HOW is it that a company can be valued in the billions when it doesn’t make any real money?
In just the first three months of this year, Amazon’s revenue was a whopping $US19.74 billion. That’s $US219 million a day. But its net profit was only $US108 million for the whole 90-day period.
$US108 million may sound like a lot of money but it’s not when you consider it’s a profit margin of only 0.54 per cent. For the full 2013 calendar year, the ‘everything store’ generated $US74.45 billion in revenue, resulting in $US270 million net profit, which equalled a profit margin of 0.36 per cent.
Compare that with Apple, the world’s most valuable company, whose first quarter profit was $US10.2 billion from revenues of $US45.6 billion, or Google’s profit of $US3.45 billion from revenues of $US15.4 billion. Both of which equal a profit margin of 22 per cent.
And it’s hardly the first time Amazon has eked out such a small profit or managed to make a profit at all. So how can a business be valued at $US153 billion but barely make any money?
The value of a company is often based on its future potential rather than its current operations, particularly with technology businesses. How else do you explain them debuting on the stock market or being acquired for billions despite not banking any money?
Twitter raised over $US2 billion from its initial public offering last year even though its IPO documents showed it hadn’t turned a profit in the three years before its market debut. WhatsApp was bought by Facebook for $US19 billion even though its only revenue source, thus far, has been an annual $1 fee from its subscribers.
But somehow, investors are still piling money into these companies.
“Often when investors buy into those companies, they buy into the company’s future and its aspirations,” head of Westpac Online Investing Darren Moglia told news.com.au. “Investors look at the scale and reach it has, as well as what future levers they can pull based on the company’s strategy.
“The future potential of the business is important but in order to generate a return [on investment], it’s got to convert that scale into profitability. Growth is the path to profit. I think a lot of investors would look for growth within three to five years.”
At less than 10 years old with 225 million users (77 per cent of accounts are outside of the US), Twitter was able to demonstrate its future viability as a business, especially on a global scale. Its first profitable quarter in many years, if ever (Twitter wasn’t required to disclose its financials for its first few years of operation), was the fourth quarter of 2013. From revenues of $US242 million, it squeezed out a $US9.7 million profit, a margin of 4 per cent.
Twitter was an attractive stock for investors because of its growth rate — its October 2013 IPO documents put its monthly active user rate growth at 44 per cent from 2012. It also generated 65 per cent of its advertising revenue from mobile platforms, which was an important statistic for investors looking at Twitter’s earning potential. However, after its Q4 results showed its new user growth had slowed to 30 per cent, its stock fell.
Daily deals company Groupon has been struggling since its debut on the stock exchange in 2011. It sacked its founder and chief executive Andrew Mason and its most recent financial report (Q1 2014), showed that despite $US757.6 million in revenues, the company lost $US37.7 million. It’s recorded annual losses for the last five years.
One of the reasons these companies aren’t uber-profitable is because they invest a lot of money back into expansion, either into new products, services, territories or acquisitions. Additionally, the focus is more on growing users and customers rather than growing revenue, let alone profits.
Amazon has opened a slew of new fulfilment centres at great cost to its bottom line while the company is eating the extra shipping cost for its Amazon Prime memberships. And sometimes, profitability is sacrificed because of shareholder buybacks or employee stock commitments. Amazon has already flagged a loss of up to $US455 million for Q2 in part because of stock compensation.
But that doesn’t explain the whole Amazon conundrum. At almost 20 years old with its IPO way back in 1997, the company is hardly a toddler and many commentators have criticised investors for being too enamoured with the company.
In January, former Slate economics and business correspondent Matt Yglesias pointed out that over the last five years, Amazon has tripled its sales but cut its profits in half. Mr Yglesias argued that Amazon persisted in being not profitable because Wall Street allows it to. He once famously wrote that Amazon is “a charitable institution being run by elements of the investment community for the benefit of consumers”.
Of course, retail as an industry is renowned for not having huge profit margins. A 2012 analysis of S&P 500 companies showed retail had a profit margin of 4 per cent. Arguably, the bulk of Amazon’s operations could still be classified as retail, even if it’s e-commerce. But it is increasingly diversifying into more technology-focused activities such as cloud computing and content streaming.
In just the first three months of this year, Amazon’s revenue was a whopping $US19.74 billion. That’s $US219 million a day. But its net profit was only $US108 million for the whole 90-day period.
$US108 million may sound like a lot of money but it’s not when you consider it’s a profit margin of only 0.54 per cent. For the full 2013 calendar year, the ‘everything store’ generated $US74.45 billion in revenue, resulting in $US270 million net profit, which equalled a profit margin of 0.36 per cent.
Compare that with Apple, the world’s most valuable company, whose first quarter profit was $US10.2 billion from revenues of $US45.6 billion, or Google’s profit of $US3.45 billion from revenues of $US15.4 billion. Both of which equal a profit margin of 22 per cent.
And it’s hardly the first time Amazon has eked out such a small profit or managed to make a profit at all. So how can a business be valued at $US153 billion but barely make any money?
The value of a company is often based on its future potential rather than its current operations, particularly with technology businesses. How else do you explain them debuting on the stock market or being acquired for billions despite not banking any money?
Twitter raised over $US2 billion from its initial public offering last year even though its IPO documents showed it hadn’t turned a profit in the three years before its market debut. WhatsApp was bought by Facebook for $US19 billion even though its only revenue source, thus far, has been an annual $1 fee from its subscribers.
But somehow, investors are still piling money into these companies.
“Often when investors buy into those companies, they buy into the company’s future and its aspirations,” head of Westpac Online Investing Darren Moglia told news.com.au. “Investors look at the scale and reach it has, as well as what future levers they can pull based on the company’s strategy.
“The future potential of the business is important but in order to generate a return [on investment], it’s got to convert that scale into profitability. Growth is the path to profit. I think a lot of investors would look for growth within three to five years.”
At less than 10 years old with 225 million users (77 per cent of accounts are outside of the US), Twitter was able to demonstrate its future viability as a business, especially on a global scale. Its first profitable quarter in many years, if ever (Twitter wasn’t required to disclose its financials for its first few years of operation), was the fourth quarter of 2013. From revenues of $US242 million, it squeezed out a $US9.7 million profit, a margin of 4 per cent.
Twitter was an attractive stock for investors because of its growth rate — its October 2013 IPO documents put its monthly active user rate growth at 44 per cent from 2012. It also generated 65 per cent of its advertising revenue from mobile platforms, which was an important statistic for investors looking at Twitter’s earning potential. However, after its Q4 results showed its new user growth had slowed to 30 per cent, its stock fell.
Daily deals company Groupon has been struggling since its debut on the stock exchange in 2011. It sacked its founder and chief executive Andrew Mason and its most recent financial report (Q1 2014), showed that despite $US757.6 million in revenues, the company lost $US37.7 million. It’s recorded annual losses for the last five years.
One of the reasons these companies aren’t uber-profitable is because they invest a lot of money back into expansion, either into new products, services, territories or acquisitions. Additionally, the focus is more on growing users and customers rather than growing revenue, let alone profits.
Amazon has opened a slew of new fulfilment centres at great cost to its bottom line while the company is eating the extra shipping cost for its Amazon Prime memberships. And sometimes, profitability is sacrificed because of shareholder buybacks or employee stock commitments. Amazon has already flagged a loss of up to $US455 million for Q2 in part because of stock compensation.
But that doesn’t explain the whole Amazon conundrum. At almost 20 years old with its IPO way back in 1997, the company is hardly a toddler and many commentators have criticised investors for being too enamoured with the company.
In January, former Slate economics and business correspondent Matt Yglesias pointed out that over the last five years, Amazon has tripled its sales but cut its profits in half. Mr Yglesias argued that Amazon persisted in being not profitable because Wall Street allows it to. He once famously wrote that Amazon is “a charitable institution being run by elements of the investment community for the benefit of consumers”.
Of course, retail as an industry is renowned for not having huge profit margins. A 2012 analysis of S&P 500 companies showed retail had a profit margin of 4 per cent. Arguably, the bulk of Amazon’s operations could still be classified as retail, even if it’s e-commerce. But it is increasingly diversifying into more technology-focused activities such as cloud computing and content streaming.
