27,900 Reasons For Amazon's Loss
Just now, the online retailer is looking for an editor to acquire titles for its romance novel imprint, Montlake; an English translator for its Luxembourg operation; bunches of technical writers and many more people to staff its growing network of product warehouses.
During the past 12 months, Amazon was on a hiring binge, bringing total employment to 97,000 at the end of the second quarter, up 40% or 27,900 positions from a year-earlier, when 69,100 workers were aboard. And it seems the hiring juggernaut continues.
The 40% rise in employment compares to a 22% increase in sales for the second quarter, so it’s little surprise Amazon lost money in the most recent period -- $7 million, to be exact – and is projecting an operating loss for the third quarter of between $65 million and $440 million. Sales per employee have fallen as the hiring binge continues.
Investors could care less about the losses, it seems from the past and from this earnings season, and are focused instead on Amazon’s revenue growth and on the fact that it’s disrupting the entire retail industry. And indeed, you’d be nuts to invest in any retail stock these days without first gauging whether the company is Amazon’-resistant, or Amazon-vulnerable.
YCharts, proclaiming Amazon the Suicide Bomber of Retail (it trashes other companies’ profits, as well as its own), has extensively covered the competitive retail landscape and how Amazon has altered it, relying on research that measures other retailers’ product overlaps with Amazon, and price differences between Amazon and others. Click on some of the links in the next paragraph and you’ll see that Amazon wins because it beats other retailers on price consistently.
TJX (TJX) sidesteps amazon by stocking goods the online giant doesn’t have. We’ve written recently about Amazon’s threat to Staples (SPLS) ; how some Amazon-resistant stocks are crushing the market; eBay’s (EBAY) competition with Amazon ; and Ulta’s (ULTA) vulnerability to Amazon.
Amazon stock is another matter. As Miriam Gottfried noted in today’s Wall Street Journal Heard on the Street:
“But Amazon has trained Wall Street to expect meager earnings and even small losses with the promise that it can become profitable with the flip of a switch. All the company would need to do is stop investing in getting bigger and begin raising prices in the markets it dominates.”
Amazon could stop growing, which would reduce its costs quickly. And, for the sake or argument, let’s assume that, with sales of about $70 billion over the last four quarters, Amazon could squeeze out an after-tax profit margins better than either Target (TGT) or Wal-Mart (WMT), say 4%. That would be $2.8 billion in net income on no, or say only modest, sales growth.
So, with 456 shares outstanding, that’s about $6.14 a share in net income. And let’s give Amazon a premium PE ratio over Target and Wal-Mart, say 25, for being disruptive and cool. That gets you to a stock price of about $153, about half the price it trades at today. That won’t work.
Gottfried also notes that Amazon could raise prices in markets it dominates, which of course would widen margins. But given that Amazon’s sales growth comes from heavy discounting of items vs. Best Buy (BBY), Barnes & Noble (BKS) and others, it seems likely that sales growth would taper off quickly if it jacked up prices. Yes, the online interface is terrific and free shipping (a form of price cutting) is great. But Amazon, it says here, lives and dies on price comparison. And lower growth would seem to take the wind out of the valuation, too.
So, is Amazon investing for the future, happy to forgo profits today to build a company that will be hugely profitable years from now? Or, the skeptic wants to know, is it merely doing everything it can to maintain sales growth because that’s what drives the stock, Jeff Bezos’s fortune and the value of options held by many of the people working there?
If you’d shorted Amazon, of course, you’d have gotten crushed. And riding the stock up, without thinking too much about the business model, has been great fun for many. The bigger Amazon gets, however, the tougher it is to produce sales growth.
In today’s job market though, Amazon the employer looks pretty good.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at email@example.com. You can also request a demonstration of YCharts Platinum.