One of the few companies where profits are under management control Credit, Amazon logo

Or perhaps Jeff Bezos won’t be annoyed. For Amazon is one of the few companies out there where reported profits are near entirely under management control. That’s an odd claim of course for we generally think that companies are profit takers. And Amazon of course is in that sense, their gross margin is hemmed in by what consumers are willing to pay, the competition they face and all that. But Amazon is one of the few companies where the translation from gross profit to net is really under the control of that management.

For most businesses it isn’t, at least not to the same extent. How much they have to invest is rather set. There’s depreciation to take care of, essential upgrades and so on. Amazon’s different in that over and above all those same things that must be spent upon to maintain the business they’ve another vast river of cash flow. Which they can direct to net profit if they wish – or, what they generally do, investment in new lines of business. They’ve not exactly been turning to the capital markets to fund the building of cloud computing now, have they? Rather, they’ve funded it internally, from that river of cash flow.

And that’s how Bezos has run Amazon all along. Instead of declaring net profit work out what it would be and then spend that, in the same time period, on the new adventures. Leaving a small net loss, or a small net profit, dependent upon how the details of the numbers work out.

Then we get to this:

Amazon’s shares hit an all-time high this evening in after-hours trading, as it surprised Wall Street by revealing profits more than doubled, instead of dipping as analysts had forecast.

The online retailer’s shares were up more than 6pc in extended trading, meaning it is poised to become the second largest US company by value, behind Apple, once US markets open.

Its revenues topped analyst expectations for the first quarter, up 43pc to $51bn (£37bn) and net income came in at $1.6bn compared with $724m a year earlier.

Well, is Bezos going to be pissed about this or not? The answer there rather depends upon why it happened. It could be that he’s decided to do what so many investors hope he will. Stop that investment in the new adventures, declare that river of cash as profits and start paying it out. Not that I think that’s likely myself. The other alternative is that management weren’t forecasting accurately. They missed how big the river was going to be and thus didn’t spend enough of it on adventures. Leading to net profit being declared instead of a $billion or more going into growing the business.

Thus, whether Jeff Bezos is happy or not with this profits doubling depends upon whether Jeff Bezos meant Amazon profits to double or not. For he’s in that lovely and near unique position of basically being able to produce whatever profit number he wishes.

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1 COMMENT

  1. The third option is that they couldn’t increase their costs fast enough, that is they projected increased headcount but weren’t able to recruit fast enough to fill those heads. So this may be an indication of amazon facing a skills shortage for the technologies/abilities they are looking for in the areas where they have their offices.