Amazon as a nonprofit

For most of Amazon’s history it made zero profit. That changed a couple years ago, but although its gross profit margin on revenues is now positive, it is still pretty negligible today.

Amazon is a huge conglomerate these days, but roughly speaking, its businesses can be divided into a boring retail business that everybody  knows well and a technology business that almost nobody knows unless you are a CFO or CIO because it operates server farms and provides technology services to other businesses. The technology business has been wildly profitable for most of this history in contrast with the retail business that usually loses money. Although most stand-alone retail businesses are different than Amazon’s in that they can’t constantly lose money every year, most retail businesses have very low profit margins, particularly if they are competing with Amazon, so Amazon’s lack of profits isn’t too far from normal.

So if Amazon’s profits have been zero or negative for most of its history and are negligible today, why is it the third most valuable corporation on the US stock exchange, almost three times more valuable than its competitor Walmart?

Cap Rank

Company

Market Cap 

on 8/20/19

1 Microsoft

1,048.0

2 Apple

950.7

3 Amazon.com

891.1

4 Alphabet

820.4

5 Facebook

524.4

6 Berkshire Hathaway

485.9

7 Alibaba

461.4

8 Visa

389.5

9 Johnson & Johnson

344.7

10 JPMorgan Chase

343.1

11 Walmart

319.9

The reason is that Amazon is using its high cash flow to invest in itself and grow its businesses. Investors are betting that Amazon’s businesses will become highly profitable someday in the future and that is elevating its stock market capitalization. Below is another way of looking at Amazon’s business with adds another line of data for its free cash flow.

Free cash flow is an alternative measure of profitability and one of the big differences is that it includes spending on equipment and assets and changes in working capital. By this measure, it isn’t hard to see that Amazon has had a lot of business success in recent years.

Posted in Managerial Micro

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