Thursday, October 30, 2014

(The Big Disrupt) Amazon: feeling the pain of imperial overstretch?

From quarterly losses to questions about it's $600 million cloud vendor deal with the CIA, Amazon as a company has been feeling the heat of late and with the company's excessive focus on the top line to the detriment of their bottom line and continuous expansion into field uber-competitive fields, the temperature is set to ratchet up for years to come.

While it's refreshing to see a company not hamstrung by short term thinking and the need for growth every quarter, Amazon, has finally paid the price for the strange strategy of expanding the company at the expense of their already slim margins when the company reported a quarterly loss of $437 million and is expecting to report another quarterly loss in the next earning report. News of the loss saw Amazon's stock plunge 10% as investor have finally grown weary of the company focus on topline growth. Amazon release of it's own smartphone, Amazon Fire, was cited as the main culprit for the quarterly loss as well as losses accrued in it's international business particularly china where , according to the financial times, they have made little headway on market share (only 2%) and are eating losses of an estimated $600 million a year.

However the main problem seems to the rapid in Amazon's expenses as according to BBC News, the company's acquisitions "has hurt profits at the firm, with with operating expenses growing to $21.1bn, compared with the $17.1bn last year". While any Amazon executive you could get your hands on would cite the company's topline growth and investments for the future, the numbers tell a different story that investors are now paying attention to. Amazon's almost pathological focus on revenue as opposed to profit has other business figures putting in their two cents as former Microsoft CEO and current owner of the LA Clippers franchise Steve Balmer took to Charlie Rose and lambasted the company not being a 'real business' as, in his words. "they make no money".

Balmer point is punctuated by the damning fact that while the company brings in large revenues and sales growth, they continue to lose money and even worse the trends doesn't seems to phase it's management. surely the smart men and women at the head of the corporate behemoth that is Amazon should realise that the reason why the company has to take out $2 billion loan from the Bank of America is because there has been no bottom line growth for three years.

Amazon has been able to justify it's crazy spending spree on its' large war chest but that's not a good reason to neglect the bottom line especially in light of their wafer thin margins. The release of the Amazon Fire smartphone is another example of the company's strange business strategy as the phone has been critically panned and sold poorly leaving the company with millions worth of stock they can't shift. to illustrate how poorly Amazon Fire sold, Amazon are offering the phone for just $1 months after introducing the phone at the top end of the market for $199.

In short, Amazon are finally paying the price of neglecting their bottom line in favour of revenue and sales growth and this strange strategy may end up biting the company where it hurts and, we suspect, the company is alreeady feeling the pinch.

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