American Consequences - August 2017

By Dan Ferris


a substitute for profitability. There is no substitute for profitability. Investors have pushed that reality aside and fallen in love with companies that have a great story and a soaring share price... regardless of profitability. What they don’t realize is that equity only has value if a company earns a profit . That means there’s a much higher probability than investors currently acknowledge that unprofitable highfliers might be worth... zero. Amazon was founded in 1994 and became profitable in 2003. Since then, it has earned a total of about $14.2 billion in pretax income. It trades at a market cap of more than $450 billion – about 32 times all the profits it has e-commerce marketplace. Amazon dominates online retail. It started with books. But today, Amazon’s marketplace for third-party sellers, video streaming, “one-click shopping,” and two-day shipping services attract buyers of everything from consumable media to clothes to auto parts and more. And Amazon Web Services dominates cloud computing. ever produced since its founding. The company has revolutionized the

nvestors today are making one of the quintessential and most often repeated mistakes of all time... They have fallen too deeply in love with risky situations. They’ve forgotten basic concepts like risk and profitability. Earlier this year, marketing entrepreneur and NYU business-school professor Scott Galloway gave a 24-minute presentation at a conference titled, “How Amazon Is Dismantling Retail.” Galloway argued that, “ Amazon has essentially changed the relationship between companies and shareholders... It has replaced profits with vision and growth .” Galloway’s remarks about Amazon perfectly encapsulate the big mistake equity investors are making right now: believing there’s ever a substitute in business for profitability . Yes, vision and growth saw Amazon through to profitability. Anybody who has read Amazon’s incredible 1997 shareholder letter – to which CEO Jeff Bezos still refers today – knows of its grand vision (which mentions profitability as a key goal, by the way). But that doesn’t mean vision and growth are

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