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Paulo Santos, Think Finance (377 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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These are just the headlines from the past couple of weeks. Don't you feel there's something wrong here? Here you have Amazon.com (AMZN), a company that's barely profitable (and that's being generous), and yet instead of focusing on any given initiative or strength, it flails wildly into every other market segment.

This is not how great companies were built. Microsoft (MSFT) didn't branch into every other segment while it was growing strongly. It mostly kept to Windows and Office until it was large enough that it had to seek further growth. At that point, it was massively profitable.

Wal-Mart (WMT) did not stray from its core business. Its core business were profitable stores, it just put out more and more of them in new geographies.

Intel (INTC) did not branch out wildly from the guts of PCs. Sure, it had some diversification within, between CPUs, motherboards, memory even. But it mostly slicked to its knitting.

All of the great growth companies of yesterday had something in common. They had some kind of product that was highly profitable, and they simply replicated that product over and over. For Microsoft if was Windows and Office packages. For Intel it was CPUs. For Wal-Mart it was stores. What this led to was significant growth in revenues and profits. This is what profits looked like in the great growth companies of yesteryear:

WMT Net Income TTM Chart

WMT Net Income TTM data by YCharts

INTC Net Income TTM Chart

INTC Net Income TTM data by YCharts

MSFT Net Income TTM Chart

MSFT Net Income TTM data by YCharts

Amazon.com shares no such characteristic. Amazon.com does not have any given product that is hugely profitable and which it can replicate over and over. Even products that might be profitable, like Kindle eReaders and associated eBooks, are stagnated and being obsolesced by products -- tablets and OS-integrated stores -- that it does not control.

This is obvious. The difference is stark. The difference is so obvious that naturally it's reflected in the way Amazon.com net profits have evolved. And they have evolved much differently than those of the great growth companies of yesterday. They have evolved like this.

AMZN Net Income TTM Chart

AMZN Net Income TTM data by YCharts

This is the reason why Amazon.com flails wildly. Because in spite of the continuous media promotion, Amazon.com has no clear path towards the large profitability that the great growth companies achieved. Amazon.com has but a dream of future profitability. And the true profitable companies were never built on dreams of profitability. They were profitable all along.

Investors are being sold a bill of goods. They're being sold empty promises that can't realistically be kept. Models that are flawed at their inception. The models, which predict huge profitability down the road, have been entirely wrong for the past 3 years. Amazon.com was already expected to be showing profits in excess of $7.00 per share right now. Instead it is entirely profitless. Yet, the models of future profits -- the same models already proven wrong over the last 3 years -- are the only thing that can show profits for Amazon.com. Because the business itself had no hugely profitable product that it can replicate massively, in spite of the $70 billion+ revenues that Amazon.com is going to post in 2013.

And worse still, each of those new initiatives that Amazon.com announces daily will carry costs with it. Each of those initiatives will put whatever profits there could be, a bit farther and farther away. And this goes on to a point that's almost ironic. For instance, when Amazon.com starts selling diapers directly from P&G's warehouses, one has to wonder what happened to Diapers.com use of Kiva robots to do the same. After all, those Kiva robots were once the latest and greatest flailing by Amazon.com …

Conclusion

As Amazon.com flails about with a new initiative every other day, it becomes ever more obvious that it doesn't have any core profitability which it can replicate massively. Amazon.com is not like the greats of yesterday. It's not comparable, and yet it trades at a valuation premium to what all of these great companies ever traded for.

Again, this cannot end well.

Source: Amazon Flails Wildly