Friday, 25 October 2013

Amazon is making lots of money and losing lots of money.



Amazon is making lots of money and losing lots of money.

The darling of Wall Street (what the New York Times calls the company as "the teacher's pet") recent data on Q3, showed more of the same.

Great sales with continued great losses.

Revenue was up a staggering +24%, beyond expectations, to just over 17 billion usd. But it lost, 41 million usd in this quarter. They lost 274 million last year although some of that attributable to poor investment in the deals site, Living Social.

But how do you generate 17 billion of turnover and still lose, 41 million? Beats me.

Investors see it all as ramping up for the future, with the Amazon Share price now 10 times what it was in 2008. In particular, they see Amazon's investment in string after string of Warehouses (100+), as enabling it to become the biggest retailer in the country. Hmmmm.

Amazon is still warning of a further loss in Q4 and investors are still smiling.

I do think Amazon is a great company and I do think The Kindle will bring it places. 

However, I do not like a strategy of owning warehousing (although I understand why) because it's old economy. These services could be supplied by someone elsewhere - they are massively eating into potential profits.

They require significant investment in perishing stock (which books for example, are) as well as high levels of investment in property that can quickly devalue. Maintenance is high and consistently rises. Staff are required 247. It's a little bit mad.

The consistent growth in Amazon is undoubtedly superb and a real indicator that what they're doing is right. However, the losses cannot go on forever like this - it is truly laughable not to be able to generate a profit on these turnovers. Something is endemically wrong with cash management and that's not good long term.

Investors are smiling.
But for how long?

I've seen it so many times before - investors will get tired of this and then things could go South. Amazon needs to make money early in 2014. Must.