Amazon.com Inc. (NASDAQ: AMZN) has to be one of the strangest companies on the face of the earth. It has a higher market capitalization than Walmart Stores Inc. (NYSE: WMT) and steadily growing revenues, yet the Everything Store earns no income and pays no dividend.
In fact, the financial numbers show that Amazon makes no money. On June 30, 2015, it reported a TTM revenue of $95.81 billion (€86.75 billion) and a net income of -$188 million (-€170.22 million). Why does a company with such fast-growing revenues—it had a revenue growth rate of 19.88% and astronomical stock prices of $523.59 (€474.06) a share in midday trading on August 11, 2015—make no money?
The first, most obvious reason why Amazon makes no money is a very basic one. Its expenses simply exceed its profits. The most obvious expense Amazon faces is shipping; it costs a lot of money to get all that stuff to your doorstep.
In 2014 Amazon reported making $4.486 billion (€4.03 billion) in shipping revenue but spending $8.709 billion (€7.89 billion) on shipping expenses, according to Statista. Simply put, Amazon loses money every time it ships an item.
Some of Amazon’s businesses are set up not to make money. Instead, the company uses its profitable businesses, such as Amazon Web Services, to fund unprofitable endeavors. Amazon spends the money it makes from Amazon Web Services to cover other expenses, such as delivery costs.
Jeff Bezos Does Not Want to Make Money
If you suspect that Amazon’s business model was deliberately designed to never make money, you are right. Founder and CEO Jeff Bezos even admitted his company is not designed to turn a profit.
Bezos actually came out and admitted that was the case at Business Insider’s IGNITION conference in 2014. The founder explained that he uses the earnings from his profitable businesses to fund other activities. For example, the cash generated by Amazon Web Services—$391 million (€354.01 million) in profit and $1.8 billion (€1.63 billion) in revenue in second quarter 2015 according to Tech Crunch—to cover the losses from shipping.
Amazon does not make money because Jeff Bezos is not interested in making money. Instead, he wants to use the cash he has to build an empire. One way he is doing that is to buy market share. Amazon is designed to build market share, not to make money.
Bezos knows that he can get a lot of market share by offering free or low-cost delivery. A person is more likely to spend more at Amazon.com if he or she does not have to think about the cost of delivery.
That sets Amazon apart from more traditional companies like Google (NASDAQ: GOOG), where moneymaking is a priority. Even though Google paid no dividend, it reported a net income of $15.09 billion (€13.66 billion) on June 30, 2015. Unlike Bezos, Google founders Larry Page and Sergei Brin set out to make a lot of money when they started their company.
Therefore the real reason Amazon.com makes no money is the values and goals of its founder and leader. Bezos’ goal is to change the world and transform retail by building a new kind of company. He does not care if he makes a profit while trying to achieve his dreams.
How Corporate Philosophy Determines Profits
There is an important lesson for investors here: Be aware of the thought processes of a company’s founders before you buy shares. If you want to make money, make sure that the company’s management shares that goal; contrary to popular belief, corporate titans do not always want to make money.
For example, Bezos is more interested in building up his empire than making money. Tesla Motors (NASDAQ: TSLA) mastermind Elon Musk seems to be more interested in transforming the way the world uses energy than earning a profit. Reuters reported that Tesla loses $4,000 (€3,621.63) on each of the electric vehicles that it manufactures.
This is why shrewd investors determine what management’s goals are before they make an investment. The goals can be usually be ascertained by examining the company’s operations, paying careful attention to the news and, above all, by reading the company’s financial reports.
The numbers in the financials can be one of the best indicators of managements’ goals. A company like Amazon that is more interested in building market share than profit will often have a very high rate of revenue growth and low net income and free cash flow figures. Income and cash flow are low at Amazon because Bezos spends all the extra cash in an effort to build up market share.
Income and cash flow at Google, on the other hand, are much higher because Larry Page prefers money to market share. A shrewd investor can tell this because Google’s net income and fee cash flow are far higher than Amazon’s even though its revenues, $69.61 billion (€63.03), are significantly lower than the online retailer’s $95.81 billion (€86.75 billion). On June 30, Google reported a free cash flow of $4.47 billion (€4.05 billion) and a net income of $15.09 billion (€13.66 billion), while Amazon reported a free cash flow of $784 million (€709.84 million) and a net income of -$188 million (-€170.22 million). Unlike Amazon, Google is designed to make a lot of money, which makes it a much better investment for a person interested in income.
Amazon should teach us that being aware of a company’s goals can help you avoid losing money on your investment. Assuming that every company is designed to make money is a fundamental mistake that can cost investors a fortune.