How do companies that consistently post losses have their stocks valued at such high prices ? Example Uber, Amazon
In: Economics
One of the major factors that influence a company’s stock price is its assets. It’s buildings, it’s staff, it’s brand awareness, contracts, interlectual property etc.
Another way of looking at it is: if someone wanted to replicate the amazon business from scratch how much would it cost?
Amazon actually is in profit now mainly thanks to its cloud computing success (AWS).
losses include expansion costs, meaning that business grows and revenues grow
there are multiple ways to run your business but usually you have active growth phase, where your top priority is expansion and staying profitable is less of an issue, and after some time of growth you’d change your focus to making your business profitable by cutting costs, working on prices and loses
in really large business both process (expansion and growth of profitability) can run simultaneously, but that’s not always the case, for example YouTube wasn’t profitable for a very very very long time while they were working on winning market share, and this strategy proved to be viable as YouTube is definitely the hegemon of video hosting market
some times you have to sacrifice profits to win the market, and after that you’ll start making money
Because investors see a lot of potential in those companies and are of the opinion that soon they’ll be making profits and play a major market role.
Amazon and Uber have different kinds of losses.
When Amazon sells you a DVD they make fifty cents. But when they build a huge distribution hub they might spend 100 million on it and those costs bring them into the red on paper – but they now have a huge distribution hub that will help them sell even more DVD’s. Investors look at Amazon and say to themselves “once this company is done expanding it is going to make INSANE profits every single year for decades”.
When you take an Uber the company loses fifty cents. They are doing this because they hope to get people regularly taking Ubers and figure that in a few years they will be able to roll out self-driving taxis that will lower their costs and make them profitable. Investors look at Uber and say to themselves “I’m sure this company, that’s only real talent was developing a smart phone app and figuring out how to thumb its nose at regulators, will be able to develop the most complicated software even imagined by humanity.”
I think its pretty clear where my biases are here, but there you have it.
Amazon in the USA claims to make losses, Amazon as a whole makes a lot of money.
Companies shift money between countries to avoid taxes.
One of the ways they do this is by using pricing within the company. Lets say Ireland has a very low tax rate and so amazon wanted to claim they made all their profit in Ireland. Amazon USA buys cardboard boxes from Amazon Ireland, but instead of buying them at the cost to make them, they buy them for 50x the price. Buying all of these cardboard boxes costs Amazon USA all of its profits so they don’t actually make any money that year, but Amazon Ireland now has a lot of money in its bank account.
There will be other methods though – they basically have lots of clever accountants working for them to find every trick and loophole to avoid paying tax.
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