American Consequences - August 2017

HOWTO GET RICHWITHOUT TURNING A PROFIT

For a decade now, Amazon has had the best logistics systems and provided the fastest delivery. But they keep investing more and making it faster. They cut available delivery to two days, then to one, and now you can get some items in two hours.

missteps. For one, it lost hundreds of millions developing the Amazon Fire smartphone, which flopped. It’s also shuttered smaller projects, like its travel website and a payment system called Webpay. Looking forward, Amazon is secretive about what it’s working on, but bits of information leak out here and there. The company has invested in drone delivery. It’s designed grocery stores that automatically ring up your purchases when you walk out of the store. It’s also been buying up shipping assets, like planes and ships, with the suspected intention of building its own global shipping network. What’s next? We don’t know exactly. But the only way to hit on the next big thing is to invest... And it seems like Amazon is one of the few companies even trying... WHERE ALL OF AMAZON’S MONEY GOES... Amazon sells, and Amazon spends. For 2016, the company took in $135 billion in sales but it’s got slim profit margins. On those sales, it only earned about $4.1 billion in operating profit (which doesn’t include taxes or interest). That’s a small 3% margin. After paying for everything else, this web giant earned only $2.3 billion in income. It’s this low level of earnings (and its high valuation – more on that later) that make some investors skeptical. However, all the blockbuster projects we listed above explain where the money goes.

Amazon constantly reinvests the bulk of its money back into its own business and new products. It doesn’t rest. For a decade now, Amazon has had the best logistics systems and provided the fastest delivery. But they keep investing more and making it faster. They cut available delivery to two days, then to one, and now you can get some items in two hours. They do this to please customers and make sure they are always ahead of any competition that may arise. For 2016, Amazon spent $6.7 billion on the purchase of property and equipment and $16 billion on research and development (R&D). These are investments that boost productivity and lead to opportunities in the future. We want more businesses to be investing like this and we want to invest in them. Too many other companies have no profitable ideas and have seen trillions in cash pile up on their balance sheet. We like stocks like Apple

62 | August 2017

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