December 11, 2014

Amazon And Hypochondria

I am no economist. Nor am I a stock market guru. But I have a hunch about Amazon.

For 20 years we have been hearing that Amazon isn't profitable because it keeps reinvesting in itself for the long term. It's a lovely story.

Knuckleheads like me have been mentally betting against Amazon for years, and have been consistently wrong. Appetite for shares in Amazon continues to remain high despite its inability to show anything resembling a real profit.

But bad things always happen when you least expect.

The stock market continues to believe that there is a point at which Amazon can seamlessly convert its tremendous sales into profits. I am skeptical. I believe Amazon's strongest market advantage is its willingness to undercut everyone else on price.

I don't think it's as easy to escape from this and get to profitability as it sounds. The minute they decide to change this strategy, two things will happen: First, someone else will come along who will be willing to make no profit in return for high sales. Second, consumers will continue to exercise their love for low online prices.

After 20 years, you'd think Amazon could have found a strategy for investing in their future while still showing a decent profit.

Amazon is a company that has operated on the money of investors rather than profit from operations. The idea that this can go on indefinitely has been questioned for a long time by skeptics like me. And we have been wrong over and over. Nonetheless, I still believe the laws of economics have not been suspended.

I like to think of my skepticism about Amazon as a kind of hypochondria. You're going to be wrong for a long, long time. But in the end, every hypochondriac turns out to be right.


denTarthurdent said...

Amazon product ads are stealing revenue from Google. Ultimately, they will make more money from clicks than from sales, because everyone goes to Amazon looking for a bargain. Probably not their original business model (or even plan z) but pretty compelling, just the same.

Cecil B. DeMille said...

When the alternative is to go to WalMart, Amazon will win for me every time. I'm too old to go there. People might think I work there. If Amazon wants to charge ten cents more on everything I buy, that would amount to less than five dollars a year. And yes, I will pay that to avoid going to WalMart. Also, I highly doubt anyone would go elsewhere to save ten cents.

Tom said...

The thinking is with Amazon and Uber ( and hence sky high valuations) is that we're in a new world of economics and where network effects, economies of scale mean that monopolies can work and vast sums of money can be made like never before ( well apart from Apple, Microsoft, Standard Oil, Carnegie Steel )

The idea is that Uber and Amazon have enough money behind them to basically slowly win market share, and survive on no profits for years and years to come, they know profit won't be coming any time soon with this growth, this is why Uber "leaks" information to get ever more funding.

It's based on the assumption, A F*CKING MASSIVE assumption, that one day Uber can buy or kill everyone else in P2P transport via undercutting, and Amazon can do the same online, and then they both have massive driver bases, user bases, servers, logistics algorithms and all that stuff that we don't ever come close to understanding, that means they can make fortunes off a monopoly in a market that nobody can ever try to enter because it's too damn scary to look at ( like Facebook or Google)

It may be correct, but my hunch is that both companies are run by sociopaths, funded by sociopaths and a little bit of empathy and critical thinking would have show the errors in their ways. Not least Amazon is a pretty shitty company to buy stuff from and Uber is a wank brand.

David Hanson said...

Shanghai61 said...

It sounds a lot like what Fiat's business model used to be ...
"We lose money on every car we sell, but we make up for it with volume."