On the other hand, the market likes to reward companies with steady and strong top-line revenue growth, even if they aren't profitable. Amazon is a prime example. Prior to 2016 it experienced decades of brisk sales growth without showing any significant profit, because Jeff Bezos kept ploughing all of the firm's cashflow back into financing the rapid expansion of the business. The stock price kept advancing over this period, because investors knew there was a big pot of earnings at the end of the tunnel.
Originally Posted by lustylad
You may already know this, but for a number of years the reason Amazon was able to grow rapidly without significant profits was because it operated with little or negative working capital. Their customers paid them quickly, so they on average collected receivables in 10 or 15 days. But they'd draw out paying their suppliers to around 80 or 90 days. They were limping along making 1% or 2% net profit margins, so didn't have much free cash flow from profits to reinvest. But they generated gobs of cash flow from drawing out their payables. Their suppliers were loaning them the money to grow their business.
This works great as long as you're growing, because your vendors keep loaning you more and more money. Once the music stops, or if things go into reverse and sales fall, you're fucked. When this unwinds it's not a pretty picture. Amazon was fortunate in that they kept growing and it never unwound. While I don't think they have negative working capital any longer, and they're spending a lot more on capex (property, plant and equipment) than they used to, their net profit margins the last couple of years have jumped from the 1% to 2% range to 4% or 4.5%. So this worked out like you described. They're making lots of money now, although still selling at a steep price. I'd argue the investors didn't actually KNOW there was a big pot of earnings at the end of the tunnel, but that appears to be the way this is working out.
For every "growth stock" company like Amazon that works out extremely well there must be a lot more that don't. Bezos must have been struggling for a long while. Amazon used to (and maybe still is) window dress its balance sheet at the ends of the quarters, by drawing out the payables even longer and accelerating receipt of payments from customers even more than usual. This gave investors a rosier picture than actually existed, because the net cash at the ends of the quarters when reporting occurred looked a lot better than at other times.
What's a little disconcerting, Biden wants to put a minimum tax on companies like Amazon, and some of his Democratic colleagues, like Sanders, would go even farther, by boosting the corporate federal rate all the way back to 35% and levying an annual wealth tax on extremely successful entrepreneurs like Bezos. This would result in very little skin off of Bezos' back, but it would be a real obstacle for smaller companies on the road to success, the next Amazons. Our companies in the USA are among the most innovative and successful in the world. We shouldn't be frothing at the bit to handicap them. We should leave the capital with the capitalists, to invest in growth and jobs, not hand it all over to government to be squandered.
Obama handed to Trump in 2017 a budget number that was lot less that what Bush43 gave to Obama. 