Amazon Profits Running Dry?

Are Amazon’s profits running dry? The strategy of Amazon (NASDAQ: AMZN) is currently under discussion as investors question the configuration of the company’s ambitions, its low profit margin, and CEO Jeff Bezos’ personal gain. The CEO is one of the 25 richest people in the world.

Since founding Amazon in Seattle in 1994, entrepreneur and company CEO Jeff Bezos has always asked his investors to trust him. Yet, with recent financial changes at the company, and despite Amazon’s net worth of $147 billion, and being the 28th largest publicly traded company in the U.S., that trust is being shaken.

Within the past two years, Amazon has invested in developing and expanding new lines of business. Among them are a smartphone, unlimited e-book services, and grocery deliveries, which Bezos hoped that customers might find exciting. The revenue has not been what investors expected, however.

Shareholders are expressing impatience and frustration with the lack of return on their investment. While Amazon held great early promise in terms of earnings, there has not been much to speak of within the past year. One might wonder if the well of profit is beginning to run dry for Amazon.

Amazon faces tough competition in the retail world. It strives to emulate Wal-Mart in its business model of moving large quantities of diverse products with low price as its market differentiator. Hot on its tail is Alibaba, a company started in 1999 which is extremely profitable in its native China, and is partially owned by Yahoo!

Four months ago the Chinese company began preparations for placing the highest initial public offering (IPO) ever in the U.S. of $15 billion. Alibaba has several components which include cloud computing, “Groupon”-like deals, Internet TV, and a “PayPal” rival. Amazon has reason to quick step in response, since Alibaba has substantial scope and size.

Amazon proponents say that it can simply not afford to slow down its growth. However, a strategy revamp might be in order. Bezos is facing criticism from the company’s stakeholders who say he needs to focus his diversifications rather than spending money on developing everything he imagines.

In response, Bezos overtly shuns “just-in-time philosophy,” saying that it is unwise in the long run for Amazon. With rock bottom prices, the company’s consistent selling point for investors is that it has an increasing share of the retail dollar.

The inherent contradiction within the company is that, despite this share, it reported that on Thursday it suffered a second quarter loss. This is Amazon’s largest quarterly loss since 2012 – to the tune of $126 million at 27 cents per share. Despite an increase in sales by almost 25 percent over the past year, profits plummeted.

AmazonThe company attributes this downturn to its rising operating costs (24 percent), as well as additional research and development expenses for technology and content. Some of this technology has been widely publicized, such as delivery drones. And, Jeff Bezos’ $250 million purchase 11 months ago of the Washington Post is also well-known. These developments helped Bezos’ personal net worth to rise to $29.8 billion.The resultant market share loss was nearly 10 percent on Friday, which represented $16 billion in company value. This is perceived as bad news for Amazon, but what is worse is that its stocks have done poorly for seven of the past nine quarters.

Jeff Bezos’ public strategy has been to tout long-term profits over short-term gains. Investors have been willing to participate, but are now more vocal about their concerns. Bezos’ response was to not field questions following the news, but to allow Amazon’s Chief Financial Officer to respond instead.

AmazonSome aspects of the company, such as Amazon Web Services, are doing quite well.  They have increased 90 percent a year since the beginning. Despite a predicted continued rise in sales (between almost $20 billion and $21.5 billion), representing a 15 to 25 percent growth, profits are expected to continue to fall short by hundreds of millions of dollars. Time will tell whether Amazon, whose profits had flowed so profusely in its early years, has now begun to run dry.

By Fern Remedi-Brown

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