But… if Amazon stopped its unrelenting expansion and settled down to a more normal pace of growth, is its business (and I realize it’s at least 4 or 5 different types of business) all that profitable? That is to say, is it an oil company, with huge profit margins, or is it more like a grocery store, with a 1% profit margin?
I’m not sure this has an answer. To give one requires knowing what the business model of Amazon will look like in the future when it has a totally different business model than today. If anyone outside of Bezos’ inner circle knew this, they would be incorporating it into the stock price, which is a prediction of future value. What bothers the analysts is that they have no idea.
It’s more like a grocery store. The thing people don’t recognize about a grocery store is how frequently they turn over the merchandise. They think, “1% margin, I could make 1% in a CD, why would I invest in a grocery store?” It’s not 1% per year, it’s 1% every time they sell an item. They may turn over that merchandise a couple of hundred times a year if their inventory system is any good. I don’t own any Amazon stock, because I like a company to make money, but I think they have a viable business model, and could show a profit if they stop pouring money into gaining market share.
Oil companies don’t have particularly large profit margins. According to Forbes, the largest oil company had an average profit margin of about 6.5% between 2006 and 2010. Oil companies have huge profits, but their margins are not impressive, compared to, say, software companies.
No, it really is around 1%. Kroger, the largest grocery store chain, has a profit margin of 1.4% or so.
You’re confusing three different things here. The “1% every time they sell an item” is markup, or gross profit margin. It’s the different between the cost of the goods and what they sell them for. And for Kroger, it’s about 20%. But they have other costs. Like employee salaries and store rental and electric bills. So, overall, their profit margin is about 1.4%. That’s what they get to keep as a percentage of their revenue. Finally, if you’re comparing it to a CD, what you care about isn’t profit margin at all, it’s return on investment, which isn’t really directly related to either number.
To illustrate: Imagine I have a store that only stocks one item, and I sell exactly one a day. I buy it for $100, I sell it for $120, and I have $18 of other costs per day.
The difference between this model and others is volume. Grocery stores have huge volume with relatively little risk that stuff won’t get sold. If you want to clear $1,000,000 a year you can do it quite safely on $100,000,000 worth of CDs - and not so safely with a smaller investment in a riskier but higher yielding product.
This has been Amazon’s business model since the beginning. I owned stock in them during the Bubble (and after, alas) and it was then. No one should be surprised. it seems to me that when they made money it was almost by accident, when Bezos couldn’t think of any good places to put it.
So they are more like a grocery which is building new warehousing and distribution facilities.
Much of the oil business, such as gas stations and refineries, have very small margins but gigantic volumes. During discussions on oil someone often says how tough the oil business is because the margins are so low. The absolute profit, however, can be very high.
The other thing is that all that infrastructure Amazon is buying - all those warehouses, all those computers, all that code - has value in itself. At some hypothetical future date Amazon could sell all that stuff to someone else and give the money to shareholders. This isn’t likely to happen, but if you own a share of it, and the real assets tied to that share appreciate even if dividends aren’t being paid, that share has increased in value.
With that said, Amazon is probably overvalued using even the most generous accounting methods.
Grocery stores usually average between 25 and 40 turns on their stock as a whole. A few individual items like meats may approach that but the difference between 3 and 4 days of shelf time is a huge difference in turns. The nightmare cases are bakeries.
You are probably confusing two entirely different things. When investors talk about revenues, profit, etc they are talking about the companies financial statements. These are generated using a set of rules called GAAP (Generally Accepted Accounting Priciples). These are designed to determine a companies financial health. They are also fairly easy to maniplate, especially in the short run.
Taxes on the other hand are determined by using an entirely different set of rules. The IRS code. The tax codes only purpose is to determine a companies tax liability. It is harder to manipulate without resorting to out and out fraud.
Just because the financials show a loss doesn’t mean the tax can’t be a positive amount.
A little research on Amazon’s financial position turned up this rather (at least to me) interesting tidbit. Over the last nine quarters Amazon has shown a positive cash flow. It totals a pretty hefty $26 dollars a share. And cash flow is much harder, barring fraud, to manipulate.
Amazon’s losses don’t come from buying assets for expansion. Spending money to buy something is not the same thing as a loss. If Amazon spends a million on a warehouse and a server farm that it can then put on its balance sheet as an asset valued at a million, then this transaction will not have an impact on the income statement (it would, however, affect the cash flow). Things start to become different when, for whatever reason, the asset goes into the balance sheet at a value different from what Amazon paid for it, e.g. as a result of depreciation - depreciation is an expense and will lower the profit. The main reason for Amazon’s losses is that much of the money it spends on expansion goes into internally created intangible assets (such as patents or copyrights) which, under the applicable accounting rules, cannot be valued at an amount that corresponds to the costs of making them. Another reason is that newly established business lines often run at an operating loss in the first years.