Amazon.com, Inc. (AMZN): Is Profit No Longer the Motive of Business?

Page 1 of 2

Today, there are a few companies making me rethink everything I thought I knew about business. I thought a business’s purpose was to provide a good or service to society, something that people would pay for and make a profit for the owners.

For years, this is the way the U.S. and the stock market worked. We looked at metrics like return on capital and net income to judge how a business was performing and the companies that made the most money were worth the most money. But Amazon.com, Inc. (NASDAQ:AMZN)‘s results along with a no-margin trend in other businesses has me wondering whether the market has flipped the script.

Amazon.com, Inc. (NASDAQ:AMZN)My world turned upside down
The transition to lower-margin businesses begins (in my eyes) in China, where the goal isn’t profit — the goal is employment. Foxconn can make computers, televisions, and just about every other electronics device for less than U.S. manufacturers not only because it have cheaper labor, but it has free money from the government and doesn’t care about margins. The company is down to about a 2% margin, what most manufacturers would consider unacceptable.

But Foxconn can get cheap money from state-run banks in China — money that fuels expansion. If U.S. banks handed out billions of dollars to companies to make 2% gross margins, we would be stealing manufacturing from other countries like crazy. Foxconn is the headline maker today, but 20 years ago China started this trend in the PC business.

It took a long time for the PC business to be overtaken by the Chinese. Dell Inc. (NASDAQ:DELL) held its own with efficient operations for a long time, but now it’s in a world of hurt and may be going private to try to turn the ship around. International Business Machines Corp. (NYSE:IBM) saw the writing on the wall before others and sold its PC business to Lenovo in 2004. Since then, we’ve seen most brands outsource manufacturing to China, if not throw in the towel altogether and capitulate to Chinese brands.

The smartphone and tablet business didn’t even have a shot at escaping the low-margin manufacturers in China. Apple Inc. (NASDAQ:AAPL) has outsourced all of its manufacturing since Tim Cook took over operations, choosing the make margin by designing and selling electronics instead of actually making them.

But Apple has come under pressure from competitors who don’t seem to even care about making money selling devices. Amazon uses low-margin suppliers to make a Kindle tablet that Jeff Bezos has said will be a no-margin device. What a great deal for consumers.

This same trend has destroyed the solar market, where easy money in China and manufacturers selling below cost destroyed the U.S. solar market. You see it in wind, too, where giants like General Electric Company (NYSE:GE) and Vestas have been overrun by companies running razor-thin margins. The examples of low-margin businesses taking over China go on and on.

Moving beyond China
If the low-margin business is working in China, why not expand it in the U.S.? Amazon is using a no-margin strategy to kill competitors and dominate online retail as we speak. Best Buy Co., Inc. (NYSE:BBY) has been relegated to a showroom for Amazon and investors have thrown the company out with the bathwater despite a valuation that looks far better than Amazon from a profit standpoint.

How can Best Buy possibly compete? Jeff Bezos has literally says that he doesn’t care about margins, calling his competitors’ margins his opportunity. The Kindle sells at cost, Prime users get two-day shipping and streaming content that has no proof of being profitable. Amazon has redefined retail as a zero-margin business and the market is applauding the results, despite no proof that it will ever turn a profit.

In tech, Google Inc (NASDAQ:GOOG) doesn’t even try to make money selling an operating system for smartphones and tablets — it just gives it away. How are Apple or Microsoft Corporation (NASDAQ:MSFT) supposed to compete with that pricing?

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!