Wolf Richter: Leading Indicator Amazon Gets Re-Crushed

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

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  1. bmeisen

    I see a merger / takeover of amazon by alibaba. we’re in the courtship phase – massive investment in 3d printers and drone delivery technology are the clinchers. The whole thing will collapse with the Chinese real estate bubble (revenge for china’s shameless rejection of austerity) and Zalando will wistfully gather up the shards – Berlin becomes the e-tailing capitol of web drei. It’s that same old same old: 2 teams composed of 11 players kick the ball back and forth and after 90 minutes the Germans win.

  2. Clive

    I think too that Amazon is vulnerable to a brand “jumped the shark” moment (which to my mind has already happened but the jury may still be out on that one). Whether this comes about through nickel and diming suppliers, tax avoidance or its distribution centres’ treatment of employees — or a left-field event — once customers start considering (for whatever reason) alternatives (and there are some) then the decline can come very quickly.

    1. Nathanael

      Amazon’s got surprisingly effective lock-in. (Like Microsoft. Microsoft’s brand is garbage and they’re actively avoided by a solid majority of customers, but they’ve got such good monopoly lock-in that they’re still alive.)

      Why? Because supply chain logistics is *HARD*. Amazon has undercut everyone on it, and it’s practically impossible to replicate. Alibaba is doing… OK, I guess, but they’re very poorly organized compared to Amazon.

  3. Jesper

    The low interest rate is destroying the profits that multinationals used to make on managing cash – paying suppliers late and getting paid early. Used to be a nice little earner to park the ‘managed’ cash in money market funds and get a couple of percent of extra profit.

    As the situation is now the only point of paying late, unless you have a cashflow problem yourself, is to squeeze your suppliers. Treasury departments used to be profit-makers, in this environment they’re more of a cost or necessary evil…. & paying suppliers late creates a nice little earner for the least favourite sector – finance. Small suppliers pay higher interest rates and have little to no negotiating power when dealing with banks.

    An enforced prompt payment legislation (30 days) would help small businesses but the legislators tend to work for big business over anything or anyone else.

    1. Ignacio 2

      The only sort of revenge the average citizen got on big biz is this. Too bad we are in “heads they win tails they win”, because it hurts the people too.

  4. john bougearel

    Down 33% from its record high? Are you kidding me? Let’s take the long view here. An investor could have bought AMZN for under $6 in 2001, under $30 in 2006, and under $40 in 2008. At $275, investors who bought in 2001, 2006, or 2008 have been richly rewarded. Is AMZN a dog with a few fleas? Sure. But its hard to imagine how a failure to establish a dominant position on all fronts might pose an existential threat to its business model. Where they fail, they can retrench, and thrive where they do dominate. The failure to take long-term risks would be riskier than taking none at all.

    And here is the kicker: if you overlay a monthly chart of AMZN and APPLE AMZN appears to be the new Apple for investors, with about a 15 yr lag. Their business models are different to be sure, but both companies have focused on innovation, growth and market share. And how many large-cap, short-term greedy companies do that these days? I can recall the innovative Steve Jobs, amongst his many successes, incurred a few spectacular failures along the way. So too, will Jeff Bezos.

    And that is the way the cookie crumbles.

  5. Mike

    Seems to me AMZN works so long as stated above they can use favorable working capital to generate cash and the stock generally increases in value as they use a lot of stock for employee compensation. As to the latter, a protracted period of downward performance really hurts the employees, can put them in a very disadvantageous tax situation and will impact recruiting.

    Comparing AMZN to AAPL is silly. One currently is using balance sheet “manipulation” to generate cash, the other currently sells its products at very attractive margins to produce a mountain of cash.

    1. hunkerdown

      Of course it’s silly. Baseball is silly, too, but it’s the national game, no matter whether one is playing with bats or stats.

  6. Washunate

    Amazon has a fascinating business model. Some things they do really well, like customer service. But their core niche was avoiding sales tax and the hassle of shopping, and there are only so many products where that offers a big advantage.

    Plus there are the political risks where the larger you get, the more attention is paid to working conditions and how you treat suppliers and so forth.

    1. Nathanael

      No no no. Amazon’s core business is supply chain logistics. And they’re *extremely* good at it.

      They could run an army. Better than the US could, actually.

      1. mookie

        Supply chain logistics? They manufacture nothing, their logistics only deal with finished goods. Their electronics products are no exception. They use their bully position in the market to try to force manufacturers into horrible arrangements.

  7. Left in Wisconsin

    As I’ve said before, I don’t think Amazon cares about making money; market share is everything. There seems to be this quaint notion that market share is only of value if it drives profitability, but not everyone thinks that way. The kind of market power that Amazon has now, and is looking to grow in a variety of areas, is not at risk from investor or customer bailout, because there won’t be one.

  8. fresno dan

    “Still, investors put their money into companies, Amazon and any other, with the expectation that at some point they will get cash out. With Amazon, Bezos is deferring that profit-producing, investor-rewarding day almost indefinitely into the future. This prompts the suggestion that Amazon is the world’s biggest ‘lifestyle business’ – Bezos is running it for fun, not to deliver economic returns to shareholders, at least not any time soon.

    But while he certainly does seem to be having fun, he is also building a company, with all the cash he can get his hands on, to capture a larger and larger share of the future of commerce. When you buy Amazon stock (the main currency with which Amazon employees are paid, incidentally), you are buying a bet that he can convert a huge portion of all commerce to flow through the Amazon machine. The question to ask isn’t whether Amazon is some profitless ponzi scheme, but whether you believe Bezos can capture the future. That, and how long are you willing to wait? ”
    Well, retail is brutal. Sears used to be big. Montgomery Ward used to be big. Woolworth’s used to be big.
    Amazon reminds me of what Evander Holyfield said about Mike Tyson – “He’s never been hit”
    As the Sales tax is taken away, (here in Sacramento 8.5% – a pretty big difference in price) a pretty big cost incentive for consumers is taken away. I was also reading an article about the Target and Walmart bots, and how they are out “boting” the Amazon bot to actually provide equal/equivalent prices.
    I actually tried the three sites as I needed to buy a new Norelco razor. Turns out the prices were all comparable (which site did you go to for the free nose hair clipper? I need to use a chainsaw for my nose hairs so it doesn’t incent me….).
    I also needed to buy a new plaid shirt. Now, if you have very specific criteria for what kind of shirt you want, it turns out that Amazon really doesn’t have that much of a selection. Also, any number of particular patterns of Arrow or Dockers shirts or any other brands could be found at Macy’s, JCPenney, Sears, Kohls, etc., but not on Amazon. This doesn’t even count shirts for specific retailers like Cabela’s, Orvis, Cooper Jones and the plethora of such unique suppliers.
    Also, when Amazon lists brands you can select from, it looks pretty impressive, unless you just do your own search for plaid shirt companies or retailers, at which point you find out that …..(dare I say it ????) AMAZON HAS NO CLOTHES! (OK, that’s hyperbole…..but its selection is not nearly as extensive as the urban legend makes it out to be). Or rather, a paucity of long sleeve yarn dyed plaid shirts.

  9. Collin

    Who cares?

    Bezos and his inner circle are already rich. If it all fails they will still be rich. So what do they care if the clickbait implodes and burns as it topples to earth. They will paracute away.

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