The Mystery of Amazon

by Dave Schuler on February 1, 2014

James Joyner muses over Amazon’s ability to maintain a high profile, high stock price, and vast riches for its owners and top management while barely showing a profit:

At the end of the day, then, does it really matter if a company makes a “profit” if its founder has gotten rich, its senior executives are making lavish salaries, and its work force are all making comfortable wages?

Well, yes, it matters. Amazon’s stock price, the basis of the wealth of its owner and founder, is itself based on the expectation of profits. Amazon doesn’t continue to exist by stock issues but depends on its ability to borrow.

If it could be proven that Amazon could never run a profit, I suspect it would soon find itself in trouble with federal authorities. The general term used for a concern that continues to pay its present stockholders by selling stock to new stockholders and has no prospects for actually operating at a profit is a “Ponzi scheme”.

If its creditors no longer believed that Amazon was able to run a profit, I suspect the company would eventually run into problems financing its debt, something that has happened to countless companies, large and small, in the past.

If Amazon could no longer find purchasers for its stock, I suspect that Mr. Bezos would find himself in trouble and, ultimately, the worth of Amazon stock must depend on profits.

None of the puzzlement over Amazon is new. I recall in the mid to late 90s when Amazon was just getting off the ground hearing it characterized as a plan for becoming rich by selling stock, creating a company, and then backing a business plan out of it, rather than the other way around as was thought to be customary. Amazon was originally a bookselling company (actually a book broker), then the online equivalent of the old Sears catalog—a place where you could buy anything, then a large (if not the largest) online portal for retail sales, then a retail services company. Its business model is still evolving.

There are already signs of it but I think that just as Google and Microsoft are fated to go head to head Google and Amazon are fated to go toe to toe. They both can’t be the primary Internet portal for retail sales and it certainly appears to me that each company has that objective. There can be only one.

{ 14 comments… read them below or add one }

... February 1, 2014 at 3:35 pm

There can be only one.

Let’s see Bezos and Brin go at it with swords! Let the head chopping commence!

Ben Wolf February 1, 2014 at 8:54 pm

It’s not just Amazon; Twitter isn’t profitable, Facebook is grossly overvalued. A great many tech stocks are trading at hundreds of times earnings including companies that don’t even have revenues. We’re at the end of another tech bubble.

Merrcer February 1, 2014 at 10:49 pm

Amazon made a small profit last year and in some other years in the past. It could make bigger profits by raising prices a little or cutting some business lines. If it only sold kindles and ebooks it would have high profit margins. Bezos prefers expanding his business over having high profit margins.

Ponzi schemes take money from new investors to pay dividends to existing owners. Amazon does not pay any dividends.

Dave Schuler February 2, 2014 at 8:27 am

Amazon does not pay any dividend

That’s really the point. It will need to at some point or it may have problems maintaining its stock value.

michael reynolds February 2, 2014 at 9:34 am

One click to rule them all.

TastyBits February 2, 2014 at 10:29 am

I do not see where Google is in the retail space. Google+ is going against Facebook, but Facebook is trying to get into Google’s metadata model.

To my knowledge, Google does not have anything similar to Amazon’s Marketplace. Newegg and a few others are trying to get into that space.

Dave Schuler February 2, 2014 at 11:33 am

You’re kidding, right, TastyBits? The bigger chunk of Google’s revenue and what made it viable is advertising placement. If no one searches for products and services but goes straight to the Amazon portal (in one method or another), that major component of Google’s business vanishes.

Mercer February 2, 2014 at 11:55 am

Amazon does not sell cars or real estate. They also do not sell non digital services such as healthcare, restaurant meals and auto repair. There will still be plenty of ads for Google to sell even if Amazon wipes out all brick and mortar retailers.

TastyBits February 2, 2014 at 12:30 pm

I think most Amazon shoppers go straight to Amazon.

Google has been amassing meta data for years. They have several sites and products that collect/track user behavior. This is way beyond ad placement on searches. Google knows more about you than you know about you.

Dave Schuler February 2, 2014 at 1:24 pm

I think most Amazon shoppers go straight to Amazon.

Which is precisely my point. I think the future of online retail is clearly to access via a limited number of portals. Amazon’s dominating online retail is in direct opposition to Google’s historic advertising placement strategy.

And, ultimately, how much Google knows is less important than how it generates revenue. Advertising placement in one form or another presently accounts for the lion’s share of Google’s revenue. Google’s placement revenue is continuing to grow but the top now appears to be in sight. Perhaps business intelligence revenue will take its place but there are few signs of that now.

TastyBits February 2, 2014 at 6:32 pm

Search as it has been known is the past, and Google knows it. Android was a deliberate move to reshape their product. Google glasses are glimpse into where they are going.

By the time Amazon could be a threat to their revenue, Google will no longer depend upon ad placement.

Red Barchetta February 2, 2014 at 7:52 pm

Just a point of order.

I don’t follow Amazon’s business at all. But if they have debt they must have sufficient profits to service debt, be it interest only, or principal and interest.

What cash flow they have has a very limited universe of potential uses: 1) debt service, 2) dividends (return of capital), 3) or reinvestment as asserted by Mercer.

As for valuation, that’s a different cat. They don’t necessarily have to pay dividends any time in our lifespans if their future earnings materialize, clearly the hope and bet being made by their equity holders. Me? Like I said, I don’t follow them, but the implicitly assumed discounted value of those potential earnings seems absurd to me. Looks like the late 90′s.

Dave Schuler February 3, 2014 at 8:17 am

Yes, thank you, RB. That’s a more accurate statement of what I was trying to get at than the way I articulated it. The basic point, however, is that there are limits to Amazon’s ability to operate without profits.

Red Barchetta February 3, 2014 at 6:04 pm

Dave

And if they plow cash back in on poor reinvestment opportunities in serial fashion the so-called “market for corporate control” – or what the ignorant call corporate raiders – will take hold and correct the process.

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