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Are Amazon’s Shareholders Suckers?
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Back in the 1990s stock bubble it was common for analysts to say things like price-to-earnings ratios (PE) no longer mattered. They were right, at least for a while, as the stock valuations of companies like AOL and Priceline soared way beyond anything that could conceivably be justified by current or future earnings.

Of course after a while, price-to-earnings did come to matter, as the stock market lost half its value from its peak in March of 2000 to its trough in the summer of 2002. The tech heavy Nasdaq lost close to 80 percent of its value. Many of the big tech enthusiasts were wiped out in this crash. While it might seem old-fashioned, people presumably value stock based on how much earnings a share commands, not the beauty of the stock certificate or how cool the company is.

With this in mind, it is interesting to think about what the Amazon future might look like given that it now has a market capitalization of roughly \$480 billion with current profits of roughly \$2.6 billion. This gives it a price-to-earnings ratio of 184 to 1.

Suppose we assume that ten years from now Amazon looks more like a normal company with modest growth potential, since at that point it will be thirty years old. This means it might have a price-to- earnings ratio closer to 20 to 1. This is still well above historic averages in the stock market, but we are plausibly in an era in which price-to-earnings ratios will be higher, and returns lower, than in prior decades.

Let’s assume that people expect a real return of 7.0 percent annually on their Amazon stock. This is the long-term average return in the stock market. While returns are likely to be somewhat lower going forward, it is reasonable to think that investors would expect a higher return on its stock than say GM or Walmart since Amazon is a fast-growing company and doesn’t pay a dividend.

This assumption implies that in ten years Amazon’s market capitalization will be just under \$980 billion, in today’s dollars. If Amazon has a price-to-earnings ratio of 20 in 2027 then it will have after-tax profits of \$49 billion in 2027. The Congressional Budget Office projects that after-tax corporate profits in 2027 will be just under \$1,400 billion (in 2017 dollars), which means that Amazon will be earning an amount roughly equal to 3.5 percent of all U.S. profits in 2027.

There are three ways to get from its current profit level to the \$49 billion it will need in 2027 to have a 20 to 1 PE ratio in that year. It can keep its current profit margin and have sales expand to a point where its profits are \$49 billion. It can have its share of the market stay roughly constant, implying 2.0 percent annual growth, and have its profit margin increase, or it can have some combination of the two.

In the first scenario its sales will have to expand to \$2.44 trillion by 2027. This is shown in Figure 1 below

This implies that in 2027, Amazon’s annual sales will be just a bit less than 10 percent of GDP. Since much of GDP involves areas like health care, rent, and education, areas in which Amazon does not currently have a presence, it would have to be an incredibly dominant actor in the segments of the market where it does operate.

The other route would imply that Amazon sales will be \$166 billion in 2027. From this volume of sales it must generate almost \$49 billion in profits. This would imply that its profit margins would have to rise from 2.0 percent of sales at present to more than 29.0 percent of sales in 2027. This is shown in Figure 2 below.

If Amazon were to hike its prices enough to achieve these margins it certainly would imply a very different shopping experience for its customers.

Of course, there can be some mix between these two paths, but it seems unlikely that Amazon would be able to substantially increase its market share even as it is pushing up its profit margins.

Amazon’s Profits, without Amazon Web Services

Amazon’s main source of profits in the last few years has been its web service division. While this division accounts for just 9.0 percent of the company’s revenue, it accounts for almost 75 percent of its profits. While it is possible that this division will continue to expand rapidly like the rest of the company, it is also possible that it will face serious constraints going forward.

Amazon was able to get a huge head start in this market, jumping in ahead of other tech giants like Apple, Google, and Microsoft. Now these companies are all making big pushes into this market. Let’s imagine as one possibility that competition from these companies leaves Amazon’s profits on its web service division unchanged in real terms over the next decade. This could mean that it either is forced to reduce margins substantially to maintain its share or it surrenders much of its share to its rivals, but keeps its margin in web services.

Either way, this assumption would imply that the company must generate \$46.6 billion in profits from its non-web services. Excluding web services, Amazon’s current profits are equal to just 0.6 percent of sales. If the company is to generate \$46.6 billion in profits in 2027 from its non-web services and keep its profit margins constant, then it will need sales of more than \$7.4 trillion in 2027 (in 2017 dollars). This is shown in Figure 3 below.

In this scenario Amazon’s 2027 non-AWS revenue would be roughly equal to 30 percent of US GDP.

The other extreme case is that sales just grow 2.0 percent a year and Amazon gets its \$46.6 billion in non-AWS profits by increasing its profit margin. This scenario is only slightly different than the one shown in Figure 2 above, although the profit share on non-AWS sales would now have to be 30.4 percent instead of 29.5 percent. This is shown in Figure 4.

Here we can also envision a mix of rising margins and rising sales, but it is difficult to see how this will get Amazon to \$46.6 billion in profits on its non-AWS sales.

Conclusion: Are Amazon Shareholders Suckers?

Amazon has revolutionized the retail market and had an especially large impact in areas like publishing and now television. But that doesn’t mean that its stock is necessarily a good buy. There are of course other factors that could make the picture somewhat better than these numbers indicate, most importantly its profit from the rest of the world, but it’s not clear that would hugely change the picture.

In Europe, Amazon is looking at a slow growing economy and a difficult regulatory environment. China is growing much more rapidly, but it is has very strong domestic competition, which the government is likely to favor in regulatory disputes. Other developing countries may offer better prospects, but it would take some very optimistic outcomes in these markets to hugely improve the picture.

It may seem strange that sophisticated investors would have hundreds of billions of dollars in a hugely over-valued stock, but we have seen this before. After all, the shareholders of Time-Warner ended up selling one of the largest media companies in the world for almost nothing when they agreed to be taken over by The value of stock quickly collapsed, and the value of the combined company was almost entirely based on Time-Warner’s value.

And it was only a decade ago that all the Wall Street geniuses thought that house prices could never fall. The mortgage backed securities that fueled the housing bubble all carried high investment grade ratings, as did Lehman and AIG.

In short, any forecast on Amazon’s future profitability has a huge element of uncertainty, but we should never rule out the possibility that its current investors are clueless.

This article originally appeared on CERP’s blog.

(Republished from Counterpunch by permission of author or representative)
• Category: Economics • Tags:, Financial Bubbles, Wall Street 
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  1. anon • Disclaimer says:

    It helps to understand accounting. A traditional industrial firm that is growing will earn a profit, pay taxes on that profit, and then invest in a bigger factory. Growth is funded by spending reported profits.

    Amazon simply expenses its growth. How can they get away with it? Among other reasons, accounting tends to be conservative and Amazon’s sales promotional expenses must be booked as an expense. Other Amazon growth costs are for creation of content, building out their computer network, building out their supply chain, etc.

    In 2016, Amazon booked an expense of 16,085 in a line item called ‘technology and content’.

    They also have a source of cheap capital. Again in 2016, their inventory was 11,461 and their payables were \$25,309. That’s \$14 billion of other people’s money they are using to build out their business. Basically, they sell stuff, but pay their suppliers after it is sold. You can look it up — its called supply chain financing or vendor financing.

    If Amazon was a more typical growth company, they wouldn’t pay dividends. They would book a profit and invest that profit through capital expenditures.

    So ….

    What do they get by expensing all their investment? They don’t pay taxes on profits. It saves them 1/3 on all investment activity.

    Amazon is a very profitable company. It earns a substantial economic profit. How much? I’ll guess \$20 billion pre tax. Or maybe less.

    Is advertising and promotion including sales building programs like Amazon Prime an expense or an investment? Per accounting — its an expanse. But they didn’t build out a massive business by breaking even.

    The ‘soft’ investment concept? What they are doing must be durable and add lasting value to be an economic investment. There isn’t any hard number — it is a matter of judgment.

    What have they built? Amazon is a valuable brand. Per CNN Money, it is the 7th most valuable brand at \$99 billion. Amazon has signed up over 50 million people to Amazon Prime. They have at least one of the top 3 cloud platforms. Google and Microsoft have spent well over \$10 billion building out their versions. They have lots of warehouses — own some/lease some. And on and on.

    And don’t forget the public companies — when they began paying dividends — frequently pay out less than half of their earnings. So — at some future date — Amazon could grow fast enough to justify ‘reinvestment’ and pay out a dividend that would justify a much higher market cap.

    Hey … lots of things can go wrong. I’m not saying it isn’t risky. Or expensive. Just that it is silly to say that Amazon simply broke even and has grown rapidly for two decades without large investments in the business.

    • Replies: @Dave Pinsen
    , @Dieter Kief
  2. Dave Pinsen says: • Website

    Also, to use Amazon and Priceline as examples of dot-com 1.0 irrationality is odd considering that they ended up being 2 of the enduring winners from the late ’90s. Both stocks are up over 1,000% since.

  3. Their model, which is based on slavelike working conditions and the destruction of any and all existing competition needs to be eliminated.

    • Agree: Autochthon
    • Replies: @Dieter Kief
  4. Jeff Bezos seems to be a devotee of the the Jonas Cord school of business administration. His strategy is simply to buy every company he can, with borrowed money, and to tout his sheer momentum as the primary reason why investors ought to keep pouring funds into his enterprise. It’s “the wave of the future” after all—the wave resulting from Jeff doing a massive cannonball into the slowly draining retail pool.

    This cannot last. Amazon is a profitless, cash-burning slave ship of a company that abuses the country’s preexisting infrastructure in order to eke out an existence. David Stockman has run the numbers. Last time I checked, Amazon’s total profits over the last 25 years amounted to something like two-thirds of one percent of gross revenue. Meanwhile, Bezos is publicly spinning pipe dreams about drone deliveries and colonizing Mars. It’s only a matter of time until investors say “Not with my money!” in their best Lionel Barrymore voice. Amazon has always been all sizzle and no steak. It was only the peculiarities of our particular era—including but not limited to vast credit expansion and a zeitgeist permeated by techno-Utopian fantasies—that elevated carnival barking mad men like Bezos, Musk, and Kalanick to the positions they currently hold.

    But as sure as I’m sitting here now, the tide will go out on this nonsense. In 10 years, Amazon probably won’t even exist.

    • Replies: @dcthrowback
  5. The current market capitalisation of Amazon is larger than Boeing, a manufacturing giant that produces masses of real things rather than acts as a glorified delivery service. This is indicative of the mess the US is in.

    • Replies: @Rod1963
  6. @anon

    As decent citizens, stockbuyers should not invest in a company, which’s business model implies making profit without paying taxes.

  7. @exiled off mainstreet

    Lots of competitiors do pay taxes. To let companies grow who don’t on the expense of those who do, seems pretty destructive.

    You could look at companies like amazon as institutions, who invade the world and destroy their home base.

    Winner takes it all is unethical – and doesn’t make for a good foundation of a decent society.

    • Replies: @Joe Wong
  8. Well, using that rational thinking tempered by professional training in financial analysis, I shorted AMZN at \$114, and I’m glad I thew in the towel at \$125. Markets can be irrational longer than you can remain liquid.

    BTW, years ago Bezos reportedly received a letter from a major consulting firm outlining how they could help Amazon get to profitability, and he reportedly responded with “Profits are for Pu**ies!”

    • Replies: @yeah
  9. Amazon is going to make huge profits by expanding into super profitable businesses like groceries and home appliances…..

    I love Amazon Prime. I can buy a pencil and get it shipped free and Amazon loses money every time.

  10. SWMBO and i are (were) big amazon customers…
    not anymore, weaning myself off of them for a number of reasons, the first being when pkgs are ‘delivered’ by USPS they are NOT ‘delivered’… while we live in a rural-ish area, we fall WELL within all the ‘guidelines’ and ‘policies’ they have for going down our road to ACTUALLY DELIVER the packages… yet, they do not…
    thus, i take off a couple hours early from work (unpaid, of course) to go to pick up the pkgs that USPS will NOT deliver… gee, seems like i should get a refund of the shipping fees i paid since they don’t actually DELIVER…
    FedEx, UPS, DHL, etc, have ZERO problems/issues in ACTUALLY delivering pkgs, but USPS will not; they are lazy assholes, i have all kinds of sympathy for their artificial pension problem CAUSED by kongresskritters, BUT, GIVEN their simply atrocious NON-delivery over the last 25-30 years while i lived here, i have come to the point where i hope they all die in a fire…
    so, after a back and forth with the amazonians (which is annoying enough to contact a human bean at most ANY company these days), they only promise they will ‘de-prioritize’ USPS as a delivery option, but that is NOT an option for me, BECAUSE THEY DON’T FUCKING DELIVER…
    so, i use amazon to look up the crap i want to buy, then go to the original source and pay a few more bucks to order directly from them… (making sure they deliver UPS/FedEx) HOWEVER, it actually ends up CHEAPER, because I don’t have to take off work, i don’t have to run 45 mins each way to the post office, and i don’t have to deal with lazy USPS workers who DON’T deliver for me AND lie through their teeth about the situation when i bitch about it every 4-5 years…
    fuck amazon, fuck usps…
    BUNCH of other issues with amazon that can NEVER get resolved cause you can’t get a hold of a live human being to deal with problems that don’t fall under their pre-canned bullshit…
    using amazon simply as a catalog now, to find out the vendor to order directly and skip all their idiotic bullshit…
    i hope amazon/bezos dies in a fire, too…

    • Replies: @bjondo
  11. yeah says:
    @The Alarmist

    Your decision to short AMZN at \$114 was sound in fundamental logic but bad by trading principles. You never short based on fundamentals only, only on strong technical (sell when the sucker takes a big price hit followed by more down days.) It is amazing, simply amazing, how long the markets can remain in la la land. It is true that in the long run “the markets are a weighing scale” (measuring stuff like EPS, P/E ratio) but, then, “In the long run we are all dead”. Bezos could say “profits are for P…” because he correctly divined that the mass of humanity (and hence the market) is stark raving irrational, fired only by fear and greed. Wait till fear replaces greed, then short AMZN – and much of the other fluff in the market.

    • Replies: @Astuteobservor II
  12. Joe Wong says:
    @Dieter Kief

    Are you anti Western value, capitalism, democracy, …? Winner takes all ruthlessly is the essence of capitalism and democracy, the foundation of Western value the American insist.

    • Replies: @CanSpeccy
  13. bjondo says:
    @art guerrilla

    USPS delivers and ships my mail and my packages
    no problems

  14. CanSpeccy says: • Website
    @Joe Wong

    Winner takes all ruthlessly is the essence of capitalism and democracy

    Not sure on what basis you make that statement, but obviously any rational person other than a monopoly capitalist favors a competitive free market, enforced with tough anti-monopoly legislation.

    The US Government flirted with that idea when the Standard Oil and Bell monopolies were broken up, but the monopolists now seem to have a firm grip on the government: unless Trump really does take Amazon down —a simple means might be to have the IRS seek payment of tax due on improperly expensed profits, plus all applicable penalties.

  15. dcthrowback says: • Website
    @Intelligent Dasein

    “In 10 years, Amazon probably won’t even exist.”

    Would you like to put some cash behind this opinion? Because I’ll f**king book it.

  16. @CanSpeccy

    Not sure on what basis you make that statement

    I made my pretty similar one on this basis:
    Sarcasm x irony x a little bit of hope.

    (Could well be, that you and Joe Wong and I agree basically).

    What I don’t get is the fact, that such simple rules-bending (tax-fraud) as being practised by Bezos is possible at all. I mean: if it had been possible for a year or two – just as long, as it takes the big machinery of the public opinion and congress etc. to start working. But that such a thing goes on for years and years, most of the time unnoticed, strikes me as quite astounding.

    • Replies: @CanSpeccy
  17. Rod1963 says:

    Very true.

    But Amazon is the darling of wall street so it’s all good. Then again Wall Street certified a bunch of junk real-estate paper as AAA when in reality it was junk rated. When it blew up the ratings firms just said “oops”.

    IOW just because Wall Street says something is good, doesn’t make it so. Ask Bernie Madoff’s investors.

    That said Amazon is butchering brick and mortar stores. First they wiped out the used book stores, then specialized book stores. Now they are looking at replacing bigger stores.

    I won’t even use Amazon anymore, outside of looking up some product and buying it elsewhere.

    • Replies: @NotBob
  18. CanSpeccy says: • Website
    @Dieter Kief

    What I don’t get is the fact, that such simple rules-bending (tax-fraud) as being practised by Bezos is possible at all.

    Although I’ve made no study of the subject, I have wondered whether the ability of US companies such as Google, or Rupert Murdoch’s NewsCrap to operate in Britain without paying significant amounts of tax is in acknowledgement of services rendered to the state.

    In the case of Bezos, what services he might offer to the US Government is not obvious, although we know that Amazon is a major CIA contractor and that Bezos owns the Amazon, I mean Washington, Post. In the case of Google, like NewsCorp, we know they greatly influence how millions of people think, so the basis of a deal on taxes seems clear.

    One might even wonder about Trump. All those hotels, so many opportunities for spying, setting people up with tarts willing to piss on the unsuspecting traveler (unsuspecting of surveillance, that is). But all one can be reasonably sure of is that in the world of billionaires vying for money and power, many strange things occur, some stranger than one is likely even to imagine. For example, the Jew, Soros, for example, openly stating on 60 Minutes that his character was formed in the act of betraying Jews to the Nazis. These people are truly amazing.

    • Replies: @utu
  19. NotBob says:

    And they just bought Whole Foods…

    First the books, then everything that could be shipped, now moving into food.

    Years ago a told somebody that I thought Bezos was the Devil Incarnate. They thought I was crazy. I can’t remember if I have ever ordered anything through Amazon. If I have, it was once upon a time, long ago, and far away.

  20. Sunbeam says:

    There was a Zero Hedge article a couple of weeks back about Amazon.

    If I remember the details correctly, packages delivered by USPS are subsidized an average of \$1.27 by people just wanting to mail a letter. I.E. stamps are overpriced and that overpricing is used by the postal service to deliver packages at an operating loss.

    No idea if this is somehow to use their protected business (mail delivery) to enable them to compete with FedEx and UPS. Or rather if it is the result of lobbying efforts by Amazon and Ebay to get a hidden subsidy at taxpayer expense (or stamp buyer’s expense).

    Take someone more knowledgeable than me to guesstimate things, but I imagine that if the average cost of sending a package were higher you would see a lot less people buying one item and having it shipped to them.

  21. utu says:

    ” what services he might offer to the US Government”

    All large corporation must, whether they need it or not, spend lots of money in support of media. Money for the media that brainwash and control the population must come from somewhere.

    The nouveau riche if they want to keep their money they must spend some of their on causes desired by the system.

    During Clinton 2nd term the idea of breaking the Microsoft up was floated. Probably this was a hint to Gates that he should share his money properly. He got the message and created a huge foundation.

    • Replies: @CanSpeccy
  22. @CanSpeccy

    The monopolists never relinquished their firm grasp on the government in the first place. Much “progressive” anti-trust legislation was in fact crafted by the very industrialists it was ostensibly meant to regulate, precisely because it would hamper competition from un-connected outsiders and entrepreneurs. Libertarians like Rothbard, following honest leftists like Kolko, have written much on this.

    • Replies: @CanSpeccy
  23. CanSpeccy says: • Website
    @Beefcake the Mighty

    The monopolists never relinquished their firm grasp on the government in the first place.

    Which would explain why former CIA Director Brennan is advocating a coup d’état against Trump, who has described Amazon as a “no-tax monopoly.”

  24. CanSpeccy says: • Website

    The nouveau riche if they want to keep their money they must spend some of their on causes desired by the system.

    Trump versus the Deep State. Is this a scripted diversion, or is the US headed for civil war? Or I suppose it could be argued that the US is already in an information civil war.

    • Replies: @CanSpeccy
  25. @yeah

    shorting is only done on insider information 🙂 if he did it without that knowledge, it was just gambling.

    I don’t see amazon going anywhere. it is a pretty safe stock to buy. bought some about 6 months ago. already earned 25%. not as well as my alibaba stock, but still a safe stock choice. I bought amzn stock because I read reports of malls, brick and mortar retailers failing. the growth will not be as big as amazon it self claimed, but there will be growth.

    good luck to you all, the next crash will be soon. the cycle is here again.

  26. VICB3 says:

    Companies all go through the 10 Stages of Corp. Lifecycle, and Amazon is no Different, with one exception: the stages are greatly speeded up at present, arching over a relatively brief period of years instead of many decades.

    Amazon now is like Sears Roebuck in, say, the 1930s, a retail powerhouse. And like Sears, it will eventually go under, done in by repeatedly squandered customer good will, unsustainable debt loads, unrealistic growth targets and weird, short-term financial games in pursuit of stock price, poor timing and sluggish response to consumer patterns shifting yet again. In other words, Nemesis will follow Hubris. *

    The difference is that it will only take 10-15 years or so instead of 100.

    Just a thought.


    *Microsoft is well along that same path. Unless they offer up a replacement for that quasi-paymodel,
    sypware-ridden POS Windows 10 (or simply just go back to Win7), they’re toast. They’ll be a stage 9 legacy company wondering what happened as a nimble rival out of nowhere offers up a seamless MS compatible OS that is better, cheaper, faster and truly private.

  27. woodNfish says:

    In short, any forecast on Amazon’s future profitability has a huge element of uncertainty

    No shit Sherlocks! That is why investing in the stock market is considered risky. And no, most of us aren’t clueless, we are just taking our money for an uphill ride that we can’t get by sticking it in a bank savings account. Some of us are even smart enough to trail stops and ignore whiners like you two.

  28. Anonymous • Disclaimer says:

    I was going to comment on the Paul Craig Roberts article, but for some reason it allows no comments, so I came here. I read this article earlier, but I am now mainly responding to the question Roberts asks.
    What explains Amazon’s share price?
    1) Bezos is at the interface between the tech world and real life. Actually, I think that is the main thing right there. Contrast him with Gates/Microsoft, which is geek operation, and Jobs/Apple, which is about image, and Zuckerberg, who runs a vast circle jerk. The only real competitors are Google/”Alphabet”, but they may be too smart for their own good. Bezos will be perfectly fine allowing the google boys to be the 2nd and 3rd richest men in the world.
    2) Amazon has a very good reputation as far as return policy goes. Their policy seems to be HEAVILY weighted to flaky buyers, to the great detriment of all Amazon-affiliated sellers. Amazon aims to be not just a “seller”, but THE MARKETPLACE. Amazon is the middleman, and if they can also take a cut as the seller, so much the better for them.

    People buying Amazon stock are effectively buying into the bet that Bezos will dominate the world, and not let them down.

    • Replies: @CanSpeccy
  29. CanSpeccy says: • Website

    People buying Amazon stock are effectively buying into the bet that Bezos will dominate the world

    Some hope. You can get all that cheap Chinese stuff from for a much better price and with fast airmail delivery. Then there’s alibaba, if you need a backhoe, prefab school building, whatever.

  30. Anon • Disclaimer says:

    Dean. Have you monitored this website for content prior to putting your articles?

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