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Amazon’s Latest Move: Far From Profitability

11 May 2017

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.

. . . .

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.

. . . .

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.

. . . .

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

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22 Comments to “Amazon’s Latest Move: Far From Profitability”

  1. And yet every time they tell us Amazon is ‘doing it wrong’ they end up eating crow …

    (Me off with me slingshot, they’ll be needing another crow soon enough. 😉 )

    • And after they eat the crow, what comes out from them is…! 🙂

      Or is that also before and during, as well as after?

  2. Meanwhile, Amazon Web Services is quietly becoming one of the biggest tech businesses on earth. But that doesn’t matter, because the retail side of the company is offering free shipping as a loss-leader. Oh noes! How can a retailer possibly survive if it has loss-leaders?

    Pardon me, I just rolled my eyes so hard they popped out and rolled under my desk, and now I have to go and chase them.

    • Felix J. Torres

      Exactly my thought.
      It’s as if they can’t grasp that there is more to Amazon than online retail.

      AWS aside, Lab126 has Apple, Microsoft, Samsung, and Google trying to get into the home automation voice recognition business Amazon created and holds 70% of. And while Apple is still working on the first Siri speaker Amazon has three separate models and has moved on to video and is moving into TV sets, a market Apple teased but eventually shied away from.

      Amazon is building an Empire and instead of looking where they’re headed those folks are looking where they’ve been.

      • It strikes me that this article is written from the perspective of those who want to make profits from the stock dividends, not the stock *price*. And Amazon doesn’t think the dividend way, never has.

      • Isn’t it the modern business attitude that every segment of a business has to be budgeted and judged separately, and that each segment must make a profit in order to justify its existence?

        • Yup.

          Where I was working they tried to turn their tech support from a cost center to a profit center. The customers were not pleased …

      • Yep. Taking a loss on shipping and making it up on efficient retailing based on their cloud platform works if the platform is efficient enough. AWS doesn’t even need to make money to make that model work.

  3. 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).

    That’s not consistent with the total cash flow and free cash flow we have seen for years.

  4. Eh.

    Warren Buffett’s one-word answer for why he hasn’t purchased Amazon shares

    When Warren Buffett was asked why he’s not buying Amazon shares, the billionaire investor had a simple answer.

    “Stupidity,” Buffett said during an interview Monday on CNBC’s “Squawk Box.”

    • His own it seems.

      • Of course his own stupidity. The whole video segment is him gushing about how brilliant Bezos is in building Amazon. Clearly he sees his stupidity in not buying in the past, and thinks it probably applies currently (but he just can’t commit to buying now with Amazon’s valuation and size).

  5. Patricia Sierra

    I suspect Amazon’s delivery costs have gone way, way, way down. I can’t remember the last time I received an order via FedEx or UPS, and I receive many orders every week. They’re all arriving via USPS — even on Saturdays and Sundays. I mentioned this to the guy who runs the local Post Office. He said they signed a contract with Amazon and the business has been great.

    • I observed the same thing; USPS delivering Amazon packages on Saturdays and Sundays. Somehow they were able to make the post office work very efficiently when no one else was able to do it.
      In the last 6 months or so, Amazon is mostly delivering their own packages. Someone drives up in a regular car. Some products I use regularly are available for same-day delivery with the $35 minimum order.
      Cant beat that!

    • We’re getting more USPS deliveries as well (my sons get lots of car parts and stuff). There’s even a special car from the post office that often brings packages rather than our regular carrier. Not sure what the difference is, or how they determine who brings what, but I’d never seen that vehicle before.

      A lot of people think Amazon is stupid and the people in charge don’t know how to run a business. Maybe so, if you’re looking back at the mid-twentieth century way. But they seem to know how to do 21st century stuff.

    • My neighborhood is simply thick with USPS vehicles on Sunday mornings from ten to noon, all delivering Amazon packages.

  6. Amazon has shipped books for free in Germany since they started operating here. (Since they couldn’t rebate them, due to book price fixing laws here.)

    Any other orders need to value € 29 to qualify for free shipping – or contain a book. I doubt that’ll go down soon, but we’ve had it good in Germany for a long time.

    • I ordered a keyboard for a mini-tab from Hong Kong through Zon at a great price. No shipping charge and it arrived in just a few days. I was amazed, didn’t expect it for several weeks.

      Zon is doing everything it does right. Seems the ADSers just can’t grok that.

  7. I’m pretty sure UPS would go out of business without Amazon. It makes me think that maybe, just, maybe…. Amazon pays lower shipping rates than the rest of us.

    • Patricia Sierra

      I take returns to UPS and mentioned once they must make money on them. The woman said they get only pennies on packages they take to Amazon. Part of the contract.

  8. Here’s the real reason why Amazon is lowering their shipping cost https://techcrunch.com/2017/05/09/amazon-drops-its-free-shipping-minimum-to-25-undercutting-walmart/

    • Patricia Sierra

      I once tried to place an order well over Walmart’s minimum but there was a catch: the items I put in my shopping cart were not all from Walmart. I didn’t notice that as I was shopping. The outcome was that I had less than the minimum from Walmart; the rest were from third-party sellers. I was then charged for shipping from all the vendors, including Walmart. I emptied the cart and went back to the Amazon site.

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