Does It Matter When Amazon Turns Its Next Profit?

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Oct. 25 (Bloomberg) -- Mark Mahaney, internet analyst at RBC Capital Markets, discusses when Amazon will stabilize margins and return to profits and why the company’s investing attracts investors. He speaks on Bloomberg Television’s “Market Makers.”

Why does it matter?

It certainly matters, and the answer to the question of when -- it already happened.

It happened in the past.

For really ported this oracle conte -- real important historical context, amazon gives investors the confidence that that is where the margins have been recovered to.

They are in the midst of a major investment cycle now.

We think the margins can recover.

You mentioned that amazon has turned a parfitt -- turned a profit before but it seems to be willing to give up the consistent profit.

Why are investors able to look past that and not hold jeff bezos to a consistent profit?

Good points.

We think it is more like a three-year investment cycle that they are in and we think we are awfully close to the tail end of accurate we think margins will start stabilizing for the first time in three years beginning in this december quarter.

If not a simmer, then the march quarter.

Why are people willing to give his company the benefit of the doubt?

Because of all the success they had building new devices, tablet, building out what will be the largest or read -- or fastest retailer.

They are getting something right.

It is really diverse.

Warehouses inside of png, and the grocery business.

Different streaming videos to try to add up to their media library.

At one point is the scale too big?

Where the synergies are too difficult.

Is there a limit on how much it and spend it where it could go?

Anybody who is considering an investment in amazon needs to know that this company has very grand ambitions.

They do not want to be the walmart of the web, they want to be the next walmart.

That entails dramatic continued growth in sales.

If they grow 20% a year for the next 10 years, they will be at that level, and that is what they're building out for.

They may make an error of overbuilding, but that is the demand curve that they are seeing that they are betting against.

If you are buying amazon, you have to believe that one day they can get to that kind of size.

I like the way you put that -- the amanda curve.

What is the -- the demand curve.

What is the biggest risk that amazon faces right now?

They overinvested in the demand just is not come.

6% of retail sales are on my.

What amazon is doing is trying to push the curve to bring distribution centers closer and closer to consumers and offering a broader range of selections and profits.

-- in products.

They may not match perfectly with the demand curve.

Which part of their business are you most optimistic about in terms of growth prospects?

The market really focuses on digital media ravens, ki -- products, kindles, cloud services.

This company is making a major move now into two very large categories -- consumer staples and fashion and apparel.

Do not think high, pink ready- to-wear.

Those are two very large categories that are very penetrated online, and amazon is leading the charge.

I think this company can be much bigger in those two categories then the market realizes.

It is still the core retail business system for the next five years.

Mark, i cannot help but come back to this idea that perhaps there is too much momentum in the stock.

Elon musk of tesla has admitted as much, and netflix when it comes to their own shares.

Kind of a cautionary tale for amazon in that yes, things are great until they suddenly stop being great.

You're right.

There is intrinsically very high valuation associated with amazon.

It does require you to believe that they can sustain close to 20% revenue growth for five to 10 years, which is very hard to do at this revenue base.

It requires you to believe they can recover to the margins they've had in the past.

We believe both of those things, but those are not easy bets to make.

I would also make the point in terms of valuation, if you look at the price of stock to sales basis, it is been very consistent.

We are not at levels, it is trading under two times sales.

It has actually been very consistent over the last five years, the range of one to two times sales.

We have not gone above that range.

I do not think the stock has traded in uncharted waters.

I know a lot of people say that amazon's model is on replicable.

-- unreplicable.

Does anyone come close?

Wal-mart maybe the company that disrupt amazon from becoming the next walmart.

The one thing i appreciate about amazon if i think of all these companies that have technological risks.

It is possible summit comes up with a new search engine and undermines google.

It is hard to see somebody coming out with a new way to set up hundreds of distribution centers in a asked logistic network in the u.s. and overseas and undermine amazon quickly.

That would require massive amount of capital, and i do not think and new entrants -- i do not think there is a new amazon to take on amazon.

The question is whether the old rigs and mortar retail stores can do appear quite all right, mark -- the question is whether

This text has been automatically generated. It may not be 100% accurate.

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