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Comment by panarky | Hacker News Reader

> Despite being the runaway leader in cloud service, they make very little money in it

From a year ago: "The biggest source of the company’s profits is Amazon Web Services, the cloud computing business that started just over a decade ago and is now on track to bring in more than $10 billion a year in revenue."

"Cloud computing is also much more profitable than Amazon’s North American retail business, which runs on thinner margins, and its international retail business, which runs at a loss. The operating income for A.W.S. more than tripled in the quarter to $604 million."

https://www.nytimes.com/2016/04/29/technology/amazon-q1-earn...

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That's neither here nor there.

Amazon has been running at a loss or close to 0 profit by design.

They could be profitable if they wanted but the choose to use the revenue to expand their expanding business (e.g. building warehouses, buying a fleet of planes etc.) or fund other businesses (e.g. successful Kindle tablets or failed Kindle phones, or Alexa or opening physical bookstores or opening physical grocery stores).

When they run out of warehouses to build (or crazy ideas to invest in) their costs will drop and that will turn into profit in an instant.

And there's not much competition there (Walmart, maybe) for the kind of ecommerce + physical commerce combination so we can assume that Amazon will grow in that space and other players will, collectively, shrink.

(disclosure: long amzn)

Walmart made a smart play with Jet.com, but I think they'll only ever do retail. They won't do AI which Amazon uses to drive more sales of Prime, etc... I also think they don't need to compete with them necessarily. Its good to have both Walmart and Amazon.

I think the closest competitor to AMZN is BABA. Souq purchase was huge to fend off that competition.

I'm long Amazon because they're the best company i see at figuring out a problem and solving to it for the long term with innovative, scalable, solutions.

Imagine a future where another tech giant buys Walmart, though. A Google-owned Walmart could certainly compete head-to-head with Amazon on retail.

What does "I'm long Amazon" mean?

http://www.investopedia.com/ask/answers/100314/whats-differe...

Being long is a stock market term that means you are invested in a company and believe the stock price will increase. It's the opposite of being short.

The poster holds stock in Amazon and beliefs in its long term success.

> When they run out of warehouses to build (or crazy ideas to invest in) their costs will drop and that will turn into profit in an instant.

I don't think there's any evidence to back that up. There are two types of costs- fixed costs and variable costs. Costs associated with setting up new warehouses are variable in the short term, and sure, those will drop to zero when they choose to stop building them. But there are substantial fixed ongoing costs associated with operating warehouses and any change in market dynamics (high unemployment, lower consumer confidence, market crashes) can cause their costs to outstrip their revenue. Just because they are Amazon doesn't make them immune to the same P&L considerations that affect every other retailer.

I just don't see much evidence looking back at Amazon's history to suggest that they can suddenly become wildly profitable when they haven't been able to in 20+ years.

What you're essentially saying is 'when Amazon decides to stop investing in its 'moat' and milk the profits?

The problem is Bezos is on the record in his annual letter saying he doesn't ever intend to do that. That's 'Day 2' thinking to him.

Yes.

It doesn't really matter what Bezos says - if they keep growing their business, some day they will find themselves in the same position as Apple, Google and Microsoft: they generate so much revenue that they don't know how to invest it intelligently.

It'll take Amazon longer because their margins are lower and their expenses (warehouses, planes etc.) higher than very generous programmer salaries but there will be a time where it won't make sense for them to build another warehouse in, say, California.

My comment was also in context: some people apparently believe that AWS is the only business that matters in context of Amazon and ignore massive revenue and continuous growth of the ecommerce business. I believe that ecommerce business will ultimately be more profitable (as total profits, not profit margins) to Amazon than AWS. And yes, it might take a couple of decades.

Amazon captured the MAJORITY of ecommerce growth in 2016. http://www.cnbc.com/2017/02/01/amazon-captured-more-than-hal... They've made it rough for physical retailers and malls.

Not to mention half of all households in the US have a Prime membership at roughly $99/yr. Allows them to leverage in to video, music, etc with a different value/cost model than Netflix for example.

< half of all households in the US have a Prime membership at roughly $99/yr.

Back of the envelope - of 300 deliveries ~45 are prime (15%) and 2 are Amazon Fresh (0.7%)

The prime patrons are addicts of prime and online in general.

But still the most in one day I have ever seen is 25 parcels for one person. One is the norm. Two once in a while.

Imo cell carriers taught people "free" (free long distance) and Amazon was smart to use that already popular notion of "free" free shipping - you just have to pay once annually.

free after a curtain price threshold too without prime though not independent sellers of course.

> It doesn't really matter what Bezos says...

You can be certain that someday Bezos will no longer be in charge of Amazon, and if it is not already Day 2, then in short order it will be and Amazon will turn a profit.

Exactly- they made $604 million in profit in the quarter. Certainly nothing to sneeze at, but to put that into perspective, the company currently has a market cap of about $430 billion.

That's $604 million per quarter.

Annualized that's $2.4 billion.

In profit.

On a $10 billion business.

That's growing at a 59% annual rate.

With no competitor anywhere close.

And AWS is just 10% of Amazon's business.

Your claim that Amazon makes "very little" on AWS makes no sense.

Okay, no money was hyperbole. It makes some money. But in the large cap tech space, it's a pittance. Apple probably makes more money on sales of the iPhone 6S.

It's 10% of their business and yet it makes them the more money than the other 90%. What does that say about the overall business? Any other company that operated with similar fundamentals would get skewered. But because it's Amazon, they get a pass.

> It's 10% of their business and yet it makes them the more money than the other 90%. What does that say about the overall business?

It says that Amazon successfully found themselves a cash cow. So, they have a fantastic business sense. They are smart. They executed perfectly (mind you, MSFT and Google and many other companies are doing IT and public computing service long before Amazon).

I am not sure what you want to say here.

Google makes most revenue and profit on Ads. But Google does all kinds of things. Does that make Google stupid? Of cuz not.

Same here. I hope you ditch the thinking that everything should be the same. Diversity is not only useful in culture, it's useful in business too.

Google works on tons of different products but their only real business is the ad business and it is hugely profitable and has been so for a very long time. I have no doubt about Google's ability to make large profits because they've demonstrated that they can do so. People keep saying Amazon can make similar profits whenever they want but I see zero proof that that is true.

AWS isn't a cash cow. It hasn't been proven to be a hugely profitable business yet. It makes a decent amount of money but at this point it's peanuts compared to the valuation. That said, I see a lot more long term potential in the AWS business than the ecommerce business but AWS has to grow by leaps and bounds to justify the current valuation.

> AWS isn't a cash cow.

Wow... I thought HN does not have people who would make such statement. Did you see the quarterly report?... That's a 14B business on a 23.5% profit margin, and still under relentless price cutting, and are gaining market everyday from traditional IT service company...

> it's peanuts compared to the valuation.

I dont know what to say. It's started in 2006, and now is 14B. If this says anything, this just shows how strong Amazon's business is! AWS alone is worth 100B market cap, and it's just a peanut to Amazon.

I am not sure you are downplaying Amazon's success, or just trying to point out how impressive they really are.

[1] http://www.businessinsider.com/amazons-q1-2016-cloud-busines...

How do you get to a 100B valuation? They are set to earn just over 2B this year. So you're willing to pay 50x earnings?

Remember, this is IT, where margins should be some of the highest of any industry. Compared to software or traditional hardware companies, a 23% margin isn't very good. I actually buy into the idea that they are reinvesting in expansion which is hurting their profits, but I think it remains to be seen how profitable cloud computing actually is in the long run. It carries enormous expenses in hardware and maintenance and is becoming more competitive every day. Will AWS grow? No doubt. But by how much and at what profit level remains to be seen. If AWS was spun out as its own stock symbol separate from the ecommerce side of the house, I might even be willing to take a flier if I really felt like gambling, but at an overall valuation of $430B, it's just too expensive for me.

Keep in mind that they're putting up these numbers in the hosting space, which has traditionally been a "race to the bottom", low margin game. While they do cut prices, they still maintain healthy margins on the services up stack. Pretty impressive profit numbers when you take into account their hardware spend, which must be enormous.

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