Why Amazon Shareholders Don't Demand Profits

A warehouse at the Amazon Logistics Center in Germany Photograph by Jan-Philipp Strobel/dpa/Corbia

Thank you, Jeff Bezos, for selling me all those retro MP3 albums for a wisp of what it’d cost me to buy them on iTunes. Thank you for all the free shipping and content my Amazon Prime account gets me, and for that wicked app that price-compares SKUs—condemning scared brick-and-mortar stores to Circuit Citydom. The constant freebies and perks make me want to buy everything on your site. And I believe I do.

But with all that largesse, how in the world are you clearing enough profit to keep shareholders happy? Is it that earnings are not expected of the Seattle mega-retailer-slash-all-media heavy? This is one of the cosmic questions, and it hearkens to the early days of the dot-com era when conventional business concerns like profits were thought to be the province of old men who drank Sanka.

Amazon.com, one of those rare thrivers from the dawn of the Web, now tows a price-earnings ratio of more than 700, tops in the Standard & Poor’s 500-stock index, according to Bloomberg data. Thanks in part to Bezos reinvesting billions back into the business, the company posted a $39 million loss last year, even as revenue soared to $61.1 billion. By comparison, in 1996, a year before it went public, Amazon had sales of $16 million. Wall Street analysts, on average, believe Amazon is headed 25 percent higher.

Craig Sterling of research shop EVA Dimensions thinks p-e, especially in Amazon’s case, is irrelevant. He’d rather track “economic value added,” a gauge, he says, “of the true economic profit of a company” that measures how effectively it has deployed its capital (debt, cash, equity). Amazon, he figures, has been especially smart in the way it has invested in new businesses, along with acquiring competitors like Zappos and Diapers.com. “We actually use Amazon as an example of why traditional cash flows and earnings are nonsense to pay attention to for an investor,” he says. “So long as a company is investing in positive EVA growth, the more it invests, and the more rapidly its EVA grows, the more value it is creating.” Given the stock’s p-e ratio, investors seem to agree.

So never mind the fact that Amazon posted a 1.1 percent operating margin in 2012. The bet is the company will clear more to the bottom line as it builds out more regional distribution centers to mitigate cost-hikes from shippers.

It’s playing offense to be defensive. Case in point: The U.S. Postal Service’s retreat from Saturday delivery will give UPS and FedEx more leverage. But Amazon’s Kindle tablet allows it to bank more high-profit, shipping-free margins from all the content deals it is striking.

(Bezos is finding ways to deploy his own cash, as well. Bloomberg News reported that he led a group putting $5 million of venture capital into Business Insider, the business news site co-founded by Henry Blodget. Of course, Blodget is the former Internet analyst who made his name when he put a wildly bullish price target on Amazon in December 1998.)

Slate’s Matthew Yglesias marvels that the company is knee-capping the popular Dropbox service with a storage offering that costs half as much. “How,” he writes, “can Amazon afford to offer such crazy prices? Well, storage is getting cheaper and cheaper, and Amazon has achieved great scale and efficiency with operating large servers. But even better, Amazon doesn’t earn meaningful profit margins on any of its lines of business. … It’s all about growth for them, which makes Amazon every possible competitor’s worst nightmare.”

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