“Profitless” Amazon Myth Lives On Thanks To Lazy Financial Media

Last night CNBC premiered their newest documentary entitled Amazon Rising. I tuned in, as I have thoroughly enjoyed most of their previous productions. I found this one to have a noticeably anti-Amazon vibe, but none of the revelations about the company’s business practices should have surprised many people, or struck them as having “crossed the line.” For me, by far the most annoying aspect of the one-hour show was the continued insistence that Amazon “barely makes any money” and “trades profits for success.” It’s a shame that the media continues to run with this theme (or at least not correct it), even when the numbers don’t support it.

Most savvy business reporters understand the difference between accounting earnings and cash flow, the latter being the more relevent metric for profitability, as it measures the amount of actual cash you have made running your business. There are numerous accounting rules that can increase or decrease the income you report on your tax return, but have no impact on the cash you have collected from your customers. A good example would be your own personal tax return. Did the taxable income you reported on your 2013 tax return exactly match the dollar amount of compensation that was deposited into your bank account during the year? Almost by definition the answer is “no” given that various tax deductions impact the income you report and therefore the taxes you pay. But for you personally, the cash you received (either on a net or gross basis) is really all that matters. One can try to minimize their tax bill (legally, of course) by learning about every single deduction that may apply to them, but it doesn’t change the amount of pre-tax cash they actually collected.

As a result, the relevent metric for Amazon (or any other company) when measuring profitability should be operating cash flow. It’s fancy term that simply means the amount of actual net cash generated (in this case “generated” means inflows less outflows, not simply inflows) by your business operations. In the chart below I have calculated operating cash flow margins (actual net cash profit divided by revenue) for five large retailing companies — Costco, Walgreen, Target, Wal-Mart, and Amazon — during the past 12 months. The media would have you belive that Amazon would lag on this metric, despite the cognitive dissonance that would result if you stopped to think about how Amazon has been able to grow as fast as they have and enter new product areas so aggressively. After all, if they don’t make any money, where have the billions of dollars required for these ventures come from? The answer, of course, is that Amazon is actually quite profitable.

AMZN-CFO-Margins

As you can see, if we measure “profitability” by actual cash collected from customers, over and above actual cash expenses, as opposed to the accounting figure shown on their corporate tax return or audited income statement, Amazon’s profit margins are actually higher than each of those other four companies. Shame on the media for giving everyone a pass when they insist Amazon doesn’t make money, or at least “barely” does so. They make more money, on a cash basis anyway, than many other large, well-known retailers whose profit margins are rarely questioned.

Full Disclosure: Long Amazon and Target at the time of writing, but positions may change at any time.

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23 Thoughts on ““Profitless” Amazon Myth Lives On Thanks To Lazy Financial Media

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  4. um. ever hear of cash flow from investing activities? this is real cash. to the tune of negative $4.3bn in 2013 for AMZN (negative $3.6bn in 2012, negative $1.9bn in 2011).

    • Chad Brand on July 9, 2014 at 2:26 PM said:

      Sure. Most of that is important for valuation purposes, but some isn’t (buying money market funds or short term bonds to earn some yield on their cash balance). CapEx is the biggest chunk, which is obviously hugely important. But we all know they are investing like crazy back into the business (the phone alone must have cost a pretty penny to design). But where did they get the $3.4B in capex for 2013? From the profits from their existing businesses. That was my point. They can spend billions to expand because they make billions to start with. It’s not being funded primarily through debt, or something like that.

  5. This is a most absurd blog post.

    Amazon.com is indeed profitLESS. Cash flow from operations is certainly not the be-all-end-all to measure operating performance. For a retailer, even an e-tailer, NOPLAT (net operating profit less adjusted taxes) is a far better measure, as that is the best estimate of the money the firm has to spend on capital or do distribute to equity or bondholders.

    What you are not accounting for is the significant amount stock-based compensation that is not accounted for in cash-flow from operations. After all, those shares dilute existing shareholders who bare their cost (i.e. stock based comp is not a “freebie”). If AMZN had to sell shares, collect the cash, and pay their employees (to the tune of $1.2 billion in 2013) in cash instead of stock based comp, cash flow from operations would be zero or negative. THAT is why everyone considers AMZN to be profitless.

    Get a clue.

    • Chad Brand on July 9, 2014 at 2:30 PM said:

      Stock based comp was only 20% of operating cash flow in 2013. Even if you assume they were paying that money out in cash, it would not come close to wiping out their operating cash flow.

  6. Moreover, your cash flow from operations includes changes in working capital, which AMZN has been using to finance its business for the last 6 years. As a result, their days payable is over 60 days, whereas Wal-Mart has a days payable of about 35 days. Wal-Mart is certainly not known as a pushover with their suppliers, so it stands to reason that AMZN’s suppliers are not going to be too happy to keep extending getting paid from AMZN. If AMZN’s payable terms stagnate or reverse to industry norms, cash flow from operations will be significantly negative.

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  9. dave on July 6, 2014 at 7:58 AM said:

    AMZN free cash flow in 2013 was 2 billion
    AMZN market cap is 155 billion

    as an investor you pay 77.5 times free cash flow to own the company

    compare that to Costco, which you can own for 3.6 times free cash flow

    Yes, Amazon can continue to grow the company.
    No, you don’t want to own it as an investor.

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  14. True on July 16, 2014 at 8:05 PM said:

    Hahaha, a capital management blog that doesn’t understand the most simple principle in business.

    Wow. The author of this post needs to read a book and learn the most basic terminology.

    Amazon is NOT profitable! That’s a FACT. The only one who’s lazy here is the author if this article.

    • Chad Brand on July 17, 2014 at 6:28 AM said:

      Huh? Amazon’s fiscal year 2013 GAAP net income (I’m assuming your preferred metric) was a positive $274 million. In fact, 4 of the last 5 years have been profitable on that metric.

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