Amazon.com, Inc. Suffering The Pitfalls Of “Buying Revenue” [CHARTS]

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Amazon.com, Inc. Suffering The Pitfalls Of “Buying Revenue” [CHARTS]

Amazon.com Inc. (NASDAQ:AMZN) executives have been the victim of an unusual occurrence in 2014. When the company’s earnings reports arrived at the end of January and again at the end of April, it seemed that investors actually reacted to the numbers on the page rather than the rhetoric on the earnings call.

Amazon is one of the biggest business on the web, but it still fails to make a profit. As evidenced by the chart above, the company’s investors have continued to boost its share price even as the company has continued to pay for increases in revenue. Ideas about how to value the company have changed in 2014, and the more recent investor have borne the brunt of losses.

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Amazon buys its revenue, here’s why

There is logic behind the Amazon.com Inc. (NASDAQ:AMZN) purchase of revenue, but investors will have to decide whether a company like the online retailer is worth buying with little sign of profit. Jeff Bezos runs Amazon, and he sees the internet as a very immature marketplace. The important thing for him is to take control of as much of that market as possible.

Amazon Net Revenue

Once growth slows profit becomes important but, as the chart above shows, there’s little slow down in Amazon.com Inc. (NASDAQ:AMZN) revenue. The company has sacrificed its margin in order to enter markets nobody expected. The chart, like the rest in this piece, was taken from an Indigo Equity Research report on Amazon’s prospects.

Amazon is buying revenue because it believes it is still a growth company. While firms like Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) have been tasked with showing an appreciable profit now that they’ve reached a certain size, investors seemed happy to allow Amazon to behave like a startup.

Amazon Growth

The company’s profit is intermittent and poor because it buys its revenue. Amazon.com Inc. (NASDAQ:AMZN) is buying revenue because its executives have decided that’s best for shareholder return in the long term. The momentum in the company’s value kept that rolling until the opening months of this year, but worries about future profitability have now crept in and disrupted the collective narrative.

Profit may not be worth the price of revenue

N. Landell-Mills the analyst who authored the Indigo report, argues that profit may be harder to achieve than expected at Amazon.com Inc. (NASDAQ:AMZN). Though the company may spend every nickel and dime on attracting more and more users to its service, there is no guaranteeing a profit worth that investment.

Amazon revenue Growth Drivers

Charting Amazon.com Inc. (NASDAQ:AMZN) revenue growth drivers, as the Indigo team did in their report, shows the weaknesses in the companies business at present. There is a slowdown in its revenue growth as well as the amount of sales per account and the amount of account growth.

Amazon.com Inc. (NASDAQ:AMZN) is currently not making a profit in order to maximize its growth an yet that growth is failing the company. With promises of expensive new projects, such as a smart phone and delivery system, investors are seeing years of more investment in customer expansion ahead. With revenue drivers already failing, Amazon.com Inc. (NASDAQ:AMZN) may take a long time before it makes up for the money it spent purchasing revenue in the first place.

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2 COMMENTS

  1. Paul = excellent summary!

    2014 is the year when Amazon’s rubber hits the road.

    Please note the headwinds AMZN is encountering:

    1. Overpriced stock = Fair Value $10. Yep, $10. If you apply generously the Dow blue chips 15 PER. AMZN already lost 20% of its value so far in 2014. Technicals are deteriorating = now a “free fall” situation – Visit Yahoo Finance’s tech Chart to see all the red flags. Long way to fall.

    2.As you pointed out, AMZN is profitless. I aver, this is not voluntary (if it ever was) but FORCED by poor business plan. Q = have you ever met a sane CEO who reported a LOSS, unless he/she HAD TO?
    A case of running fast to stand still.

    3. Alibaba’s upcoming entry to AMZN’s home turf is per chance the stick that shall brake the camel’s back. With billions (with a “b”) yearly income to back Alibabba, a show down at O.K. Corral is quite inevitable.

    Good investing to all!

  2. Thank you for the succinct analysis. I knew the analogous term “buying revenue” but it really fits the Amazon’s strategy. Only the thing is, the strategy never worked in the long run. I’d like to see how it plays out.

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