Hacker News Reader

Comment by dev_jim | Hacker News Reader

The problem with this whole profit "debate" about Amazon is that most people don't understand that public corporations are not like households or small businesses. Generating a profit is not the same as a person's savings. If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit, which is then taxed at 35%, and having either having that cash sit in the bank, buying back stock, or paying it out as a dividend (which then taxes the person receiving the dividend). I'd much prefer a company that has recognized opportunities to invest in then one that inefficiently uses my capital.

View on HN

"If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price."

But why should you pay a high price for a stock with no expectation of profits, and, ultimately, dividends?

That's not an investment. It's a baseball card.

We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits, because the stock prices kept going up.

Until they didn't.

Which gets back to the point of the article. Sure, it is good for a company to reinvest revenues in growth, in hope of larger future profits which will one day be paid out in dividends. With Amazon showing growing revenues but flat, small profits over the first 18 years of its existence, it's a legitimate question as to when Amazon might finally give a return to its investors.

"We went through all of this in the Dot Com bubble in the 90s. Most people believed it was OK to invest lots of money in companies without profits"

This is silly. Amazon has real revenue that is growing at a fantastic rate. Pets.com and it's ilk did not.

"when Amazon might finally give a return to its investors."

It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception.

"It has given a return to it's investors. Up 655% in the last 10 years and 17,000% since inception."

Only if you sold the stock at that price.

OK, Amazon is clearly not Pets.com. It has growing revenues and some profits.

But Amazon famously has a higher P/E than many other technology and Internet companies. This is only justified if Amazon has a clear path to greater profits and dividends than those other companies in its future. The article points out its not clear what this path for Amazon might look like.

This also makes me think of Facebook. As we waited for Facebook to go public, many speculated that Facebook was still in the stage of rapid growth, and it didn't matter that revenue and profits were low because eventually huge profits were guaranteed with so many users. Facebook is a profitable company, but since it's gone public, revenue and profits haven't grown the way people thought, and the stock is still below its IPO price.

My point is lots of users, lots of customers, and lots of revenue are necessary preconditions for a company to be worth investing in. But at some point, growing profits has to be a concern, too.

Maybe the best way I can phrase it: Do you want to be Apple or Amazon? Apple found a path to high profit margins, high growth, and a business generating lots of cash, and now they are both buying back stock and paying dividends to share holders. With Amazon, the profits, cash, and dividends seem always in the future, yet Amazon has usually had a higher P/E than Apple. Which do you think is the better model?

"Only if you sold the stock at that price."

Nope, you don't get to redefine a return as only realized gains. This is a very liquid and can be sold at anytime. I can borrow against it in my portfolio to get a mortgage, can use it for margin, etc.

"But at some point, growing profits has to be a concern, too."

Not when the cash can be more smartly reinvested in growth. Facebook is above it's IPO price btw which means growth is in line with a year ago.

"Maybe the best way I can phrase it: Do you want to be Apple or Amazon?"

Apple's growth has completely stalled and they have no clue what to do with $100B+ in cash which is the reason for their massive stock price fall. Amazon knows exactly what to do with their cash and is piling it into growth. This is a far more efficient use of capital for an investor.

And I don't know what it means to "be Apple or Amazon" but I'd rather be an investor in Amazon - and so would most of Wall Street.

> If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit

If a company has excess income to reinvest, that is profit. You can't reinvest profits if you don't have profits to reinvest.

> That is a much better use of capital then generating a profit

No, actually, its a use of profit (perhaps one that converts it into capital.) And, obviously, you have to generate profit before you can use it for anything.

You don't understand how corporate accounting works.

I don't understand either. How can reinvesting corporate revenue avoid taxation? Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?

If you reinvest your profits into your own business that money usually gets charged as a expense on the income statement so your reported gross profit reduces by that amount and thus, you don't pay taxes on that amount.

For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.

Is there anything analogous for personal income? That is, can I invest my income in such a way that my gross income is $0 for the year? I know mortgages are deductible, as well certain retirement savings accounts, but what about daily living expenses? It seems a tad unfair that corporations can effectively evade taxation while individuals cannot. Or is that by design because corporate spending trickles down to individuals' salaries?

Generally, no. The key difference between personal and corporate tax in most countries is that personal tax is conceptually taxed first, after which you can spend what's left. But a corporation gets to spend first, after which taxes are levied on whatever remains.

Unlike you or I, if a company makes no profits, it pays no tax on its income.

The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy.

I am not an accountant, this is not financial advice.

In theory, the basic exemptions for each dependent (including, for independent taxpayers, the taxpayer the self) serve a loosely analogous role.

But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.

> Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?

No, in addition to regular business expenses being deductible, there's all kinds of special deductions and credits for specific kinds of reinvestment.

Taxes are levied against profit, not revenue.

If you spend the money on operational expenses (OpEx), then you reduce your profit by that amount and thus your taxes.

If you spend the money on capital expenses (CapEx), you create assets that will depreciate in future. The depreciation can be deducted from your profit and also reduce your taxes in forward periods.

Thus a company can arrange its affairs to have very high free cash flow but low profits. And sometimes vice versa, which usually leads to unhappy surprises for careless investors.

That isn't how it works.

Reply on news.ycombinator.com