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The strategy of “spend now to make money later” has served Amazon (NASDAQ: AMZN) investors quite well for the last decade.
Shares of the ecommerce giant are up over 800% for the last ten years, a return that’s over fivefold what the NASDAQ Composite (INDEXNASDAQ: IXIC) returned for the same period.
But the market appears to be losing faith in Amazon’s leader and founder, Jeff Bezos. More importantly, they no longer believe in the spend now to make money later strategy.
The company missed Wall Street’s expectations for the second consecutive quarter earlier this month, sending shares down by 11% in a day. The world’s largest ecommerce company reported a loss of $126 million for the second quarter, more than double what was expected. The quarterly loss was the largest since the third quarter of 2012.
But the company remains a revenue generating machine. Sales were up 23% year-over-year and the tech company has generated $179 in revenue per share over the trailing twelve months.
Meanwhile, Google shareholders have only collected $97 per share in revenues for the same time period. Amazon trades at a P/S (price-to-sales) ratio of 1.8, while Google trades at 5.9.
Last year, Amazon generated $74.4 billion in sales, but only brought in $274 million in profit. One way to think about these huge numbers is to compare them to a couple of other major ecommerce companies.
China’s Alibaba Group generated $6.7 billion in revenue during fiscal 2013, but it also brought in a net profit of $2.85 billion. Baidu generated only $5.19 billion in revenue – less than a fourteenth that of Amazon – but its profit for the year was over six times Amazon’s, coming in at $1.7 billion.
Bullish investors have followed Bezos with the understanding that the losses will not last forever. Bezos cut his teeth on Wall Street by working there after graduating from Princeton in 1986. He knows what it means to invest in a business for future profits.
But has he become too entrenched with growing Amazon into a company that sells consumers anything and everything?
It’s tough to tell. Amazon has its hands in so many cookie cars these days it’s hard to tell what Bezos’ ultimate goal is, but a few theories include.
1. Jeff Bezos wants Amazon to be a media king
With its hardware products, including its set-top TV box, Amazon is making a push toward media. It’s already developing its own TV content and given it has some 250 million customers, it has a big opportunity to grow into a media empire by selling ads on the back of its content hardware devices.
2. Jeff Bezos is building up a robust cloud offering and hardware is a byproduct
It could be that Bezos knows that the margins in the e-commerce and hardware business is relatively low, but that by getting his smartphones and tablets in as many consumers’ hands as possible, it’ll be easier to up-sell them to higher-margin cloud-based services.
3. Jeff Bezos wants to retail everything
Amazon is already one of the leading e-commerce companies, but now its making and selling set-top TV boxes, smartphones, tablets, cloud services and more. Just this week, Amazon announced that it would be taking on Square and eBay’s PayPal by offering its own credit card reader. Ultimately, this will give Amazon valuable info on how shoppers shop offline. And like Amazon’s usual motive, it will sacrifice margins to gain market share by offering lower fees than the competition.
What’s more is that the metrics and information that Amazon provides sheds little light on exactly what’s working for the company. The sales figures for Web services are grouped into the “other” category on Amazon’s income statement. Kindle sales and membership figures for the Prime program are not disclosed.
In reality, Amazon is a very unique situation.
Shares of Amazon trade at a P/E ratio that’s 840, making it almost impossible to analyze the company using conventional methods. Amazon is sacrificing earnings to grow market share. That’s what bullish investors keep telling themselves.
You ultimately have to trust that Bezos will turn his focus to profits at some point in the future, and give up his quest of transforming Amazon from an “everything store” to an “everything company.”
For the time being, it seems like that’s still a few years away. Prudent investors might find better opportunities elsewhere. For example, since its IPO, the return on shares of Facebook are more than double what Amazon has managed.
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