| There are quite a few companies I know that exist for decades now who are living on a (relativly) low margin and cash flow focus. Most of them are retail discounters. And by coincidence these very companies are eating up market share from other retailers. The whole eCommerce business of Amazon is very supply chain heavy, and here they are among the best (along companies like Apple and McDonalds). On the other hand I know more than one company with incredible margins who are bleeding money for years now. And they are not doing well. Agreed, Amazon will be facing the challenge of slower growth. Wether they can pull another strategy and execute on it only time will tell. But untill they hit this point Amazon is in very strong position. Maybe a little anecdote regarding Wal-Mart. Back the day, Wal-Mart invented things like cross-docking. That basically reduced the inventory levels in their warehouses to zero (well, not quite, but in theory items were no longer stocked but transfered from on truck to another). Things like that made Wal-Mart the giant they used to be. And then Amazon recruited a lot of Wal-Marts supply chain and logistics people when they started to built there own network of fullfillment centers. Regarding the operation of a private fleet of trucks, well back in the 80s it was quite common. But these days are more or less gone. That was replaced by specialised 3rd and even 4th party logistcs providers. Regarding point 2: These two metrics (cash flow and profit) and as much related as you think. Imagine you sell a product for 100 on day one. Your customer pays you on day 2. And you pay your supplier 80 for that product on day 30. Perfect from a cash-flow perspective, now you can invest without going to a bank. Profit is a completely different matter now. Imagine your operating cost is 10, then you are cash-flow positive AND profitable. If your operating cost is 30, then you are still cash-flow positive but you are losing money. In theory, a company can live eternally on a positive cash-flow and zero profit (or very low profit). As long as shareholders buy it, that is. Excuses for the very simple explanation, but I hope the general point more or less came across. |
My point regarding Walmart was that, even with many of the historical expenses (like trucks) that they no longer bear, they were still more profitable throughout their history than Amazon has ever been. Why?
Point 2. I don't think we disagree, as I'm referring to the long term, not the short term. In most circumstances, a business can't be both unprofitable and cash-flow positive indefinitely, unless there is something very strange happening with the accounting (like unusual tax losses a la GE Capital).
Profits and free cash flow can and do diverge for short periods in the company's lifecycle, but they ultimately must converge in terms of sign/direction.