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Why is Amazon all of a sudden not re-investing all its profits?

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Re: Why is Amazon all of a sudden not re-investing all its profits?

#41
post #25

I find it very interesting to know what Amazon's competitive advantage would be from having their own logistics business. 1) Shipping is the definition of a commoditized business. Unlike AWS, for example, they will not be pioneering a new business model or technology. 2) What they pay right now to FedEx, UPS, USPS, DHL, OnTrac, etc. should be very close to zero margin, given their position to negotiate those companie…

You should toss all your preconceived notions. For example, Amazon would not have to cover all areas. It could easily just cover its densest areas and leave the rest to UPS, et al.

I would not underestimate what Amazon could pull off with complete control of shipping & logistics.

Re: Why is Amazon all of a sudden not re-investing all its profits?

#42
post #6

Because that was the plan all along? At some point Amazon is going to get a return for all of its investment. The entire market is now dancing to Amazon's tune. Why not now?

Bezos understands that the value of a stock is its discounted future cash flows.

Re: Why is Amazon all of a sudden not re-investing all its profits?

#43
post #21

Earlier quoted context omitted.

Sure. Bezos can just borrow ~250 billion to buy the rest of the company. Seems easy.

A private equity firm would find the money in a heartbeat.

That's absurd. Ignoring the sheer scale of the loan, there's no path for repayment. People don't tend to make loans when they don't expect to get the money back (with interest). Assuming someone lined up to loan Bezos $250 billion and gave him a ridiculously-generous 1% APR and 30-year term, the quarterly payments would be over 2.4 billion, or nearly 5 times as much as they just posted in their best profit ever.

So who exactly do you think has pockets deep enough to fund this 250 billion loan and accountants so terrible they can't see how badly it's going to go?

Re: Why is Amazon all of a sudden not re-investing all its profits?

#44
Amazon's fundamental source of competitive advantage is rarely talked about, but I think this is a great example of what that is -- they have built a company that succeeds in very low margin businesses.

So they started in online retail with < 10% gross margin. With AWS with its ~40% GM they have INCREASED the GM of the company. Contrast this with Microsoft and Google which sell software at 80%+ GM. When they do Azure or GCE, they have to decrease their GM. This is hard! FedEx runs around 60% GM. So just think about what this will do for Amazon ...

Re: Why is Amazon all of a sudden not re-investing all its profits?

#45

Frankly I'm surprised this hasn't happened sooner. So much money is sloshing through Amazon these days, keeping it balanced to the point where you don't let it accumulate (generating profit) or flow to fast (generating loss) has got to be scary complex. At every large company I've worked at there are things on the balance sheet that are "tunable" by management which helps with this. It was a running joke inside Netwo…

Is this "tuning" typically done on the revenue side or the cost side? I'm surprised it's at all possible with proper revenue and cost recognition policies in place.

At Sun there was literally a taped square on the floor of the factory, and things in that square were "shipped" to as the quarter was finishing up the factory would figure out how much had to be shipped to make the numbers, and they would process enough orders to make that happen. If there weren't orders, then some "one time deals" would be mentioned to top customers who might get a really nice discount or something. Sometimes contractors are told to go home until the next quarter.

At NetApp there were other tools, service revenues, expenses, etc. One quarter the call went out for everyone to be sure they had expensed everything they had outstanding. Once the summer employee event shifted by a week. They would also do close the quarter incentive sales which could bring in just enough orders to keep it in line.

As far as I can tell this is something they teach in business school as part of your MBA training. It seems pretty universal. When things can't be managed that way, you get actual unexpected surprises, lay offs, or work furloughs, or perhaps you decide you aren't going to hire nearly as many next year so you trim all the contract staff.

Clearly people aren't as worried by over delivering as they are under delivering. As you can see from the Apple and Google earnings calls, a small miss negative can have an outsized impact on your stock price. But it is also important to not consistently have upside surprises as suddenly people start valuing the stock assuming an upside surprise.

Re: Why is Amazon all of a sudden not re-investing all its profits?

#46
Amazon bought 3 city blocks in Downtown Seattle a few years ago. Two of those are done or nearly done, the thirds one houses a scrotum-shaped building (three connected spheres, what's going on here?) that's still under construction.

Technically that counts as reinvesting profits, but its the old "Are we an X company or a real estate company?" issue that happens so often.

Personally I think it's the last chance for Bezos to roll around in his piles of cash before he has to start giving some back to his investors.

Re: Why is Amazon all of a sudden not re-investing all its profits?

#47
I wonder how much talent retention comes into play here, since Amazon has a very high ratio towards RSUs in the total comp package if I remember correctly.

When $AMZN girates or tanks, at least some part of their workforce would be tempted to leave. Though maybe that's the exact segment they wouldn't mind see leaving anyways?

Re: Why is Amazon all of a sudden not re-investing all its profits?

#48

Earlier quoted context omitted.

Is this "tuning" typically done on the revenue side or the cost side? I'm surprised it's at all possible with proper revenue and cost recognition policies in place.

At Sun there was literally a taped square on the floor of the factory, and things in that square were "shipped" to as the quarter was finishing up the factory would figure out how much had to be shipped to make the numbers, and they would process enough orders to make that happen. If there weren't orders, then some "one time deals" would be mentioned to top customers who might get a really nice discount or something.…

Everybody lives and dies by the numbers, long term consequences be damned.

Even developers do this, although most of us resent having to do it. You manage risk and tech debt by splitting high risk projects into many small pieces, and amortizing improvements across low-complexity features. The long and short lines are never more than an order of magnitude or so apart, even though it might take ten 'tasks' to equal one change that the customer will actually notice.

Re: Why is Amazon all of a sudden not re-investing all its profits?

#49
post #46

Amazon bought 3 city blocks in Downtown Seattle a few years ago. Two of those are done or nearly done, the thirds one houses a scrotum-shaped building (three connected spheres, what's going on here?) that's still under construction. Technically that counts as reinvesting profits, but its the old "Are we an X company or a real estate company?" issue that happens so often. Personally I think it's the last chance for Be…

This is what those three connected spheres are:

http://www.theverge.com/2013/10/24/5023454/amazon-giant-biod...

Re: Why is Amazon all of a sudden not re-investing all its profits?

#50
post #35

Frankly I'm surprised this hasn't happened sooner. So much money is sloshing through Amazon these days, keeping it balanced to the point where you don't let it accumulate (generating profit) or flow to fast (generating loss) has got to be scary complex. At every large company I've worked at there are things on the balance sheet that are "tunable" by management which helps with this. It was a running joke inside Netwo…

Bezos is in it for the long haul. He's probably the most impressive business person there is right now. Buffett and Musk are impressive in different ways.

Sorry, but Bezos and Buffet are not even in the same league as Elon Musk.
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