No profits, no worries!

I have heard it being said that this is the company that does not make a profit, it is gearing up on massive infrastructure instead, taking their sweet time. Last evening post the market close, Amazon.com Announces Third Quarter Sales up 20% to $20.58 Billion. That sounds great, right?


Revenue expectations for the next quarter, the Christmas/holidays quarter (more than one third of total revenue normally) is expected to be 27.3 to 30.3 billion Dollars, representing growth rates of around 7 to 18 percent, that is an exceptionally wide guidance, and indeed comfortably below consensus which was closer to 31 billion. And because the guidance for sales is that wide, the company expects in the next quarter to either make an operating loss of 570 million Dollars or make a profit of 430 million Dollars, which is still well short of the 510 million Dollars that they made last year, the company is now expected to post a wider loss for the year, somewhere closer to 75 cents per share.


Back to the current quarter however, the company made an operating loss of 544 million Dollars, a net loss of 437 million Dollars which equates to minus 0.95 US cents per share, worse than anticipated. The company refers to a trailing 12 month operating cash flow (measured against the other 12 month trailing), that increased 15 percent to 5.71 billion Dollars. Equally trailing 12 month free cash flows were 1.08 billion Dollars, trailing 12 month capex was as much as 4.63 billion Dollars. Mainland US still represents 63 percent of all of their sales, and indeed grew faster than the international segment, underscoring importance that the US economic recovery has had on US based companies.


The company has an active customer account base of 260 million people globally, I am one, I read and use the Kindle actively, my wife is a voracious reader. We rarely (if ever come to think of it) read each others book choices, having built up a library in the cloud however is a pretty interesting concept. I think of my parents and their book cases and many books and wonder what to do with my books, when does it get to the point that books just become display items.


EGM (Electronics and General Merchandise) sales are growing, now at 68 percent of global sales, registering 13.95 billion Dollars. I am pretty sure that the company would prefer the media revenue to have grown, it was however only 4 percent higher at 5.24 billion Dollars. I must try harder and read more. EGM sales in both North America and across the globe is growing at a much faster rate than their media revenue. Which is not exactly good news. There is of course an ongoing shift of the rental model, which is lower margin for the company.

What do you get when you buy and own a business like Amazon.com? First, you get access to one of the most energetic and inventive people out there, Jeff Bezos. In his last letter to shareholders he explained how he started out, himself delivering Amazon packages to the Post Office in his own Chevy Blazer, and he even spoke about one day owning a forklift. Well, now Amazon.com have 96 fulfillment centers, currently on the 7th redesign. What? These are the warehouses where the goods are dispatched from, when you click, to the fetching of a product, to the packaging, the dispatch and delivery, it is a complicated process. It is also in the process of being automated, for quicker delivery.


What do you feel about the company with all these different irons in the fire, should they not be focussing on their core business only? A little like Google, they have their core businesses, and then they have an amazing number of different out there ideas that they invest real money in. Drones, phones (they took an inventory write down of 170 million Dollars on the Fire phone), tablets, and so on. On the conference call however, the point was made by Tom Szkutak, the CFO, that the company is going to continue to chase new opportunities, the metric however for paying attention to (as Szkutak was answering a question) was cash flows and return on invested capital (ROIC). ROIC is simplistically net income minus dividends (none on this case) divided by total capital.

Failure comes part and parcel with invention. It's not optional. We understand that and believe in failing early and iterating until we get it right. When this process works, it means our failures are relatively small in size(most experiments can start small), and when we hit on something that is really working for customers, we double-down on it with hopes to turn it into an even bigger success. However, it's not always as clean as that. Inventing is messy, and over time, it's certain that we'll fail at some big bets too.

And then the age old question, when are you (the company) going to be profitable is the question that analysts, investors and the broader community asks. I will go back to the 1997 shareholders letter, in a segment headed It is all about the long term: We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. So there. They will obsess over what the customers want. Not Wall Street.

If you want profits in the short term, I am afraid that Amazon.com is going to disappoint you as a shareholder. If you are looking to own a business that continues to transform and reinvent what is normal (from the last Annual Report), then this is a business that you are going to have to take a LONG term view on. The company is trying to reinvent the way that you think about the brick and mortar shopping experience and shift to one that is all online. That takes a massive shift in human nature, the more younger clients they have, obviously the better for the future prospects of the business.


Are you then unable to value this business on normal metrics as a result of them continuing to build and add to their infrastructure? To value them is too simplistic, they are part a technology company with hardware products (don't forget their monster cloud business) and part retail with the platform that we crave here, no thanks to the Post Office is why Amazon.com's core business is discontinued here. They will get around to SA when they can I guess, do not expect it on their priority list.


They have a market capitalisation of roughly 1.9 times sales. Perhaps that is some metric to look at. I am sure that many people are getting impatient, deciding that enough is enough. The stock is down over ten percent after market. Expect a heavy day of selling today. If you adopt the Jeff Bezos approach that build the field, they will come. Their customers already spend around 75 billion Dollars a year, they are there, the margins will expand when they stop investing heavily. By that time, they will have market share, you are just going to have to ride a wild ride between now and then I am afraid. The lower share price is always an opportunity to accumulate more.