Amazon will NEVER make a profit…

Here’s why I think that; its not because they can’t, but because to do so is not in their or their shareholders best interest.

Increasingly, businesses don’t generate profits. They generate capital gains. 

Here’s the US opportunity… if your company makes profits, it will have to pay taxes on them. (nominally, in theory, 35%) Then you and your investors will have to pay taxes on them again when they’re distributed to as dividends. (at a20% rate ).  Add those two up over many years, and you’re talking tens, hundreds of billions of dollars in taxes.

How are you going to avoid that? Simple: don’t show any profits (or, hence, distribute them as dividends).

And consistently set prices so you constantly break even. This has at least three effects:

  1. You undercut all your competitors’ prices*, driving them out of business. Nobody who’s trying to make a profit can possibly compete.
  2. You control more and more market share, enabling you to pressurise suppliers to reduce costs or enable you to substitute suppliers.
  3. You build a bigger and bigger business.

Number 3 is how you create value for your shareholders. The value of the company (its share price/market cap) rises steadily. Obviously, a business with $136 billion in revenues (2016) is going to be worth more than one with $10 or $50 billion in revenues — even if it never shows a “profit.” You take your profits in capital gains.

There is also the added benefit that investors are always going to be thinking: “They could always turn the dial from market share to profits. Just raise prices a little, and profits will flow. ”  But: you never do.

As the business grows, valuation grows, share price grows; All based on the fact that you could raise prices and deliver profit. In the meantime the business both generates and has massive value.  Here are the results of your long-term plan:

Half a trillion dollars in revenues over the years and essentially zero profits.  And value delivered onto investors’ balance sheets? Somewhere in excess of $300 billion.

And instead of being double-taxed on profits for all that time, investors’ income is taxed once, at the low 20% capital gains rate. And that, only when those gains are “realized” through sale of the stock. In the meantime it’s all tax-deferred — yet another huge effective-tax-rate win for shareholders. The longer they hold, the bigger the win. If they pass the stock on to their heirs, those gains are never taxed at all.

Great plan…

*OK they don’t have the absolute cheapest price on every item at any time. But they definitely have the impression of having the cheapest price, and where they focus they DO have the cheapest price. Don’t forget that about half of their revenue comes from 3rd party sellers, on which they make 15%-30% commission.  The impression that Amazon always has the cheapest pricing enables some sellers to utilize an arbitrage strategy through Amazon and still make money