A few weeks ago, Amazon released its third quarter results on the heels of an only $7 million net income during the second quarter. In the third quarter, things were much, much worse for Amazon – a $274 million loss according to Anthony Ha for TechCrunch.
Of course, anyone who understands some of the reasons behind this knows that it isn’t a sign that Amazon is going out of business or anything remotely related to that. They are making some huge changes and investments. Mostly people are worried that they are willing to suffer so much loss all at once to enhance their capabilities.
Will Investments Pay Off?
Analysts are hoping to learn whether Amazon’s investments into new infrastructure, the Kindle, and other areas “are actually paying off.” They are concerned enough to be asking Amazon’s CFO, Tom Szkutak, about what’s going on.
To be the CFO of Amazon would be quite a task, but also a dream come true for many CFOs. Amazon has a lot of assets and a huge business to work with. This permits strategies that other firms might not be able to support. For example, Amazon doesn’t make much of a profit on their Kindle tablets and e-readers. But these products are seen as “a path to making more money later by selling digital content.”
This sort of strategy does appear to be working for Amazon. Sales in their media and digital services division are up 11 percent from a year before. Not a lot of companies could pull off selling one product at break-even or a loss and still make money indirectly off of it. So in a sense, Szkutak does believe that these investments will pay off.
Szkutak Believes in Amazon’s Investments
It looks like Szkutak is betting on the strategy of creating products and services that feed back into Amazon’s other primary services. In a sense it’s almost like an investment – dump money into something that will eventually provide returns.
Szkutak explains the lack of profits by pointing out that “Amazon is now a couple of years into a period of heavy investing.” Szkutak believes the investments Amazon is making into China, technology, warehouses, and other areas are going to have extreme payoffs in the next few years. He didn’t give details about the actual returns on the investments, but notes that all of Amazon’s businesses are generating “great returns.”
Szkutak has seemed to take Amazon’s investments in the direction of serving its portfolio of services. What’s good for the Kindle, like selling at cost, or for Amazon’s retail-like expanding distribution centers, will ultimately be very good for Amazon as a whole. They don’t need new ventures or new products; Amazon needs to solidify its position in the market and Szkutak and the company are willing to set profits aside to do so.
What do you think about Amazon’s heavy investing and little focus on profits?