Yves here. As Matt Stoller wrote recently, Amazon’s business strategy is all about becoming a globally-dominant trading company. It might have helped if Amazon and its investors had studied the closest historical analogue to what Amazon is seeking to become: Japanese trading companies. In their heyday, Japanese trading companies, such as Mitsubishi International Corporation, which intermediated trade for the Mitsubishi zaibatsu, and its post-World War II less-tightly-integrated incarnation, a keiretsu, had an almost impossible-looking financial statements: staggeringly large revenues, extremely thin profits (those went to the industrial companies) and enormous balance sheets with breathtaking leverage.
The Amazon 2.0 version has a lot of improved features, the biggest being impressive cash flow, since it manages to get income before it has to pay for goods. However, Amazon, like its Japanese forebearers, is interested in dominance above all. For the Japanese trading companies, that made sense because they were the sales arms for the companies in their group, so the objective wasn’t for them to prosper but to merely get by. But for Amazon, plowing its vast cash flow into growth looks less and less sensible as losses gap up. It’s one thing to incur large costs to obtain a monopoly or oligopoly position, since high margins are expected to come later. Amazon has gotten away with no profits because, in reality, cash flow generation is in many ways a better measure of the true productivity of a business. But in Amazon’s case, its hugely positive cash flow is entirely dependent on its collection v. when it pays suppliers. If suppliers, which Amazon is also squeezing on cost, start to push back this hugely successful machine will look a lot less pretty. And this ins’t a theoretical concern; Justin Fox at the Harvard Business Review points out that Amazon of late hasn’t been able to stretch payables as much at it once could. Amazon is moving on so many fronts where establishing a dominant position is far from assured, which could call its entire model into question.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
In December 1999, it started crashing, a leading indicator of investor exasperation. Now it’s down 33% from its February high .
This shouldn’t surprise anyone, but by the way the stock plunged after Amazon announced its blistering third quarter loss, it seems plenty of people got caught with their pants down. The stock is now off 12% in after-hour trading as I’m writing this. But what the dickens were people expecting? That Amazon would make money, like normal mature retailers?
Heck no. That would be too uncool for Amazon. Amazon doesn’t need to make money.
Revenues rose 20% from a year ago to $20.6 billion, yet it lost $437 million. That’s about ten times what it lost in the quarter a year ago. With the current loss, the financial year-to-date sinkhole is $455 million.
But Amazon is no slouch. It finagled $205 million in income tax benefits, graciously provided for by hapless taxpayers. Its loss before income taxes is actually $634 million.
You have to read through four paragraphs of its press release, praising sundry metrics, before you get to the first mention of the word “loss.” If, exasperated by this much hype, you stop reading, you’d probably be better off.
And then there’s CEO Jeff Bezos holding forth on how they’re going to do this and that:
As we get ready for this upcoming holiday season, we are focused on making the customer experience easier and more stress-free than ever. In addition to our already low prices, we will offer more than 15,000 Lightning Deals with early access to select deals for Prime members, hundreds of millions of products across dozens of categories, curated gift lists like Holiday Toy List and Electronics Holiday Gift Guide, new features like….
Yada-yada-yada. It’s the same song and dance we’ve been hearing for years. How about explaining to exasperated shareholders how Amazon is going to make a net profit?
Well, after an eternal list of doodads, thingamajigs, and services that Amazon has already rolled out or will roll out, it finally gets to the part of how it is going to make a net profit.
Um, it’s not going to make a net profit.
It explains: “Operating income (loss) is expected to be between $(570) million and $430 million, compared to $510 million in fourth quarter 2013.”
Here’s the thing: Aside from being a range that extends all the way from Kabul to Seattle, even at the optimistic top end of making an operating profit of $430 million, Amazon would remain in its financial sinkhole for the year.
Its net loss so far this year is $455 million. And the Q4 net profit, if any, is going to be lower than the operating profit. So in all likelihood, 2014 is going to be another red-ink year. It barely made money in 2013 ($274 million, a rounding error for a company with $74.5 billion in revenues). It lost $39 million in 2012. It made $631 million in 2011. This isn’t exactly an improving trend.
Now don’t get me wrong. I’ve been a satisfied customer of Amazon for fifteen years or so. I also published two books – BIG LIKE and TESTOSTERONE PIT – using Amazon’s services, and I have no complaints about how that worked. Amazon does a lot of things very well, and some things better than anyone else out there. It also uses and abuses its increasing heft in the market place to stifle competition and create a monopoly. It’s not cool, but hey, all big companies strive to do that. A monopoly is the corporate wet dream.
But Amazon doesn’t give a hoot about its stockholders. Never has. To heck with them. It clearly has no intention of making money. And it doesn’t have to because shareholders are still buying the shares. Even today, though at a much lower price.
The stock is now changing hands at $275 a share, as I’m writing this, a 52-week low, and down almost 33% from its all-time high in January of $408. Maybe shareholders are finally waking up to reality. And then there are memories: Amazon started crashing in December 1999, three months before the rest of the Nasdaq did. It was a leading indicator of investor exasperation. It didn’t take all that long before Amazon was down 80%.
And why the heck did Daimler just now turn its supposedly strategic investment, and one of the hottest stocks, into cash? What does it know that we don’t? Read…. Daimler Closes Tesla Hedge, Dumps Shares, Grabs Cash, Runs