From Seeking Alpha:
Those who follow us know about our strong bearish thesis on Amazon. We wrote several articles explaining why Amazon’s business model is not bound to make a profit, and why we believe its valuation is one of the biggest bubbles this decade.
In our latest article (linked below), we also argued that including revenues from Prime members in calculating Amazon’s cash from operations is totally misleading. That’s because the company spends all its Prime revenues on shipping expenses.
Yesterday, a piece of news reaffirmed our belief that Prime revenues are not even sufficient to cover Prime and shipping expenses.
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Few investors have heard about Amazon’s latest offer to its non-Prime customers – the minimum amount needed to be spent to get free shipping has been slashed from $35 to $25 per delivery. And, guess what? Two months ago, it also slashed that rate from $49 to $35.
Well, that’s funny considering Amazon’s huge shipping losses. A slash from $49 to $25 means that Amazon’s shipping costs will be higher, as it will be forced to free deliver goods that barely make a profit in gross terms (taking the $25 price tag).
We believe that by making this move, Amazon is proving that it won’t make a profit for a very long time due to its huge shipping expenses, which will continue to deteriorate, accompanied by its overgenerous services for its Prime members. Here’s why.
According to Amazon’s latest 10-Q, Amazon’s shipping losses were $1,886 million in Q1 2017. And that includes a “portion” of revenues earned from Prime members.
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We can’t know how much this “portion” is. But we can get a range at least.
So, let’s assume that none of the Prime membership revenues are included as shipping revenue, which is the best case for Amazon for sure. Thus, we should add back all Prime revenues to know if Amazon loses money on shipping or not.
Amazon recorded $1.94 billion in Q1 prime membership revenues. So, if we add all that number (assuming Amazon didn’t include anything from Prime revenues into Shipping revenues) to the shipping loss of $1.89 billion, the segment would have a profit of just ~$50 million.
Remember, Amazon already includes a “portion” of Prime revenues in the above calculation in its 10-Q. So, it’s clear that Amazon will spend all of its Prime revenues on shipping to cover the costs. That’s also in addition to an unknown amount which will substitute losses from the new offer.
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Amazon is obsessed with growth because it’s the only way to increase its valuation. And it is achieving that by taking cash payments from customers and postponing payments to suppliers or postponing services to customers (free shipping for a year). And instead of making Amazon shipping profitable, it is making the segment’s performance worse by increasing costs to an already losing segment.
Link to the rest at Seeking Alpha