into cash.

Yes. But only when there are no longer attractive opportunities for them to invest in expansion.

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.

mkaziz 12y ago
If they don't want a profit, what's their motivation for existing?
- amaks 12y ago
  They do want the profit, they just keep reinvesting it to capex.
- RaptorJ 12y ago
  "Amazon" isn't a thing that has wants or feelings. You can not make a profit and still pay your executives a bundle of money.
- zaidf 12y ago
  It isn't that they don't want a profit, it's just that as long as they feel they can reinvest the profit relatively safely to make even more profit in the future, they will continue doing so.
- AndrewKemendo 12y ago
  The other replies to this aside, I think the assumption inherent in your question is myopic. I know for myself, my motivation to get capital (profits) is so I can build things that improve decision making, increase longevity and in the end expand knowledge worldwide. Perhaps Bezos has motivations that are along the same lines and this is how he is achieving them.
- gatehouse 12y ago
  Since they are a publicly traded company, the ownership can be fluid. As a shareholder you can stay in or cash out whenever you want, if you want to simulate a profit you can sell shares periodically. So the separation between the company's internal finances and the exchange of shares on the stock market is what allows this to happen and still make sense.
- tim333 12y ago
  Profit in this case is generally a quantity calculated by accounting rules (US GAAP probably) and is a different thing from wealth created. Amazon has produced a lot of wealth for it's shareholders, enough for Bezos to be worth ~$30bn build spacecraft as his hobby. The difference is more obvious with a company like Facebook. Say they spend $1bn building the company from zero to 500m users and at the same time receive $1bn in ad revenue. Their accounting profit is $0 but their wealth is a lot due to the value of the 500m users. There are advantages to keeping the GAAP profit near zero because you pay no corporation tax that way.
  - wodenokoto 12y ago
    But in the end that wealth is based on people's belief that 500m users can be turned into a profit.
- Twirrim 12y ago
  Your question could be interpreted in a couple of different ways. Are you implying that profit is the only reason for a company to exist? If so, would you indulge my curiosity, what leads you to think that way?
- auxbuss 12y ago
  You might be confusing profit with margin. You need margin, in general, but you don't necessarily need profit.
sliverstorm 12y ago
So if they will never pay dividends, why is their stock worth anything?
- superuser2 12y ago
  Because you can sell it?
- jmccree 12y ago
  Because you can sell it for more than you bought it for. Look at Warren Buffet's Berkshire: You would have doubled your money in 4 years if you bought in 2010. They've pretty consistently increased the value of their shares without paying a dividend in 50 years or so.
  - apalmer 12y ago
    Absolutely understand what you are saying. But isn't that by definition a hot potato Ponzi scheme? I mean there are large monster e-commerce giants in other nations, it is a very real possibility that Amazon will have to battle with some company at scale who is also in the razor sharp margin mindframe. Its not impossible to imagine a world where amazon gets into a war with an Asian e-commerce giant for domination of the worlds e-commerce needs. If this does come to fruition this battle will probably not be resolved until 2020 ish time frame... so its a real possibility that amazon could be in business for 30 years, never return a profit to its investors, and NOT end up ever ruling ecommerce.
    - cellis 12y ago
      But in the meantime, there is money to be made in holding on to it. Look at AMZN speculation like Bitcoin speculation: there's really no intrinsic value of a Bitcoin or AMZN share, except that others want them and there's a finite supply of them, and also there is some underlying (quickly growing) market that they represent, which means that the shares should also grow in value. Couple that with a nice PR machine ( can't understate the value of people like PMarca writing about how amazing they are ) and you've got a way to reliably grow your portfolio.
swalsh 12y ago
"Interestingly enough, after reading that, I realized that Google doesn't stand a chance in hell of beating them at commerce." I used to work for a strapping start-up. Our competition had a lot more money, and people than us... but it didn't really matter because we were smarter in how we approached building the product. The future of eCommerce is going to be very heavily dependent on AI & robots. Product Suggestions > inventory management > ware house > packing > delivering. AI makes your customers buy more, and robots make delivering it cheaper. As good as Amazon is at creating this infrastructure, google has demonstrated a mastery in AI, and they're purchasing every robot company around. The competition is on, and I wouldn't count them out.
- exelius 12y ago
  Amazon has actually been better at this kind of stuff than Google. Since their acquisition of Kiva Systems, they have built what is by far the best automated warehousing/logistics platform of any company in the world. The future of EVERYTHING is going to be very reliant on AI and robots. My view is that the last 20 years have been the Internet revolution. The next 20 are all about AI and robotic automation. Both disciplines have existed for a long time, but they've hit a tipping point where price and effectiveness are putting them within reach of total ubiquity.
- jfoutz 12y ago
  Both Amazon and Google are very smart. Amazon seems to have a greedy algorithm with regard to new tech. I mean, Amazon seems to keep automating the least efficient thing - http://www.kivasystems.com/ http://www.kivasystems.com/ for example. Google is much more forward looking, looking for big changes, like self driving cars. I can see google taking over more markets like they did with search. "more wood behind fewer arrows" was the saying. Amazon is much more broad, if Amazon has something, they'll rent it to you.
  - seanmcdirmid 12y ago
    Agreed. Google is more likely to be the GE of the future: a lot of great technology, hands in many industries. Amazon, in contrast, is like a cross between Wal-Mart and the old AT&T (there is no good previous analogy for what they are doing, but many are doing the same...see Taobao).

SilasX 12y ago

If you reinvest all profits, you're still turning a profit. To say otherwise is to confuse the issue, even if technically correct in some contexts.

vasilipupkin 12y ago
Not really, because your re-investments could be profit-destroying. If you earn 100 dollars of profit and gave to investors, the investors now have $100. If you reinvest $100, the investors have a bet that some time in the future they will have more than $100. Clearly, the two are different.
- jacquesm 12y ago
  Think of it as endless stockdividends, so every profit is turned into money that fuels further growth of the machine without having to hit anybody up for capital. As long as there is growth plow the profits back into the engine. Once the growth stops (you'd have to wonder what the implications of that alone would be, I'm not sure I can quite envision how large a vertically integrated company that would run into the limits of geographical expansion would be, planet wide perhaps?) you can start thinking about dividends. Until then the best investment is to re-invest because that is where ultimately you'll make the highest ROI. It's the longest of long bets, and since Bezos / Amazon is betting on itself there is a large number of ways in which he can affect the outcome. If he would invest his profits after dividend into some other company (after all, just letting it lay around would be very wasteful) he's likely not get as much influence and not as high an eventual ROI. It's a very smart long term strategy.
- SilasX 12y ago
  Yes, in the future you might not be profitable. In the year that you turned a profit, you turned a profit, even if you decided not to pay it out as a dividend.

Pxtl 12y ago

If all the profit goes back into the company to expand the company, is it somehow not "profit"? Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". Amazon's individual operations do generate a profit, except for the new bleeding-edge expansions into new businesses. Those things run at a loss, fed by the profitable wings of the company. And when they become profitable, they become a part of the other side of the machine and Amazon expands further. Amazon simply chooses to invest every penny of profit into growth. Somehow we don't consider that "profit".

vasilipupkin 12y ago
it's not profit in the sense that we assume that amazon investors would be worse at reinvesting cash from existing operations than amazon management. It could very well be true now, but it may also not be as true as you think. That's why it's not really profit in the true sense of the word.
baddox 12y ago
> Saying that Amazon doesn't make a profit depends on a misleading definition of the word "profit". It's only misleading if you pick a definition of "profit" at random rather than investigating the definition being used in the article. As the article states, Amazon's gross profit is over 20%. And the article briefly hints that gross profit is not a very useful metric. It's certainly of little immediate relevance to Amazon's investors.

MaysonL 12y ago

They're turning a profit continuously: it's just that they're turning that profit into warehouses rather than into cash.