Sales
Are Colossal, Shares Are Soaring.
All Amazon Is Missing Is a Profit
By FBWorld Team
An
Amazon warehouse in Swansea, Wales. The company is expected
to have around $75 billion in revenue this year.
It
just bought an online education company and introduced
a payment mechanism for Internet retailers that competes
with PayPal. It started selling wine for the first time
in New York, updated its line of tablets, gave the go-ahead
to three new comedy pilots and began a design competition
for its fashion division. It is setting up mini-warehouses
inside suppliers like Procter & Gamble to ship goods
faster.
But
one thing it will not be announcing this month: a significant
profit.
Who cares? Amazon lost money in 2012, and analysts are
anticipating another loss when the company releases its
third-quarter results on Thursday. Yet the stock is at
a record high.
Amazon
shares are up around 150 percent since mid-2010, which
perhaps not coincidentally was the last time the company
had sizable profits. In other words, investors really
decided they loved the company only when net income began
to slide.
"This
isn't supposed to happen," said William H. Janeway,
an economist and venture capitalist. "It violates
mainstream finance theory. Very few companies have been
valued this way outside a systemic bubble."
No
one is asserting that Amazon is a flat-out bubble, but
there is an increasingly noisy debate about when it will
- or even whether it can - deliver the sort of bottom-line
profits that investors normally demand from a company
expected to post $75 billion in revenue this year.
The company declined to comment.
Some
analysts point out that those sales are negligible when
set against the market being targeted by Jeff
Bezos, Amazon's founder and chief executive.
"The market is effectively limitless: all of global
consumer commerce and maybe business-to-business commerce
as well," said Mr. Janeway, author of "Doing
Capitalism in the Innovation Economy."
With
that prize as the goal, making money today would be a
positive hindrance. As Benedict Evans, an analyst based
in London, put it: "Bezos has chosen to run Amazon
to be the biggest, most powerful and successful retailer
on Earth 20 years from now. Any fool could run it profitably
today."
Others
argue that once a discounter, always a discounter. Amazon
is branching out into many forms of commerce and technology,
but at its core it sells commodity goods cheaply. A book
from Amazon is the same book that it would be from any
other retailer, and so is a package of diapers. Amazon
also ships cheaply and has renowned customer service.
To
make a significant profit, though, some or all of those
variables will have to change, which might alienate customers
and slow down that roaring revenue growth. That, in turn,
would cause investors to demand profits even sooner.
Best
not to venture down that road, said Colin Gillis, senior
tech analyst at BGC Partners. "It is easier,"
he said, "to sell things and not make money than
it is to sell things and make money."
In
this view, Amazon's whirlwind of activity - a set-top
box, thrusting it into more direct competition with Netflix,
is expected to be announced any day, while the rumors
of an Amazon smartphone will not cease - is merely a useful
distraction from its retailing reality.
The
premise that Amazon can change its business model from
selling other people's products at a razor-thin margin
to selling other people's products at a large margin "is
not credible," wrote
Horace Dediu, an analyst with Asymco.
Companies
simply do not shift their business model so simply, he
added, noting that Microsoft, for all its money and smarts,
still could not reorient its PC-based strategy to take
advantage of the trend to mobile computing.
The
current discussion about Amazon is reminiscent of the
arguments about the company during the last systemic bubble,
in 1999. Then, too, the corporate goal was to get big
fast, to seize new markets before anyone else.
But
when the crash came, all the talk of unlimited potential
disappeared. It was replaced by a fierce concentration
on profits, which were described as being right around
the corner.
Mr.
Bezos said
in 2001 that the retailer would "ferociously
manage the products we carry so that we sell only products
that are profitable. The 30-pound box of nails isn't long
for our world." Investors were mollified and the
company survived.
That
was then. You can once again buy a box
of 4,000 nails on Amazon (shipping weight:
38 pounds) and have them delivered to your door free.
But the retailer has gone far beyond such modest offers.
The Thunderbird
Cookie Dropping Machine costs $32,329 and weighs
1,260 pounds, but Amazon will also ship it free. (It is
currently out of stock.)
Commercial Food Services Equipment, a third-party vendor
in Chicago, lists a Thunderbird for sale on Amazon, but
charges almost $2,600 for shipping.
"Amazon
will sell many more cookie dropping machines than I will,
but even if you buy from me instead of Amazon it will
earn a commission on the sale and the shipping,"
said Hyo Lee, the owner of Commercial Food. "Now
you know why Amazon's sales have gone from $34 billion
in 2010 to $61 billion in 2012."
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By
DAVID
STREITFELD
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