Amazon is one of the very few companies that loves to defy Wall Street traditions, but has also mastered the art of keeping everyone on tenterhooks as to what will happen over the next quarter.
On the one hand, Amazon has a CEO who has openly said that he doesn’t care as about the earnings or how much profit the company makes, but would rather focus on how much cash flow or how much more money its businesses can generate by keep the customer at its center. On the other, the company keeps coming up with record-breaking numbers on the growth front so investors can’t really find fault with the way Amazon operates.
“A few big successes compensate for dozens and dozens of things that didn’t work,” he said, pointing to Amazon’s gains from its Kindle tablet, data center business and third-party online marketplace. “Bold bets…pay for a lot of failures. I’ve made billions of dollars of failures at Amazon.com.” – CNET
“Percentage margins are not one of the things we are seeking to optimize,” Bezos said in an interview with the Harvard Business Review posted online Jan 3. “It’s the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that’s something investors can spend.” – Bloomberg
These are just two examples of Jeff Bezos’ way of thinking, which is naturally what Amazon’s belief is as well. But that one small number that Amazon puts out every quarter – operating margin – plays a huge role in making sure Wall Street doesn’t get what it wants, but at the same time investors clearly understand what the company is upto.
In the last three quarters of this year, Amazon’s sales grew by 28%, 31% and 29%, a growth momentum that defies the size and scale of the company. Hitting 29% growth when you are a relatively small company earning $32 million is one thing, but when you just made $32 billion in revenues in the past quarter, that kind of sustained double-digit growth is phenomenal.
As they keep their sales numbers growing at a breakneck pace, each quarter Amazon announces how much operating income the company expects to make the next quarter.
How Amazon Guides for the Subsequent Quarter
Fourth Quarter of 2015, Amazon’s projection for the next quarter:
Operating income is expected to be between $100 million and $700 million, compared with $255 million in first quarter 2015.
First Quarter of 2016, Amazon’s projection for the next quarter:
Operating income is expected to be between $375 million and $975 million, compared with $464 million in second quarter 2015
Second Quarter of 2016, Amazon’s projection for the next quarter:
Operating income is expected to be between $50 million and $650 million, compared with $406 million in third quarter 2015.
Third Quarter of 2016, Amazon’s projection for the next quarter:
Operating income is expected to be between $0 and $1.25 billion, compared with $1.1 billion in fourth quarter 2015
As you can clearly see, Amazon typically guides a wide range for its next quarter operating margin estimates. I don’t think there is any other company of such repute and scale in the world that comes out and gives such a huge range for its operating numbers.
A few percentage points up or down is what most companies project when they provide guidance estimates, so you’ll be hard-pressed to find a company that posted $1.1 billion in operating income last quarter and then says: “we may just about break even this year.”
And it’s not that Amazon doesn’t know what it’s going to spend its money on next quarter. What they’re doing is sending a very clear statement to Wall Street as much as their own investors that it will be Amazon that decides where the money goes and how much goes towards growth initiatives.
At the same time, by comparing the guidance figures to last year’s numbers, Amazon is making sure that its investors as well as analysts are aware of how much it made last year. The wide range of guidance merely reiterates Amazon’s view that it will not shy away from spending everything that it earns if that means more growth and more customers.
And that’s what makes Amazon.com one of the most unique companies in the world.
