Menu
Kim Kardashian Leaked Photos Backlash

Kim Kardashian Leaked Photos Backlash

Benedict Cumberbatch is Alan Turing in The Imitation Game

Benedict Cumberbatch is Alan Turing in The Imitation Game

Amber Heard Topless Photo Leaked

Amber Heard Topless Photo Leaked

The Sexiest Halloween Costumes of 2014

The Sexiest Halloween Costumes of 2014

Oculus Unveils Crescent Bay, its New Virtual Reality Headset Prototype

Oculus Unveils Crescent Bay, its New Virtual Reality Headset Prototype

Amazon Posted Its First Profit In Months, but Stocks Fall

Jan 31 2014, 7:25am CST | by , in News | Technology News

Amazon Posted Its First Profit In Months, but Stocks Fall
 
 

YouTube Videos Comments

Full Story

Amazon Posted Its First Profit In Months, but Stocks Fall

Amazon posted results yesterday for its all important holiday quarter. One of the surprising things about this quarter is that Amazon posted a nice profit of $239 million, after several quarters of almost no profit or outright losses. And yet the stock was absolutely crushed, falling 10% in after-market before recovering slightly.

How come?

The results fell slightly short of expectations, but that alone doesn’t account for the swing. The bigger reason tells you how markets work. The main reason why Amazon tanked is that it posted guidance–Wall Street speak for how a company thinks it’s going to do over the next quarter–below expectations. And that makes a world of difference.

In finance theory, the value of any asset–a house or a company–is the net present value of its future cashflows. In other words, what determines what a house or a stock is worth is how much money it will make in the future. The value of a money-producing asset is equal to all of the money the asset will earn in the future (discounted to today, because a dollar today is worth more than a dollar tomorrow). The asset’s past performance is only relevant insofar as it tells you something about its future performance. This is the key thing that people always forget. It helps explain why revenue-less startups can be valued at billions of dollars, and why Apple can tank as it posts record profits, and Amazon can soar as it loses money.

Now let’s think about that within the context of Amazon. Over the past few quarters, Amazon has been losing money–and yet investors have sent the stock soaring. Why is that? If a company is losing money, it can mean several things. It can mean that its business is not working. But it can also mean that it is investing in businesses that will pay off in the future. In other words, if the company is losing money, it can mean it becomes more valuable since it means it will make more money in the future–and remember, what an asset is worth depends on the money it will make in the future.

Of course, any company that’s losing money will have a CEO saying that it’s because of “investment” and not because its business is doomed, and investors shouldn’t necessarily trust it. Why did they do it for Amazon? Because Amazon has done it before. Amazon has shown that when it invests, it generates future cash flows–when it invests, it makes the company more valuable. Amazon lost money for its first 8 years as a company. After the dotcom bubble burst, everyone thought Amazon was toast. And yet, Amazon and its CEO Jeff Bezos showed they knew how to make money. And from 2003 to now, Amazon has been minting it with its incredibly popular retail franchise.

And now Amazon is investing in new lines of business: warehouses so it can offer better shipping; Kindle devices and services; cloud computing; video streaming, and more. Remember, if a company is losing money, it could mean its business is not working–but Amazon has shown that its core retail business works. If Amazon is losing money, it means it’s investing in new lines of business. That’s never a guarantee of success, but Amazon has a great track record of making its investments pay off–and so investors are being totally rational in bidding up the stock, because it’s a very sensible bet that when Amazon invests, it is increasing its future cashflows, and therefore increasing its future value.

Now go back to yesterday’s quarter. Amazon posted okay-ish results. But that’s the past. What it said about the future is more important. It posted guidance (about the future) below expectations. It also suggested that it might raise the price of its phenomenally successful Prime two-day-shipping program. That’s also about the future.

When Amazon was losing money, there was a totally rational reason for its stock to go up. Now, Amazon might be making money, but it’s telling Wall Street the future might be less bright than it expected. It’s totally rational for the stock to drop. If you understand those reasons, it means you understand that the value of an asset depends on its future prospects, not the past. And if you’ve understand that, you’ve understood the most important thing about markets.

Source: Forbes

 

You Might Also Like

Updates


Sponsored Update


Advertisement


More From the Web

Shopping Deals

 
 
 

<a href="/latest_stories/all/all/31" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

 

Comments

blog comments powered by Disqus

Latest stories

Scott Disick to leave Kourtney Kardashian before Delivery
Scott Disick to leave Kourtney Kardashian before Delivery
Kourtney Kardashian is worried these days about Scott Disick. She fears that her boyfriend would leave her before the delivery of their third child.
 
 
Kendall Jenner Was Delighted to Lead the Milan Show
Kendall Jenner Was Delighted to Lead the Milan Show
Kendall Jenner, the 18 year old model, led the Dolce & Gabbana’s Spring Summer 2015 fashion show.
 
 
10 Million iPhone 6 Sold in 72 Hours
10 Million iPhone 6 Sold in 72 Hours
Apple reached a new record selling 10 million iPhone 6 in the first three days.
 
 
Joseph Gordon-Levitt in Talks to Play Edward Snowden
Joseph Gordon-Levitt in Talks to Play Edward Snowden
Oliver Stone is making an Edward Snowden movie titled The Snowden Files. Joseph Gordon-Levitt is rumored to play Snowden.
 
 
 

About the Geek Mind

The “geek mind” is concerned with more than just the latest iPhone rumors, or which company will win the gaming console wars. I4U is concerned with more than just the latest photo shoot or other celebrity gossip.

The “geek mind” is concerned with life, in all its different forms and facets. The geek mind wants to know about societal and financial issues, both abroad and at home. If a Fortune 500 decides to raise their minimum wage, or any high priority news, the geek mind wants to know. The geek mind wants to know the top teams in the National Football League, or who’s likely to win the NBA Finals this coming year. The geek mind wants to know who the hottest new models are, or whether the newest blockbuster movie is worth seeing. The geek mind wants to know. The geek mind wants—needs—knowledge.

Read more about The Geek Mind.