Last week, Amazon reported its second straight quarterly loss. Instead of dumping the stock, investors bought more pushing Amazon to new heights and prompting analysts to slap $400+ price targets on it.
This oddity — Amazon getting rewarded for not making money — led to the usual jokes on Twitter about Amazon being a charitable organization, as well as skepticism that it can ever make money.
Wei explains that both the jokes and the skepticism are wrong. Amazon is profitable in its retail operations, but it's losing money overall because it's investing in big opportunities to expand globally and crank up sales.
He has a great analogy for explaining how Amazon works:
To me, a profitless business model is one in which it costs you $2 to make a glass of lemonade but you have to sell it for $1 a glass at your lemonade stand. But if you sell a glass of lemonade for $2 and it only costs you $1 to make it, and you decide business is so great you're going to build a lemonade stand on every street corner in the world so you can eventually afford to move humanity into outer space or buy a newspaper in your spare time, and that requires you to invest all your profits in buying up some lemon fields and timber to set up lemonade franchises on every street corner, that sounds like many things to me, but it doesn't sound like a charitable organization.
Catch that? Amazon has a profitable business. It has figured out how to make money. Now, it's investing in expensive stuff like fulfillment centers to create a more profitable, global business.
His full analysis is worth a read, but if you're short on time, here are the key points:
His two-sentence explanation of Amazon's business: "Amazon is a classic fixed cost business model, it uses the Internet to get maximum leverage out of its fixed assets, and once it achieves enough volume of sales, the sum total of profits from all those sales exceed its fixed cost base, and it turns a