If a large retailer announced a loss of a few hundred million dollars in quarter three, about half related to its core retail business and about half related to its investment in a high-tech startup the culprit would be obvious—competition from Amazon. And if a tablet manufacturer announced a loss in quarter three, the culprit would again be obvious—competition from Amazon. Except the company in question is Amazon itself which beneath a press release of “Amazon.com Announces Third Quarter Sales up 27% to $13.81” said it lost $274 million about half of it related to Living Social.
And this is what makes Amazon the most amazing company in the world today. Obviously it can’t keep losing money like that every quarter, and it probably won’t. But most quarters it earns very low profits, with margins so thin that happenstance can force it into things like its Q3 loss. As deliverer of services to consumers, it’s incredible but as a generator of income and earnings it totally sucks.
But what makes Amazon not just amazing but downright dangerous is that as a financial matter it has something even better than profits—the boundless faith of the investment community. You can think of a company’s stock price as jointly determined by its profits (“earnings”) and by Wall Street’s level of optimism about the future, expressed as a price-to-earnings ratio.
Here’s Amazon in blue compared to the world’s leading tech compan in orange (Apple) and the world’s leading retailer in red (Wal-Mart) in terms of PE ratio:
That’s just staggering. It means that Wall Street is on board with an Amazon business strategy that doesn’t require it to actually make profits as long as it increases sales volumes. And if you’re in any line of business where you compete with Amazon—and Amazon is in a lot of businesses, and seems to get into new ones each year—that should terrify you.
In any line of business where you’re earning healthy profits you always need to worry that a competitor will undercut you on price. But normally you can also have some confidence that they’ll be restrained in their price cutting by the need to maintain profits of their own. Amazon is totally off the leash in this regard. Wall Street treats it like a brand new startup that just needs to think about growth and can find a viable business model later. Which means that if they come after you, you have no recourse. Your profits are going to shrink, and your investors are going to punish you for it but Amazon’s profits don’t necessarily need to grow proportionally. They just need to show they can poach your market share.