When Amazon reported second quarter earnings, or rather losses, it surprised no one, though some people were surprised that it lost that much ($126 million). To make us feel better about those losses, and to be able to beat analysts’ expectations later, it preannounced losses between $410 and $810 million for the current quarter. Analysts fell all over each other dodging the question how a company with over $19 billion in revenues could lose that much, and so consistently.
Amazon has been doing this sort of thing for years. Countless analyses have been written about how terrible its financial performance has been, and how the metrics have been deteriorating, including the operating margin that has swooned from 4.9% in Q2 2010 to a nearly invisible 0.8% now (chart). The company made a tiny bit of profit in 2012, lost money in 2013, and is starting this year out in the hole as well.
“We continue working hard on making the Amazon customer experience better and better,” explained CEO Jeff Bezos in the press release. “We’ve recently introduced Sunday delivery coverage to 25 percent of the U.S. population, launched European cross-border Two-Day Delivery for Prime….” Etc. etc.
He sounded like Patrick Donahoe, CEO of the US Postal Service. Amazon has a lot in common with USPS: they’re in the same ballpark in terms of revenues, both dominate their markets, and neither can figure out how to make money.
But there are a few differences between Amazon and USPS:
Bezos can run his show as he sees fit. OK, there is a board, but it doesn’t seem to give him a hard time about the company’s performance. As long as the stock keeps going up, who cares?
The Postal Service, which had revenues of $16.7 billion in Q2, can’t even sneeze without Congress giving it prior approval. Shutting down unneeded post offices or dropping Saturday delivery? Addressing its huge pension obligations or switching to a pension plan of the kind Amazon has (LOL)? Forget it. Not if any of it would happen in any congressional district and impact negatively any voters. A lawmaker’s sole job is to hang on to his or her job, and everything else serves to get that accomplished.
In return for its valiant service as Congressional and public punching bag, USPS is allowed to perform financially about the same as Amazon: losses as far as they eye can see.
So traders weren’t amused with Amazon’s losses, and there were some hick-ups in revenues too, and the stock plunged over 10% in after-hours trading and stayed near that loss on Friday. It’s now down 20% from its $400 peak at the end of last year.
Bezos doesn’t care. At least Donahoe gets grilled ceremoniously by Congress from time to time about the losses USPS generates. And when he comes up with ways to save money, lawmakers in whose districts he wants to save money in whack him over the head.
Bezos is not subject to this sort of enlightened treatment.
After each loss, shares either jump or dive, depending on whether the loss was worse or less bad than expected, and then, the stock rises again to continue its incredible rally, independent of the company’s performance. At least that’s how it worked until the end of 2012.
During the dotcom bubble, Amazon became famous as a precursor. In December 1999, the stock peaked. A month later, it was down 40%. It had started crashing three months ahead of the market. Ironically, only hindsight will tell if it is once again a precursor.
But in late 2008, Amazon commenced its current mega-rally. It was the time when the Fed began throwing money and ZIRP at Wall Street and speculators, and from then on, nothing else mattered. In five years, the stock rose 10-fold. And the company is still not making any visible profits. The stock is simply surfing on the Fed’s endless sea of liquidity and Wall Street’s hoopla.
That’s why Bezos doesn’t have to produce profits. As long as the stock keeps going up, why bother? Having to produce adequate profits would crimp his style. He has thrown off these constraints normally imposed by owners and creditors on management.
Here is where that’s a problem.
Amazon competes with companies that must make money because their investors demand it, and if these companies don’t make money, investors and creditors walk away, and the money dries up, and they’re finished. Amazon, free from profit constraints, competes with bookstores that, like Borders, go bankrupt if they can’t make money, and with smaller stores that just shut down one day because they must make money to stay in business.
Their big competitor has unlimited resources by being able to raise billions at practically no cost. It can always sell more of its inflated shares, a safety blanket if it runs out of money. It pays executives and other employees via its equity compensation plans, which is like raising money by selling shares to the public and using the proceeds to pay these folks in cash. When Amazon needs additional money beyond that, it sells bonds that cost it, depending on maturity, less than the rate of inflation and are thus free money.
Throughout, neither creditors nor stockholders demand to see any profits.
If the owner of a small bookstore walked into the bank with red on its income statement and begged for a loan, the loan officer would ask, after the pleasantries, “You mean you want to get a loan to fund your operating losses?”
For a small business owner, that’s not a good place to be. And this questions, which was entirely rhetorical, would be followed by another one: “How are you going to pay this back if you can’t make any money already?”
You get the drift. This loan, if it materializes at all, is going to be very expensive and will likely entail the bane of small business, a personal guarantee.
Amazon is Exhibit A of how the Fed’s policy of flooding Wall Street and corporate mastodons with nearly free money is destructive to the rest of the economy.
It creates unfair competition.
Because Amazon can competes on its ability to not ever have to make a profit, it can cut prices to the bone, offer free shipping, etc., which initially is great for consumers until its monopoly power allows it to trample on consumers and suppliers alike – and suppliers, namely publishers, are already experiencing the wrath of Amazon.
This type of competition stifles the local economy, leads to job losses among companies that are not so privileged, and cements the monopoly or oligopoly power of the corporate mastodons [read…. The Jobs Curse At Amazon, And How Obama Stepped Into It].
Of course, that’s how the Fed operates. These corporate mastodons (particularly the big banks) are the legal owners of the 12 Federal Reserve Banks that make up the main part of the Federal Reserve System, and their executives and former executives play important roles in that system. For example, GE owns a stake in the New York Fed, and GE CEO Jeff Inmelt was a Class B director of the New York Fed during the period when it handled the bailouts, including the bailout of GE. Amazon too got bailed out, but indirectly, by investors flush with this freshly printed cash which had to go somewhere.
This is one of the pernicious effects of the Fed’s policies.
They drove stocks to insane heights and the cost of money (for those with access to it) to insane lows in order to create that “wealth effect” and enrich the very top layer of society beyond any measures previously imaginable. But for the rest of the economy, the wealth effect has been an utter failure, a sham, and a pretext.
In the process, these policies destroy the functionality of the Main Street economy where investors and creditors keep companies in line by pushing them to produce real income – not ex-bad-items adjusted pro-forma operating income or some such contrived figure, but real income under GAAP. This form of discipline that every executive of a small or medium-size business is subject to, is completely absent for Amazon (and many other publicly traded companies, including the likes of Twitter). And the only cure is a decision by investors and creditors to walk away from them until they deliver real and adequate profits.
Bubbles are easy to discern – including the performance of Amazon’s stock – despite the Fed’s rhetoric that bubbles cannot be discerned. What’s hard is pinpointing the moment they top out. But that’s precisely what everyone wants to know to cash out before it implodes. Lacking reliable scientific indicators of when to get out, everyone has their own list of ersatz indicators. And I just added a new one to my list, concerning the startup and IPO bubble. You can’t make this up! Read…. Sign of Top? Banana Republic Trots out ‘Startup Guy’ Look
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.