5 ms·

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.
    - thaumasiotes 12y ago
      There is intrinsic value in a share of AMZN, because unlike the concept of bitcoin, Amazon formally owns assets which the share gives partial ownership of.
  - jmccree 12y ago
    I don't think Ponzi scheme applies at all. In this case, the value and price of a share is based on the actual revenue growth of amazon from non-investor provided income. If amazon was taking on new investors to pay out money to old ones, it might apply. It's certainly possible amazon could end failing and the stock would end be worthing much less than expected. It seems unlikely the name brand, market capture, datacenter and distribution facilities, etc would not end up with amazon being acquired by a walmart or something ala AOL/TW.
  - burgers 12y ago
    It isn't a ponzi scheme because Amazon isn't dependent on new share purchases to keep running. It is a fully functioning operation that is in the black. It just isn't generating any real profits above its costs. Amazon is worth money right now. Just like a lawn mower doesn't turn a profit on its own, but it is still worth something. In the long term view, which Amazon definitely takes, this current process is just there to fund the final business. Which is providing infrastructure. It uses its current operations as a way to fund the build out of that infrastructure. The future of Amazon, in my opinion, is not selling books etc, but providing someone with the infrastructure to sell books. Its using its current book sales etc to fund that build out.
    - apalmer 12y ago
      I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works. I dont think Amazon is taking a bad approach but, realistically feel Amazon is not going to produce any other return for its investors for the next ten years until it completely dominates the world market. Couple this with the fact that Amazon is not guaranteed to ever actually completely dominate the world market... its just unusual for a company to never return a profit after 20 years of business and investors are still hungry for the stock.
      - gizmo686 12y ago
        The big distinction is that Ponzi schemes have no end-game: they inevitably burst. Amazon has a well defined end-game (start to turn a profit), and there is good reason the believe that they will eventually do so. Assuming this eventuality remains reasonable, the stock will have some inherit value because someone will be willing to buy it today for the expected payout of dividends later.
      - baddox 12y ago
        > I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works. By that definition, literally every investment would be a Ponzi scheme. A savings account would be a Ponzi scheme.
  - prostoalex 12y ago
    The book "Outsiders" talks about this in historical perspective http://books.google.com/books/about/The_Outsiders.html?id=psSLKgV8IO4C http://books.google.com/books/about/The_Outsiders.html?id=ps... Essentially, there's a philosophy among some CEOs that at current tax rates profitability is something to be avoided, but a healthy EBITDA and reinvesting the capex is the way to increase the shareholder value. The voluntary nature of capital gains tax makes stock buybacks or busines reivestment a more efficient mechanism of delivering value to shareholders.
- sliverstorm 12y ago
  Berkshire Hathaway holds liquid assets though. It makes perfect sense that a holding company with $1B in liquid assets should have a market cap of $1B, and from there any growth in their holdings translates to a growth in market cap. There's a clear equity/stake relationship. There's even a clear speculative-equity/stake relationship. Amazon is completely different from that, no? A tremendous amount of their value is in intangibles that produce revenue, rather than have intrinsic value. This is fine when you say "I want to own a piece of that revenue stream for the future profits", but if Amazon by choice will never produce net profits from that stream... do you see what I'm getting at? A goose that lays golden eggs has no value if the eggs are never sold and simply hatched.
  - tim333 12y ago
    Both BRKA and AMZN have a lot of assets that could be sold for something like their market caps. Hence the value in each. Same way a gold bar is worth about as much as a gold bar even if you have no immediate plans to sell it.
  - melvinmt 12y ago
    AMZ is 910 P/E, so yes, you're paying quite a premium on today's value.
  - clarky07 12y ago
    It's still worth something. All of these warehouses and data centers are assets if nothing else. You can sell buildings and land. Obviously that value alone doesn't justify the share price, but it does justify > 0 value. The bet that investors are making is that at some point the revenues and cash flow will be so huge that Amazon won't know what to do with them and at that point they will start showing a profit and perhaps even pay a dividend. It's not entirely unreasonable. Even Apple finally started paying a dividend once they got to 100 billion or so in the bank. Noticing that Amazon only has 1% of the retail market is pretty crazy. the potential opportunity they have is staggering. It's not unreasonable to think at some point their will be profits to be had.
swalsh 12y ago
never is a long time.
ghaff 12y ago
As others have written downthread, it's probably at least worth the pro-rated value of their assets at fair market value. That said, the classic theoretical valuation of a stock is the net present value of their dividends--i.e. the cash you receive from the company. Obviously this doesn't work very well as a stock pricing proxy for most companies. But if you factor in things like estimated acquisition price, you get closer.
- sliverstorm 12y ago
  Right, I mean it makes perfect sense if the dividends have some expected future value. But my parent was saying they don't need to make a profit. If they never turn a profit, the expected future value of the dividends is $0.
  - eru 12y ago
    Only if they certainly never turn a profit. If there's some possibility, it will be above $0.
x0x0 12y ago
the hope (gamble?) of price appreciation hedging diversification lottery tickets on bezos owning a significant fraction of world commerce
dragonwriter 12y ago
> So if they will never pay dividends, why is their stock worth anything? Because stock is a claim against the assets in the event of dissolution, so it should be valuable as long as the company is expected to have a positive net worth. Dividends are simply a mechanism allowing stockholders to realize value prior to dissolution. Of course, so is simply selling stock. Further, if Amazon runs out of good opportunities to funnel operating returns into expansion, then it would make sense to start returning some via dividends, its just that its not there yet and that situation isn't even apparent on the horizon -- its not that they'll never pay dividends, its just that it doesn't seem to be the optimum strategy for the foreseeable future.
- andrewflnr 12y ago
  stock is a claim against the assets in the event of dissolution Holy crap. Stock makes sense now. Thank you.
  - dragonwriter 12y ago
    Its one of those things that's important to understanding the meaning/value of stock, but easy to lose track of in practical terms because, in practice, you almost never see a corporation dissolved in circumtances where the stockholders would see any value, because dissolution, if it happens, usually happens in insolvency, so creditors, with their higher priority claims, leave nothing for stockholders. But that's because as long as a corporation is solvent, stockholders either expect that it will have greater net value in the future or can find someone else who thinks that, making holding or selling the stock preferable to dissolution. But its the claim against assets in the event of dissolution that supports all that.

Because you can sell it?

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.
  - thaumasiotes 12y ago
    There is intrinsic value in a share of AMZN, because unlike the concept of bitcoin, Amazon formally owns assets which the share gives partial ownership of.
- jmccree 12y ago
  I don't think Ponzi scheme applies at all. In this case, the value and price of a share is based on the actual revenue growth of amazon from non-investor provided income. If amazon was taking on new investors to pay out money to old ones, it might apply. It's certainly possible amazon could end failing and the stock would end be worthing much less than expected. It seems unlikely the name brand, market capture, datacenter and distribution facilities, etc would not end up with amazon being acquired by a walmart or something ala AOL/TW.
- burgers 12y ago
  It isn't a ponzi scheme because Amazon isn't dependent on new share purchases to keep running. It is a fully functioning operation that is in the black. It just isn't generating any real profits above its costs. Amazon is worth money right now. Just like a lawn mower doesn't turn a profit on its own, but it is still worth something. In the long term view, which Amazon definitely takes, this current process is just there to fund the final business. Which is providing infrastructure. It uses its current operations as a way to fund the build out of that infrastructure. The future of Amazon, in my opinion, is not selling books etc, but providing someone with the infrastructure to sell books. Its using its current book sales etc to fund that build out.
  - apalmer 12y ago
    I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works. I dont think Amazon is taking a bad approach but, realistically feel Amazon is not going to produce any other return for its investors for the next ten years until it completely dominates the world market. Couple this with the fact that Amazon is not guaranteed to ever actually completely dominate the world market... its just unusual for a company to never return a profit after 20 years of business and investors are still hungry for the stock.
    - gizmo686 12y ago
      The big distinction is that Ponzi schemes have no end-game: they inevitably burst. Amazon has a well defined end-game (start to turn a profit), and there is good reason the believe that they will eventually do so. Assuming this eventuality remains reasonable, the stock will have some inherit value because someone will be willing to buy it today for the expected payout of dividends later.
    - baddox 12y ago
      > I am just pointing out that as a stock holder if the only value of buying AMAZON stock is that you expect that someone else down the line is going to pay you more to buy it than you paid for it then thats similar to how a Ponzi scheme works. By that definition, literally every investment would be a Ponzi scheme. A savings account would be a Ponzi scheme.
- prostoalex 12y ago
  The book "Outsiders" talks about this in historical perspective http://books.google.com/books/about/The_Outsiders.html?id=psSLKgV8IO4C http://books.google.com/books/about/The_Outsiders.html?id=ps... Essentially, there's a philosophy among some CEOs that at current tax rates profitability is something to be avoided, but a healthy EBITDA and reinvesting the capex is the way to increase the shareholder value. The voluntary nature of capital gains tax makes stock buybacks or busines reivestment a more efficient mechanism of delivering value to shareholders.
sliverstorm 12y ago
Berkshire Hathaway holds liquid assets though. It makes perfect sense that a holding company with $1B in liquid assets should have a market cap of $1B, and from there any growth in their holdings translates to a growth in market cap. There's a clear equity/stake relationship. There's even a clear speculative-equity/stake relationship. Amazon is completely different from that, no? A tremendous amount of their value is in intangibles that produce revenue, rather than have intrinsic value. This is fine when you say "I want to own a piece of that revenue stream for the future profits", but if Amazon by choice will never produce net profits from that stream... do you see what I'm getting at? A goose that lays golden eggs has no value if the eggs are never sold and simply hatched.
- tim333 12y ago
  Both BRKA and AMZN have a lot of assets that could be sold for something like their market caps. Hence the value in each. Same way a gold bar is worth about as much as a gold bar even if you have no immediate plans to sell it.
- melvinmt 12y ago
  AMZ is 910 P/E, so yes, you're paying quite a premium on today's value.
- clarky07 12y ago
  It's still worth something. All of these warehouses and data centers are assets if nothing else. You can sell buildings and land. Obviously that value alone doesn't justify the share price, but it does justify > 0 value. The bet that investors are making is that at some point the revenues and cash flow will be so huge that Amazon won't know what to do with them and at that point they will start showing a profit and perhaps even pay a dividend. It's not entirely unreasonable. Even Apple finally started paying a dividend once they got to 100 billion or so in the bank. Noticing that Amazon only has 1% of the retail market is pretty crazy. the potential opportunity they have is staggering. It's not unreasonable to think at some point their will be profits to be had.

swalsh 12y ago

never is a long time.

ghaff 12y ago

As others have written downthread, it's probably at least worth the pro-rated value of their assets at fair market value. That said, the classic theoretical valuation of a stock is the net present value of their dividends--i.e. the cash you receive from the company. Obviously this doesn't work very well as a stock pricing proxy for most companies. But if you factor in things like estimated acquisition price, you get closer.

sliverstorm 12y ago
Right, I mean it makes perfect sense if the dividends have some expected future value. But my parent was saying they don't need to make a profit. If they never turn a profit, the expected future value of the dividends is $0.
- eru 12y ago
  Only if they certainly never turn a profit. If there's some possibility, it will be above $0.

x0x0 12y ago

the hope (gamble?) of price appreciation hedging diversification lottery tickets on bezos owning a significant fraction of world commerce

dragonwriter 12y ago

> So if they will never pay dividends, why is their stock worth anything? Because stock is a claim against the assets in the event of dissolution, so it should be valuable as long as the company is expected to have a positive net worth. Dividends are simply a mechanism allowing stockholders to realize value prior to dissolution. Of course, so is simply selling stock. Further, if Amazon runs out of good opportunities to funnel operating returns into expansion, then it would make sense to start returning some via dividends, its just that its not there yet and that situation isn't even apparent on the horizon -- its not that they'll never pay dividends, its just that it doesn't seem to be the optimum strategy for the foreseeable future.

andrewflnr 12y ago
stock is a claim against the assets in the event of dissolution Holy crap. Stock makes sense now. Thank you.
- dragonwriter 12y ago
  Its one of those things that's important to understanding the meaning/value of stock, but easy to lose track of in practical terms because, in practice, you almost never see a corporation dissolved in circumtances where the stockholders would see any value, because dissolution, if it happens, usually happens in insolvency, so creditors, with their higher priority claims, leave nothing for stockholders. But that's because as long as a corporation is solvent, stockholders either expect that it will have greater net value in the future or can find someone else who thinks that, making holding or selling the stock preferable to dissolution. But its the claim against assets in the event of dissolution that supports all that.