Cool. Go buy Walmart stock.

Seriously, guys, all this "Oh, well, I disagree with the valuation of this company" stuff isn't very interesting. We all know that sometimes the market gets the value of companies wrong. Probably if Amazon's next quarter is not very good, its valuation will go back down.

And trying to make a virtue of extremely simple analyses of company valuation is also silly. It's not like you're revealing a deeply held secret that Amazon is very low-margin and often runs a loss. It's not like people don't get that. They've decided that Amazon has other virtues. Maybe they're right and maybe they're wrong, but I'm really confident that looking only at net profit as your sole method of valuation is a losing stock market strategy.

> I'm really confident that looking only at net profit as your sole method of valuation is a losing stock market strategy.

I'm not sure investing only in highly profitable companies would result in a "losing stock market strategy" (assuming "losing" means underperforming the S&P 500). Just looking at the ten most profitable[1] eight of them (all but Chevron and Walmart) are among the most weighted in the S&P 500 (in fact they're the top eight), Apple alone makes up 3.84% of the index. Combined these eight seem to account for about 15% of the index[2][3].

That's only looking at eight highly profitable companies in an index of 500 and it's 15% of the index! I can't imagine a portfolio of the 20 or 30 most profitable underperforming the index considering they would make up such a large part of the index itself. [Though it would be interesting to see historically what the performance would be of such a portfolio].

[1] http://fortune.com/2015/06/11/fortune-500-most-profitable-co...

[2] http://portfolios.morningstar.com/fund/holdings?t=SPY (this is actually looking at the ETF but it's presented better then [3], which is provided to show they don't differ much)

[3] http://slickcharts.com/sp500

Here are the 10 most profitable companies (also according to F500 (http://money.cnn.com/2006/04/03/news/companies/mostprofitabl...) of 2005:

1. Exxon Mobil (2005 price: 61.05, 2015 price: 79.95)

2. Wal-Mart (2005 price: 51.60, 2015 price: 71.58)

3. GM (Went into bankruptcy, I don't really understand what happened to its stockholders, which thank god I was not)

4. Chevron (2005: 61.71, 2015 price: 90.62)

5. Ford (2005: 12.40, 2015: 14.39)

6. ConocoPhillips (2005: 42.38, 2015: 52.08)

7. GE (2005: 36.12, 2015: 25.76)

8. Citigroup (2005: 497.80, 2015: 58.72)

9. AIG (2005: 1317.20, 2015: 63.64)

10. IBM (2005: 94.10, 2015: 159.76)

S&P500: 2005: 1191.17, 2015: 2079.65

That's not "a portfolio of the 20 or 30 most profitable" companies vs the S&P 500. That's a portfolio of ten companies that were at one time the most profitable and then not regularly adjusted compared to an index that was updated regularly (only 312 companies in the index in 2005 were still in it in 2015[1]).

A realistic portfolio to prove/disprove your theory that investing in highly profitable companies is a losing strategy would be to take the 25 most profitable companies (I said 20 or 30 so let's just go with the middle) and update it every year.

With only the eight most profitable making up ~15% of the weight a portfolio of 25 is probably going to approach 30%. It's hard to imagine the largest components representing nearly a third of the index weight are going to move completely and drastically divergent to the index as a whole.

[1] http://marketcapitalizations.com/changes-in-sp-500-component...

The Citigroup comparison isn't correct (they were not worth $1.5+ trillion in 2005).

Today their market cap is $176 billion, in 2005 it averaged around $230 billion or so.

AIG :O

I think the argument is that high profitability will increase demand for a stock to the point of it being overvalued.

My argument, at least, is that profitability is good for a company and a stock, but isn't the only thing that's good for a company and a stock.

Which, honestly, everyone already knows.

Replace "profitability" with "growth" and you get the dual problem.

Sure, but first you go put all your wealth into AMZN for the next ten years and don't touch it. Think you're any better off from Walmart over that time frame? Valuations are fickle at best. At some point, money needs to be made.

For a 25-30 year time frame AMZN will beat S&P and Walmart by several X. AMZN, GOOG are companies which will have a huge impact on how we live. I have put some money into them. They are Berkshire Hathaways of our time.

After Lehman, I learned not to say such things.

25-30 years is too long to predict anything when it comes to tech. The Chinese already have their versions of Google and Amazon...and just like the Japanese automakers in the 70's there is nothing to suggest they can't displace either Amazon or Google.

Also what happens tomorrow if you don't have to go anywhere to buy most products, but just fabricate it at home or at the local fab down the road as Neil Gershenfeld predicts.

Financial analysts have been harping at Bezos for the need to make profits or see his valuation tumble since 1998-1999, when he invested an obscene amount of money in expanding his infrastructure.

That's more than 15 years. So far he has been proving them wrong.

That is not a good argument. The market can remain insane longer than any one of us can stay solvent.

There different ways to value a company beyond their ability to profit in the near term.

Walmart perfected 20th century shopping and are reaping dividends for it in terms of current monetary profits.

Amazon is working on perfecting 21st century shopping. Bezos owns 18% of the company and he plays a long game. He sees what others don't see.

e.g. He was supposedly an idiot for selling books online.

> e.g. He was supposedly an idiot for selling books online.

By whom? Everyone I know who first used Amazon back in the 90s thought it was a great idea.

I think it's weird how we've fetishized the idea that "everyone else thought that business plan was crazy except for the visionary founders."

If anything, I'd argue these founders are "geniuses" because they executed better than anyone else at the time, not that everyone else thought the idea was crazy.

I don't necessarily disagree with the strategy, but I'm not sure that's Bezos's own game as far as his personal finances go, or that his game is even that long in that respect. Bezos owns an 18% and declining share of the company, which he has been slowly liquidating. He owned 41% when it went public, and has been steadily selling around 1% of the company each year. So his own fortunes are becoming less and less tied to those of Amazon, except in terms of ego/reputation.

Accounting profits are too easy to manipulate. Valuation experts prefer to look at cash flows.

Here's a precocious '09 writeup on AMZN from an analyst at Andreeson-Horowitz.[1] He points out how Amazon's re-investing CF's to finance capacity, warehouses, real estate, etc. This is instead of realizing accounting profits.

[1]http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-n...

edit: it's worth pointing out that AMZN could be one of the most profitable companies (accounting profits) at the flick of a switch if it diverted its CF's away from capex and internal investment. Its CF's have been enormous for quite some time.

The stock market tends to value growth very highly (probably too highly). Amazon is growing faster than Walmart. Not that I disagree with you on how to "value" a company, but the stock market thinks the expected future growth of Amazon is more valuable than the current profit of Walmart.

You have a lot in common with the U.S. Department of Treasury.

At the end of January of 2015, Wal Mart's income tax was approaching $8B for the previous 12 months.

Amazon was 161 million.

https://www.stock-analysis-on.net/NYSE/Company/Wal-Mart-Stor...

https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-I...

Maybe we should lobby for change ;P

It's really not smart to count that against Amazon. Amazon doesn't run a profit because it believes it can better utilize the money to invest in its business. If that's actually true, it's way more valuable than spinning off cash. Being able to reliably convert large sums of money into substantially larger sums of money is an extremely high value talent.

profit is irrelevant. their capex is $1B-$2B per quarter. they could lower their capex at any point and show a few hundred million dollars net earnings. the point is that they are as big as they are and continue to invest in the future, and hence the insane p/e ratio and stock price

Let me know when they can shuffle the books and make 16 billion fall out and I'll stop laughing.

On first read I thought you meant a giant warehouse robot shuffling books like a deck of cards.

Let me know when they can do that too.

It seems like Amazon is in a position where they could turn a huge profit, they're just choosing to reinvest instead. If they just raised prices by something tiny like 1%, wouldn't their profits become instantly massive?

If consumers were insensitive to that hike, yes. Problem is they aren't, which is why Amazon has to keep reinvesting and operating on that razor thin margin. That strategy is as bad for individual companies as it is for the macroeconomy (Asian tiger bubble comes to mind).

They don't have to increase prices. They just need to reduce CAPEX (stop reinvesting the money). Their operating margins are healthy.

From the article you're commenting on:

"Amazon posted a surprise second-quarter profit"

From the comment you're replying to, that was a "b" for "billion".