[HN Gopher] Amazon and the "profitless business model" fallacy (...
       ___________________________________________________________________
        
       Amazon and the "profitless business model" fallacy (2013)
        
       Author : simonebrunozzi
       Score  : 15 points
       Date   : 2021-12-23 12:41 UTC (10 hours ago)
        
 (HTM) web link (www.eugenewei.com)
 (TXT) w3m dump (www.eugenewei.com)
        
       | dang wrote:
       | Discussed at the time:
       | 
       |  _Amazon and the "profitless business model" fallacy_ -
       | https://news.ycombinator.com/item?id=6620598 - Oct 2013 (137
       | comments)
        
       | SilasX wrote:
       | The previous discussion had a good top comment:
       | 
       | https://news.ycombinator.com/item?id=6620885
       | 
       | >However, things are not that simple. Sometimes some expenses
       | which are about building for the future and investing into new
       | growth are not capitalized. This is the case because for some
       | expenses the benefits are so uncertain and difficult to quantify
       | that the SEC requires that they are reported as ordinary expenses
       | instead of capital spending. These types of expenses tend to
       | involve R&D and may include certain administrative expenses
       | associated with growth initiatives.
       | 
       | That shows why GAAP has legitimately different standards of
       | profitability than an investor or HN comment might.
       | 
       | When people bring up "haha, Uber/Amazon has never even been
       | [GAAP] profitable! What a joke!", it's usually to make the point
       | that, "investors are dumb, this enterprise isn't even capable of
       | value creation because they can't sell outputs for more than
       | production costs, what a scam".
       | 
       | But that doesn't follow at all from GAAP-non-profitability. If a
       | company _would_ have been profitable but for regularly dumping
       | fortunes into speculative projects, that's still great news for
       | investors. It means they could one day give up on that
       | speculation and go back to taking those easy profits from value
       | creation.
        
         | TaylorAlexander wrote:
         | There's so much news where people read a headline and believe
         | it uncritically. I always thought it was silly that people
         | accused Amazon of being unable to make a profit when they were
         | obviously intentionally investing their would-be profits in to
         | growth.
         | 
         | A lot of people don't really care if what they say is accurate.
        
         | foobarian wrote:
         | I always wonder if this is why they make us fill out time
         | sheets. I also always gently propose to our management chain to
         | share the money we save on taxes by doing the timesheets as an
         | extra incentive, but so far I was not successful :-)
        
           | sokoloff wrote:
           | Any time that your company is obligated to capitalize results
           | in them paying more current taxes, not less. (Time that is
           | expensed fully this year is already tax-deductible.)
           | 
           | The reality is (at least in the US and probably elsewhere),
           | that it's not an option to just decide to expense or
           | capitalize everything and so the timesheets might be better
           | viewed as the mechanism the company has chosen to remain
           | compliant with the law and not something that's
           | optional/subject to incentive pay.
        
             | foobarian wrote:
             | Right, I didn't think of the compliance angle. In my case
             | the leadership justification is that doing timesheets
             | "saves us money on taxes." Given how much most of us
             | dislike doing the timesheets I thought it would be nice if
             | they told us exactly how much that savings is, and if a
             | large number possibly we would all be more enthusiastic
             | about doing them.
        
           | throwoutway wrote:
           | Depends on the projects in your time sheets. My time sheets
           | were various businesses (customer) that I was billing time
           | against
        
         | leobg wrote:
         | "Tesla loses money on every car they sell" was another popular
         | one. People seriously believed it.
        
           | triactual wrote:
           | This one actually blew my mind at the time. Tesla had a wait
           | list ten miles long and an obviously superior product
           | (safety, speed, comfort, space, the whole electric thing,
           | etc.). Sometimes, a business isn't as complicated as people
           | make it.
        
       | anonporridge wrote:
       | It kind of seems like traditional finance people and investors
       | who spent well over a decade bashing the growth of companies like
       | Amazon have severely over corrected by spewing as much money as
       | they can into any vaguely similar tech company, potentially
       | creating a new investment bubble that's going to crash when a lot
       | of companies fail to ever flip into profitability.
        
         | missedthecue wrote:
         | People always say that wall street bashed Amazon for growth
         | over profits but I don't think that's true. Amazon has always
         | been endowed with a massive earnings and sales ratio.
         | 
         | If wall street had been bashing Amazon, you'd think their stock
         | would have been muddling along with low multiple over the past
         | 20 years.
        
       | xwdv wrote:
       | People have a hard on for seeing profit. It's like they don't
       | understand the opportunity cost of taking profit means you are
       | not investing in your business to make bigger profit. When I see
       | profit, I see inefficiency. A young business should have zero
       | profit until it can no longer grow.
        
         | adventured wrote:
         | So with zero profit, operating on a razor line at all times,
         | what's your plan for major acquisitions or severe shock events
         | outside of your control (eg national economic recession)? Where
         | is the cash to come from on that terrible rainy day or when a
         | huge opportunity presents and you need cash.
         | 
         | If you're not building cash, how do you plan to avoid
         | catastrophic, unnecessary damage to your business structure
         | when a recession hits? Banks hate to lend during recession, and
         | lending gets a lot more expensive when times are bad.
         | 
         | And banks generally are horrible alternatives when it comes to
         | capital for acquisitions, unless you're a large corporation.
         | 
         | Dependent on venture capital? Another horrible, expensive
         | alternative to profit.
         | 
         | You're seeing inefficiency in profit because you're not pricing
         | in everything in the operating life of a business correctly.
        
           | aksss wrote:
           | I think GP is using 'profit' to talk about wealth extraction
           | from the business. Putting surplus cash into an emergency
           | fund, maintaining a cash balance for unforeseen costs, or
           | similar wouldn't be quite the same thing. One way to think
           | about that is that if your company has a financial goal of $X
           | for a cash reserve, the lack of it can be considered a
           | liability, diminishing net profit.
        
         | castratikron wrote:
         | One thing that is not known to everyone and therefore may come
         | as a surprise to some is that corporations (in the US) are
         | taxed _on profit_ , not on income. This is the explanation to
         | the click baity titles like "Amazon paid less tax than you this
         | year!" etc. So any profit a company makes is basically the same
         | as writing a check to the government; more likely, it would be
         | better spent growing the business. Any kind of growth company
         | should have a goal of making close to zero profit.
        
         | mathattack wrote:
         | A lot is accounting treatment, though I agree with you in terms
         | of cash. Businesses with high value investment opportunities
         | should spend every dollar they have and then some. If it's on
         | something that gets expensed (Marketing) then profit is zero.
         | If it's something that gets capitalized (equipment) then the
         | cash hit is immediate but profit impact is peanut buttered over
         | time. Either way companies with growth prospects should spend.
         | 
         | The flip side is that many companies get large enough that they
         | can't invest smartly any more. So they should give money back.
         | (IBM, etc)
        
       | Animats wrote:
       | Well, they certainly fixed that problem.[1]
       | 
       | [1] https://www.macrotrends.net/stocks/charts/AMZN/amazon/net-
       | pr...
        
       ___________________________________________________________________
       (page generated 2021-12-23 23:00 UTC)