Why Jeff Bezos doesn't care about profits

Amazon reported a second quarter loss yesterday. It's the sort of thing investors have come to expect.

by Emma Haslett
Last Updated: 03 Oct 2013
On the face of it, results posted by Amazon don’t look good: the company made a net loss of $7m (£4.56m) in its second quarter, on sales of $15.7bn – 22% higher than the year before.

Shares fell 2% on the news – but that was mainly down to its forecast, which suggested sales for the coming quarter would rise by somewhere between 12% and 24% to $15.45bn-$17/15bn, below analysts’ expectations.

Investors would be stupid to be surprised – because in the 20-odd years since it was founded, Amazon’s profits have always been dwarfed by its revenues. Just look at the past two years: in the fourth quarter of 2012, it reported revenues of $21.27bn, but just $97m in profits. In 2011, its Q4 revenues were $17.5bn, while profits were just $177m. Any other business run like that would cause riots among investors.

But chief executive Jess Bezos has hinted that, well, he doesn’t care about profits. In a letter to shareholders in April, he said the company wasn’t focused on ‘short-term profitability’, but on its customers.

‘We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions,’ he wrote.

Amazon’s business model is straightforward: it savagely undercuts rivals, selling its products at razor-thin margins – and even, in the case of the Kindle Fire, at a loss. That means sales rise, and the headline figures (sales, revenues etc) when it posts its results look encouraging.

But the company is essentially still being run like a startup, with Bezos investing in building the brand and undercutting its competitors. The difference is that the figures we’re talking about are billions, rather than the few thousand most startups have to play with.

As suggested by this morning’s tiny slide in share prices, investors don’t seem to mind. They’re patiently riding out Amazon’s 20-year ‘startup’ phase on the basis that when it does make a profit, it’ll be something to write home about.

What’s ironic is that Amazon, which over the years has been blamed for the demise of entire industries as it relentlessly pursues its own success, doesn’t actually make much money at all. And investors are totally on board with it. There’s nowt so queer as folk, eh?

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