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For a few hours, Jeff Bezos, the boss of Amazon, was the richest man in the world. And then reality struck, as Amazon revealed its latest results. Is it time we examined Amazon through the lens of reality, too?

Maybe the real power of Amazon is not so much the way it makes money, but the way it persuades the markets that one day it will make money.

In the latest quarter, the company made $197 million in profits, considering the company is valued at around half a trillion dollars, that is quite a multiple.

You could say that it matters not, what really matters is the underlying trend – well Amazon also said it may lose $400 million in operating profits in the current quarter.

Okay, there are good reasons for the losses. Amazon, as Jeff Bezos likes to remind us, plans for the long term. Its profits are so low, because it is re-investing.

It is just that if you look back at this time last year, net income came in at $897 million – a record quarterly profit. And indeed, at that time the company proudly boasted it was the fifth straight quarter of profits.

But step back, at that time the company was worth around $350 billion. Even if we look at what was then a record quarter, the multiple of valuation to profits was enormous.

People moan because the company does not pay much corporation tax, but that is because it doesn’t make that much profit.

Let’s rewind the clock to earlier this year. In February, Amazon revealed its results for its fourth quarter. Profits came in at $749 million, and in April, net profits were $724 million.

In fact, of the last 20 quarters, the company made a loss on no less than six occasions.


The cumulative total of profits at Amazon since the first quarter of 2012 is $3.8 billion. Contrast that with Facebook which made $3.9 billion in its latest quarter alone.

And yet the markets value Amazon more highly than they do Facebook – okay, the difference is small, Facebook is valued at $494 billion, around six billion less than Amazon.

You have to feel sorry for Mark Zuckerberg, his company may have made almost 20 times more profit than Amazon in the latest quarter, and yet his net wealth is a mere $73 or so billion, around $15 billion less than Bezos.

So why is Mr B so rich, while Mr Z is struggling to make his first $80 billion?

It boils down to potential, and maybe the cloud.

Amazon may not be making much of a profit, but revenue rose 25 per cent on the year before, enjoying $38 billion in sales.

But it is the web services division, (AWS) that is where the company is seeing the fastest growth, and this division is profitable, too. Operating income at this division hit $916 million, which was greater than the operating income for the entire company – in short, if it wasn’t for the Cloud, Amazon would have made a loss in the quarter.

So why such a high valuation?

As Brian Olsavsky, the company’s CFO said: “Q3 is generally a high investment period.”

The company has

• Launched a Prime Now service in Singapore• Is exploring opportunities in health care technology and pharmaceuticals• Announced a forthcoming merger with US firm Whole Foods, which will cost $14 billion• Launched new Echo devices

Amazon’s growth comes at a time when mainstream retail is struggling in the US and there are fears that regulators are beginning to question if the company is becoming too powerful.

It is odd how Amazon is moving into conventional retail.

Does Amazon’s result history suggest it is overvalued?

Not necessarily – investors have become used to this, all the hope lies with the long term.

But a company’s value is meant to be a function of future dividends, discounted to give a net current value. At some point, Amazon will have to make profits in the tens of billions of dollars to justify the current valuation.

And credit to the markets for putting such a value on long term thinking. If nothing else, it shows that the tyranny of quarterly accounting can be overthrown – the company still has to report on a quarterly basis, but valuation suggests the markets feel the importance is limited.

But don’t be surprised, if, by the time the year is up, it is Mark Zuckerberg who is homing in on Bill Gates for the title, richest man in the world.