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

Re: Amazon and the "profitless business model" fallacy

#31

Post by moca » Sun, Oct 27, 2013, 6:34 AM UTC

pbreit wrote: post #25

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…

Can you explain how capital expenditures do not affect profits? Doesn't capitalization just mean that expenses are applied over time? They don't disappear, correct?

Yes. Capital expenditures don't disappear. You can buy a piece of land to build a warehouse. You can sell the land to get money back if needed, so you can't report the money for the land as loss.

Re: Amazon and the "profitless business model" fallacy

#32

Post by selectodude » Sun, Oct 27, 2013, 6:35 AM UTC

eru wrote: post #29

WalterBright wrote: post #5

Amazon is the proof that corporations are not all short-term-focused, and the shareholders have amply rewarded Amazon for that with a huge P/E.

Isn't Amazon's P/E negative?

Right now, it's 1,286.56.

Re: Amazon and the "profitless business model" fallacy

#33

Post by MaysonL » Sun, Oct 27, 2013, 6:40 AM UTC

pbreit wrote: post #25

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…

Can you explain how capital expenditures do not affect profits? Doesn't capitalization just mean that expenses are applied over time? They don't disappear, correct?

Last quarter, Amazon had 834M of depreciation, and 281M of stock-based compensation: 1.1 billion of non-cash deductions from revenue. They made capital expenditures of 1.03 billion. They ended the quarter with about $100 million more cash than they started with.

Re: Amazon and the "profitless business model" fallacy

#34

Post by MaysonL » Sun, Oct 27, 2013, 6:44 AM UTC

ballard wrote: post #24

The author may not fully appreciate the long game Bezos has been uniquely blessed to play: the sooner Bezos can effectively expand what's working, without over-expanding, it's bootstrapping on a massive scale: buying speed without diluting ownership to even more money sooner. It's not deficit spending (until it is), it's reinvesting profit to grow assets that are the body of the money monster. (For Starcraft fans out…

Despite losing money as the SEC and GAAP accounted for it, Amazon ended last quarter with about $100 million more cash than it started with.

Re: Amazon and the "profitless business model" fallacy

#35

Post by gamegoblin » Sun, Oct 27, 2013, 6:45 AM UTC

WalterBright wrote: post #5

Amazon is the proof that corporations are not all short-term-focused, and the shareholders have amply rewarded Amazon for that with a huge P/E.

Isn't Bezos into the whole "Long Now" long-term thinking organization?

Re: Amazon and the "profitless business model" fallacy

#36

Post by MaysonL » Sun, Oct 27, 2013, 6:47 AM UTC

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.

So, which cable companies, having run out of room to expand, have started going broke?

Re: Amazon and the "profitless business model" fallacy

#37

Post by moca » Sun, Oct 27, 2013, 6:50 AM UTC

By running at zero profit margin, Amazon is essentially growing itself as fast as it can manage, i.e. reinvest every dollar. Its current revenue growth is even faster than Google. That ensures itself as the biggest ecommerce platform for years to come. If it wants more profit, it can certainly do it. I believe Amazon will eventually automate most of its systems, like using robots instead of humans for warehouse, and gain significant profit margin. Chinese company Taobao (like eBay) provided free service for 5 years, and gained dominant market share. Now it is hugely profitable.

On the other hand, Jeff is likely more interested in just growing the business than counting profit dollars.

Re: Amazon and the "profitless business model" fallacy

#38

Post by tsotha » Sun, Oct 27, 2013, 6:51 AM UTC

yetanotherphd wrote: post #26

krakensden wrote: post #23

It's worth noting that Yglesias actually knows this[1]. His point is that public companies generally aren't allowed by their shareholders to be this ambitious. Which 100% vindicates Eugenewei's point about tech companies being wary of capital markets. [1]: http://www.slate.com/blogs/moneybox/2013/10/22/amazon_profit...

If the stock market refused to acknowledge the value of long term investment, then all stocks would have the same book-to-market ratio. However, investors and CEOs will rarely see eye-to-eye on the correct level of company growth, since CEOs by their nature tend to want to increase the size and scope of their company. Investors know that only some companies will benefit from this increase in size and scope, and other…

>However a key point that is often missed is that there is very little that shareholders can do to force CEOs to do their bidding. In spite of a lot of talk about activist shareholders, the only real discipline that management face is the thread of being bought out.

Eh? Shareholders elect the board, and the CEO serves at the pleasure of the board. The shareholders can absolutely do something to force the CEO to do their bidding - they can fire him. It happens all the time.

Re: Amazon and the "profitless business model" fallacy

#39

Post by tsotha » Sun, Oct 27, 2013, 6:54 AM UTC

ars wrote: post #19

Would it be so terrible if Amazon just stayed as a break-even company forever?

It would certainly be terrible for the shareholders. The whole point of investing in a company is to share in the profit.

Re: Amazon and the "profitless business model" fallacy

#40

Post by yetanotherphd » Sun, Oct 27, 2013, 7:02 AM UTC

tsotha wrote: post #38

yetanotherphd wrote: post #26

Earlier quoted context omitted.

If the stock market refused to acknowledge the value of long term investment, then all stocks would have the same book-to-market ratio. However, investors and CEOs will rarely see eye-to-eye on the correct level of company growth, since CEOs by their nature tend to want to increase the size and scope of their company. Investors know that only some companies will benefit from this increase in size and scope, and other…

>However a key point that is often missed is that there is very little that shareholders can do to force CEOs to do their bidding. In spite of a lot of talk about activist shareholders, the only real discipline that management face is the thread of being bought out. Eh? Shareholders elect the board, and the CEO serves at the pleasure of the board. The shareholders can absolutely do something to force the CEO to do th…

Yes, it does indeed happen occasionally. However, such actions are relatively rare, hence the term "wall street walk" for large block holders selling their shares when they are unhappy with management, rather than trying to influence them.