Jeff Bezos rolls up another $437m, lights Amazon's cigar with it It's not black magic that Amazon works on its financial results each quarter but red magic – because however massive a haul of cash the company pulls in, it just can't seem to turn a profit. Odd, that. The e-tailer's net sales were up 20 per cent for the third quarter of its fiscal 2014, year-over-year, bringing in a whopping …
Got to figure they've blown a couple billion easy on putting out one of the worst phones of the year. If you can't get over a 2-star review rating on your own website for the phone, might as well drop it.
If all they do is stop chasing boondoggles like that, they'll be out of the red pretty quickly.
And by the way Amazon - your Kindle is a wonderful device, but your app store apps get older and dustier by the day. Let the people have Chrome and access to the Play Store - clearly you aren't making much money off 2-year old versions of apps.
Phone is not capital infrastructure.
Some of that 1.3 Bn on capital went into stocking up the German datacenter with kit as it had to be seeded to be a full region in AWS from day one. However that does not explain all of it. My guess is that they acquired one more location for a datacenter this year somewhere outside USA.
Anyone ever consider the future of their AWS / cloud apps running on infrastructure where the provider is making a loss and facing increasing price competition from Microsoft / Google etc. who are otherwise profitable and perhaps can run at a loss for longer?
"it just can't seem to turn a profit"
"Anyone ever consider the future of their AWS / cloud apps running on infrastructure where the provider is making a loss and facing increasing price competition"
One of the many reasons why we went with Azure. Azure is about to overtake Amazon S3 in revenue! And makes a profit.
Many defenders of Amazon say that they can pull a profit anytime they want by just easing up on the "reinvestment." But I question that. It costs a lot of money to run a data center and continually update its features and functions. You can potentially slow down the pace at which you open data centers or release updates, but you can't really stop, lest the likes of Google, Azure, or even Rackspace will start to pull marketshare from you. So, I question how much profitability is built up the system.
Last man standing.
You know all that money they lost competing with bricks+mortar bookstores and other online book sellers? Where are their book competitors now?
And the $14Bn they are making selling electronics. Radio shack are gone, Best Buy won't be long, even ebay is looking bad.
They can spend a lot more than Rackspace, Google don't have cloud as a core business - their only real competition is Microsoft.
Google needs another revenue stream, or two. They still make more than 80% of their cash from online advertising (that figure's from memory though).
Now I believe they're making cash on Android, and they've invested hugely into that. And that might start them making decent money from the Play store - not just in software but also films/books/audio. But then it might not.
But the advertising market is very cyclical. And quite fickle. Maybe online advertising will fall out of fashion, given how ineffective it seems to be. And how some browser maker could just decide to kill it at a stroke. Maybe search might start working in a different way, that doesn't allow for the same level of profit for Google.
Google aren't shy of chucking huge amounts of cash after long-term bets. See Android for details. They probably blew well over $10 billion on that before it turned a profit. And it's now part of Google's core business. The question isn't whether cloud is part of Google's core business now, but whether Google management thinks it will be soon.
As a quick thought-experiment: I think smartphones are now massively over-priced. When a Motorola G or Lumia 730 is well under £150. Can there still be much room to pay £500, except for specialist customers? I don't think for much longer. Except maybe for Apple. So who's going to make the money off this market? The manufacturers will turn into commodity sellers, fighting over scraps, just like the PC market. Maybe the people who design the software, if they can get people to want theirs. But there's going to be a big market in data. Who's going to manage my photos, email, important documents, e-tickets etc? Now I might say, me. But 95% of the population aren't currently capable of it. And I know just as many young people who don't understand computers, even if they use Facebook and Skype more. That's a lot of small, but regular cash, along with some quite juicy personal data. But requires huge infrastructure and a trusted brand. I personally think Google are risking their brand by being too creepy, but they're currently still a well-loved brand with a few detractors. Like Apple.
the $14Bn they are making selling electronics.
Yet Another Anonymous coward,
You mistake turnover for profits. Something I am beiginning so suspect that Jeff Bezos may be doing too. They don't make $14bn on sales of electronics. They buy about $14bn of electronics from other people, and sell them for hopefully a higher number. That difference is their gross profit. From which you take their costs to work out how much cash they have left to blow on winning market share in other markets.
They may have mostly killed the large book and music chains, but that doesn't mean they can massively up their prices. There are plenty of other online companies around, and as Amazon proved, it's much easier and cheaper to set up online, so they'll never be safe from competition.
So I'm sure they can outspend Rackspace, but not Google or Microsoft. Remember Google and MS have to have huge datacentres already, to do the other that makes them profits. So they are only adding to infrastructure they've already built and must maintain to survive.
Amazon make losses (or sometimes break even) every quarter, and say it's because they keep re-investing it into new bits of the company. MS and Google also invest lots of money in bits of the company and yet they make profits each quarter. MS about $5bn, Google about half that.
Which means that either of them could invest as much money as Amazon does on cloud infrastructure again, and still be making healthy profits, despite the fact they already invest as much or more than Amazon do.
One certainty is that Amazon cannot outspend them. And that's to ignore IBM, Oracle, HP and I suppose even Apple. Any of those could afford to blow a few billion a quarter on datacentres if they want to.
Beyond that we start getting into questions about tax law, especially in the US. My understanding when I was helping NPOs go through the incorporation process some years ago was that at some point the books have to balance and you have to have a surplus/profit. I think they need to have some black ink real soon or the IRS hounds will be released.
Nothing new... Just plain old fashion creative accounting...
Decades ago when employed by a very profitable corporation composed of 14 divisions with over 120,000 full time employees, before each new fiscal year a group of us drones would meet at corporate headquarters to determine which divisions would loose money for tax purposes in the following year. The most common accounting tool we used was inter-division billing where the designated loosing divisions would be billed for services and materials at inflated prices resulting in paper losses.
I buy a lot of electronic gadgets, usually online, and I always strive or wait for the lowest prices. Amazon doesn't get very much of my business in this sector, perhaps about 2%. Their prices are rarely the lowest.
So if one is looking for a root cause of their supposed lack of profits, I don't think that it's because they're giving away electronic gadgets.
What is just insane is how they keep going in spite of the losses. Why are they still being lent money to contiue trading? If this was a traditional bricks and mortar company, the administrators and receivers would have been called in years ago. Just becuase this is a web-based company, it is acceptable to have a crazy share price, run at a loss, and yet still have funding.
Either the accounting practices are highly questionable (just like their tax arrangements) or there are too many investors that are in so deep they cannot afford the alternative. It is the same as the backing crisis where "Too big to fail" came in. The reality is that at some point the wirting will be in the wall and a company of this size is going to crash. The trouble is then what goes with them because all off the plonkers that have bought into the "cheap is best" with the race to the bottom that is ongoing at the moment.
If they have positive cashflow and they're investing their money in stuff that has value, then things look different. So if I can tell my auditor that I just spent $1bn on an asset that's still worth $1bn - they aren't going to get angry with me, and do horrible things to me. What they might tell me to do is to close or sell loss-making parts of the business.
At which point standard procedure, from my experience, is that you go out for a nice dinner (which the auditors pay for) and have a polite but bitter argument about it all. Then you come back and decide that they will sign off on your books, because that bit they told you to close is expected to make a profit in future, honest guv. The auditors then go back to their office, and send you an invoice for the cost of their time checking up on you, and telling you how to run your company, and adding a charge on for the dinner, which is about twice the cost of the meal.
In our case we'd just spent several million opening a couple of new shops, and the auditor informed us that as they weren't yet making profits, they should be shut down 6 months later! Although they did have a fair point about store number 3, which never seemed to make any profits at all.
It would be interesting to see if the shareholders ever revolt though. Assuming they're allowed to. A lot of these modern tech companies have stupid share structures, where the bosses own such high percentages of the voting stock, that they can pretty much do what the hell they like. I seem to remember that Zuckerberg has 51% of the Facebook voting stock, but owns less than 10% of the company.
Auditors don't "tell" the companies they're auditing what to do - their role is to ensure that the results have been compiled in a reasonable way so as to give an accurate view of the company's finances. They don't give two hoots whether you're making a loss or not! If you're allowing your auditors to determine your business strategy then you're an idiot.
The auditors I know, and my experience from my old job with a mid-sized multi-national, would disagree with you. That dinner I described happened in about 1998.
Audit is there partly to protect the shareholders. A proper audit should also challenge management to back up certain decisions, as well as to check the accounts aren't fiddled. Not all accounting questions have cut-and-dried answers. Audit must also check that the limited liability guarantee isn't being abused, and that the company is solvent. Trading insolvently is fraud. Hence profitability is an important issue.
And I'm sure a lot of that reinvestment is good business and staffing. Amazon's customer service, when I have dealt with them, is second to none. I've clicked on support and asked for a call back. A couple of minutes later my phone rings and I'm talking to a human being (with an Irish accent).
Any time I've had a problem, they've been able to sort it out to my satisfaction in next to no time. I'm sure there are those who HAVE had problems, but I've found them excellent. I recently bought some MP3s from them and decided to try out their download software to see what it was like. Not only did the MP3s I had bought appear, but MP3 copies of all the CDs I had bought from Amazon over the years! You can't beat that kind of service.
Edit - OK CaptainHook got in first but still worth saying...
Reading the comments.... are we really engaged in the shared delusion of believing any of this? Who, other than the revenue collectors of every country where Amazon sells stuff and services, believes that Amazon is a failing business?
I would fall off my chair in amazement if i clicked on Amazon UK and it wasn't there any more.... and so would you I would guess. How would that reaction tally with a company that is apparently haemorrhaging money?
Maybe we should just give Jeff Bezos a knighthood (or whatever floats his boat) and ask him nicely to fix the global tax system.
Monkeyman,
Amazon somewhat gives the lie to constantly-repeated saying that the markets can't cope with long-term investment.
However, it's the shareholders' company. In the end they have to be rewarded for their investment. If Bezos wanted a personal plaything with which to do cool stuff, then he should have kept control of the company. But he didn't. He sold it. and probably became rather wealthy in the process. With that transaction comes the nast responsibility to other people, whose money you are now custodian of.
Not that investment in the future is a bad thing. It's important. But selling shares is the alternative to borrowing money. That's one of the reasons these tech company structures are so bad. There should be a downside to doing an IPO and getting rich. And it's the loss of total control over your pet project.
When they export their untaxed profits, they pretend to "import" something to balance the books. Typically something like royalties out for an "import" of a license to use a Trademark. Or "management fees", or some other " IP" transfer.
Governments could easily, if they really wanted to, slap an import duty on such "imports".
Allow a generous deduction and link further deduction credits to income tax paid. Done right, there'd be no significant escape.
This policy change should help with government deficits. All good.
It's nothing like a Ponzi scheme.
Amazon has effectively displaced a significant chunk of the retail sector with a more efficient and cheaper service that not only includes direct sales but a marketplace for other retailers to operate in. It's about as much of a Ponzi scheme as John Lewis or your local shopping centre.
The only thing that will do in Amazon's business is competition which offers even more of what drives people to Amazon in the first place, which is precisely why Amazon doesn't want to leave the door open to such competition by doing silly things like pushing up prices to raise a dividend.
Me thinks there is a lot of cross cost-centre charging going on here.
One part of the business charges another part a silly amount for something relatively trivial.
No need to pay a dividend on profits (as there aren't any) to shareholders.
No need to pay the protection racket known as tax, as no profit has been declared.
Amazon is keeping its money for itself.
I love smoke and mirrors, me.
edit: pdlane beat me to it.
Why would the investors put up with not getting any dividends? Easy: their shares in the company have a worth which is largely determined by both its current size and its projected growth.
Sure the stock market may go sulky for a moment about the numbers not being what they predicted, but the overall trajectory of Amazon is "business as usual" - i.e. ferocious growth.
And lest we forget, Amazon didn't become the business it is today by trying to turn a big profit to give to shareholders. Since the start, it has aggressively undercut in order to carve out an ever-bigger slice of the economy.
The shareholders who had shares in them from the start won't give a damn that they've not received dividends, because they can sell their shares for a vast profit to other people who will be happy to hold those shares because of the aggressive growth that the company continues to pursue.
You can't compare Amazon with (say) Currys as another example of a loss-making business. The former is on the way up, the latter is on the way down. It makes all the difference to perception of worth on the stockmarket.
On the other hand I might be wrong, in which case, you should all rush out and short Amazon stock - you'll make a fortune!
Come back and tell us how it went in a year's time!
Quick quiz for you, what should the share price be for Amazon if it NEVER pays a dividend? Answer: Zero. Otherwise investors rely on the greater fool theory where someone pays them more tomorrow than they paid yesterday for a share, and someday the fools will run out and those who hold shares will be left holding the bag.
The "yeah if you don't think it is super-valuable like I do you should short it" argument is rather weak, because it assumes that investors come to their senses based on some sort of a schedule. They haven't done it yet, though the 30% drop this the past 9 1/2 months may indicate that is starting to happen. But it could equally be seen as an opportunity to load up more shares by those deluded like you are, and the stock price could be quickly bid back up again if there are enough of them willing to put enough money behind their delusion.
Amazon can play this game of claiming they lose money because they're investing for the future all the want, but what is the POINT of investing for the future if not to be more profitable in that future? Amazon is massively overvalued, but until investors who think like you finally realize there's no pot of gold at the end of Bezo's rainbow, it will continue to be massively overvalued.
If you bought in a few years ago you've made out pretty well, even with today's 10% drop and the larger drop this calendar year. If you bought in less than a year ago, you might be starting to panic seeing the value of your investment drop by a third with no sign that the business will generate any better results that would give a reason to bring it back up again. Once the number of panicked investors exceed the number sitting on the sidelines waiting to buy because they think it will continue to go up and up for no reason, that's when you should short it.
I have no way of measuring that so no way to know when to short it, and prefer instead to invest in companies who have a sound reason behind their stock price with boring traditional measures like actual profit instead of fantasy "maybe in a decade, if we run every other retailer in the world out of business somehow". They are subject to their own bouts of delusion (c.f. Apple's decline that dropped its P/E well below 10, without any reason to think its current products were a problem, only that "no Steve Jobs, no new paradigm-shifting products) but so long as there is an actual profit stream that can be relied on at least in the short/medium term, it sets a floor below which the stock price cannot go. A stock like Amazon that generates no profit has no floor, it could theoretically drop down to its book value, which is about $20.
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