Amazon and the "profitless business model" fallacy • Hacker News Board

Re: Amazon and the "profitless business model" fallacy

#121

Post by abalashov » Sun, Oct 27, 2013, 9:06 PM UTC

cperciva wrote: post #52

Mikeb85 wrote: post #43

Earlier quoted context omitted.

Not if Amazon decides to use some of it's free cash to buy back shares... Share buybacks and dividends are the end game for all public companies. Profits don't mean anything if money isn't being returned to shareholders. Amazon's generous valuation means that long-term investors think they'll continue to grow, and someday they'll return money to shareholders...

If they never make a profit, how do they obtain the cash to spend on buying back shares?

Well, it's possible to have free cash without being profitable on paper. For instance, remember that depreciation is a major expense for capitalised assets (such as fulfillment centres, data centres, computer equipment, real estate, etc.) but isn't actually a hard cash expense, just a formal expense. The hard cash expense came at the time that the investment was made, i.e. when the data centre or what have you was actually bought and paid for.

So, the difference between that "virtual" expense and actual cash is one accounting category that free cash can come from. There are others.

Re: Amazon and the "profitless business model" fallacy

#122

Post by coldcode » Sun, Oct 27, 2013, 9:11 PM UTC

snowwrestler wrote: post #113

brisance wrote: post #95

This is a dangerous narrative that links the founder to the company in the same way that Apple is forever linked to Steve Jobs.

Amazon is Jeff Bezos's company and everyone knows it. He maintains detailed oversight of all the lines of business.

Until he gets hit by a bus or some cancer cells. Then what?

Re: Amazon and the "profitless business model" fallacy

#123

Post by fspeech » Sun, Oct 27, 2013, 9:13 PM UTC

fauigerzigerk wrote: post #41

hristov wrote: post #22

There are some issues with this explanation. The main issue is that the rules of accounting have a very good provision to take into account investing into the future. It is called capitalization. Thus, if a company spends money to build or acquire a new asset, it is called capital spending and it is not subtracted from the profits. Thus, for example, if a company had a million dollars of profit and decided to spend t…

That's all true, but Amazon is free cash flow positive. So it's not like they're making huge "losses" after deducting capex.

The fcf for retailers can simply come from paying suppliers later than getting paid by customers. While a cheap source of capital (even this is doubtful), not exactly a winning strategy in the long run. The fcf will stop once revenue growth slows. As capital it is only cheap in the sense that you don't have to constantly raise equity for growth. Without earnings your equity base can't grow w/o getting more from shareholders.

Re: Amazon and the "profitless business model" fallacy

#124

Post by darkarmani » Sun, Oct 27, 2013, 10:05 PM UTC

gjm11 wrote: post #68

eru wrote: post #30

Earlier quoted context omitted.

> He probably has aces up both sleeves to clobber anyone that tries to make a move. The razor thin margins are a great moat in themselves.

I'm still trying to work out whether (1) ballard 's remarkable cascade of mixed metaphors was itself a joke, or (2) eru 's comment was poking fun at it, or (3) both comments were intended entirely straight and it's just coincidence that the density of metaphor mixture is so high. Both comments make perfectly good sense taken "straight". I'm leaning towards #3, with apologies to ballard and/or eru if I missed their jo…

My father-in-law who himself was a director in a large international company told me about a game they used to play in meetings: bullshit bingo. You have to make up your cards ahead of time and then mark off the squares as you hear buzzwords.

Re: Amazon and the "profitless business model" fallacy

#125

Post by darkarmani » Sun, Oct 27, 2013, 10:08 PM UTC

KaoruAoiShiho wrote: post #46

Amazon only has around 10 more years before 3d printing starts to kill retail. Beware.

Is this what photo printers did to prints? People don't buy prints as much because of digital photograph, but when they want prints, people still pay someone else to print them.

Re: Amazon and the "profitless business model" fallacy

#126

Post by vasilipupkin » Sun, Oct 27, 2013, 10:19 PM UTC

codex wrote: post #108

Bezos has found and hacked a feature of public markets: you can get away with no profits as long as you're growing. Therefore, you can construct a profitless business scheme that reinvests all profits (or doesn't generate any) as long as your sales forever climb. It's the business equivalent of the Ponzi scheme--and if you look at Amazon's revenue, it is a classic exponential curve. If sales ever plateau and investor…

Right. It is not a Ponzi scheme. Investors price stocks based on the expected future cashflows. And those expected cashflows by the very definition reflect the non-zero probability of failure. Now, investors as a whole may overvalue or undervalue those cashflows - but this has nothing to do with a Ponzi scheme

Re: Amazon and the "profitless business model" fallacy

#127

Post by yuhong » Sun, Oct 27, 2013, 10:38 PM UTC

ericd wrote: post #45

gizbot wrote: post #14

Strangly, this was the business model of cable companies for the longest time. They never turned a profit. When they expanded, they could use the increased income stream to go deeper into debt. The profits and extra capital went into more expansion. Eventually, they ran out of room to expand, and where are they now? Someday, Amazon will need to face the brutal reality of profit.

They ran out of room to expand and now they're regional monopolies, and can gouge their customers with impunity. Was that your point?

So I wonder what led the cable companies to try this.

Re: Amazon and the "profitless business model" fallacy

#128

Post by codex » Sun, Oct 27, 2013, 10:40 PM UTC

vasilipupkin wrote: post #126

codex wrote: post #108

Bezos has found and hacked a feature of public markets: you can get away with no profits as long as you're growing. Therefore, you can construct a profitless business scheme that reinvests all profits (or doesn't generate any) as long as your sales forever climb. It's the business equivalent of the Ponzi scheme--and if you look at Amazon's revenue, it is a classic exponential curve. If sales ever plateau and investor…

Right. It is not a Ponzi scheme. Investors price stocks based on the expected future cashflows. And those expected cashflows by the very definition reflect the non-zero probability of failure. Now, investors as a whole may overvalue or undervalue those cashflows - but this has nothing to do with a Ponzi scheme

It is like a Ponzi scheme in that it requires continuous expansion to maintain. Switching metaphors, it's also like a Catch-22: Amazon is successful precisely because it makes no profit. How, then, do you value future cash flows? Any profit it does make will hamper future flows. Furthermore, Bezos is far too into empire building to stop and take profits. His ego and fame is bound up into the size of his company, not how profitable it is, so the expectation of profit should be near zero.

Re: Amazon and the "profitless business model" fallacy

#129

Post by epa » Sun, Oct 27, 2013, 10:54 PM UTC

quaunaut wrote: post #92

epa wrote: post #15

Earlier quoted context omitted.

"profit" and "money" are two very different things. "profit" is how much you are making at the end of the year, this is to be reinvested if you are efficient (as you suggest is good, i agree) "money" is the what is sitting in the bank, not being utilized. Would you say that a company who is breaking even is utilizing their cash properly? no, they don't have any cash to utilize, therefore profit and cash are different…

...or they could have just already utilized the cash, which is what Amazon is doing?

Capital assets are not fully expensed in the year they are bought.

Re: Amazon and the "profitless business model" fallacy

#130

Post by epa » Sun, Oct 27, 2013, 10:58 PM UTC

fspeech wrote: post #123

fauigerzigerk wrote: post #41

Earlier quoted context omitted.

That's all true, but Amazon is free cash flow positive. So it's not like they're making huge "losses" after deducting capex.

The fcf for retailers can simply come from paying suppliers later than getting paid by customers. While a cheap source of capital (even this is doubtful), not exactly a winning strategy in the long run. The fcf will stop once revenue growth slows. As capital it is only cheap in the sense that you don't have to constantly raise equity for growth. Without earnings your equity base can't grow w/o getting more from share…

Only ignorant investors can get fooled by large account payables. It's not a source of capital..