Amazon Needs More Than Drones

 | Dec 03, 2013 | 12:00 PM EST  | Comments
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FB

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tsla

For starters, the Amazon's (AMZN) drone idea is flawed and will never get "off the ground." Years from now, nobody will remember CEO Jeff Bezos dragging a fawning Charlie Rose into the R&D laboratory to bear witness to Project X.

Nobody will remember any of it. It won't matter, though, because Bezos will have gotten the biggest publicity hit of all time, a slavishly- drooling piece of non-investigative journalism just hours before...dum dum da...Cyber Monday. Charlie must have forgotten to ask the "where's the profits" question, or else he did and it ended up on the editing room floor.

You can probably deduce from paragraph one that I don't like Amazon. It is immoral to not make profits. It offends me. I don't see why Amazon gets an exemption from the quarterly rigmarole that Wall Street puts every other company through. If Facebook (FB), or Tesla (TSLA), or Apple (AAPL) don't make money (especially Apple), the stocks are punished mercilessly. But just when Amazon starts to go under the microscope – it's "hey, look over there, drones!"

The bull case on Amazon is that they will maintain price discipline for x number of years at which point they will have 100% market share and they can raise prices with impunity. That reasoning is flawed. Amazon has never made money, not for 17 years, and there is no reason to expect that they ever will. Bezos said as much in his interview, telling Charlie Rose that if they raised prices, they would damage the relationship with their customers.

Amazon is, logistically, the coolest thing in the world, with its mathematically-organized fulfillment centers and all the operations research. But a business that earns nothing (and I mean bottom line, accounting profit, net income available to common stockholders) is worth -- nothing.

The propagandists at CBS were quick to point out Amazon Web Services and its hugely profitable, big-fat-margins CIA contract. (sidebar: am I the only one with a problem with a company that is inextricably linked to a killer robot-operating intelligence agency landing drones in my front yard?) But if Amazon makes money on AWS, it must be losing it somewhere else, because there is a zero at the bottom of the spreadsheet. This means that – gasp -- the retail business is probably a massive loser. But we don't know, because Amazon doesn't break out the financials per business line.

Imagine, hypothetically speaking, that Amazon tries to spin out the retail business in an IPO, and we get a look at the balance sheet and income statement. Money-losing businesses do manage to go public, but there has to be a plan. Amazon? No plan. More revenue.

I have no problem with creative destruction if the creator who is doing the destruction is actually earning an economic profit. But there is a difference between being disruptive and being destructive. The page one shareholders of Amazon enable them to sell goods at a massive loss in order to crush competition, and do things like actually win antitrust cases against...the poor publishing industry.

If anyone ever complains, it can't hurt that Bezos personally bought the big newspaper in Washington D.C. And it can't hurt that its editorial page writes about things like, oh, repealing the 22nd Amendment (just last week).

When I look at Amazon, I don't see a paragon of free-market capitalism. I see a politically-connected bully, whose CEO -- a very shrewd former Wall Street guy, I might add -- pays his promises to old investors with money from new investors.

What is it worth? Pick a number. 200, 400, 600, whatever. It makes zero. The price-to-earnings ration is #DIV/0. What if Amazon actually does succeed -- all commerce in the United States just ceases to exist, there is one store, Amazon, and it sells everything -- but makes no money. What is it worth? If revenues are a trillion dollars, but net income is zero, what is it worth? It is worth zero.

I could be wrong. Amazon is either the greatest company ever conceived, or it is a very elaborate, sophisticated hoax. It's your call.

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