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TheStreet Open House

I Don't Understand Why Amazon Needs to Worry About Profits

NEW YORK (TheStreet) -- I reserve the right to be wrong. And an idiot. But I honestly don't understand why Amazon.com (AMZN) needs to worry about things like profit.

Last quarter Amazon generated sales of $19,741,000,000. It incurred operating expenses of $19,595,000,000. So, leaving all the other math aside for argument's sake, it's basically a wash. Expenses at Amazon are up across the board quarter over quarter -- fulfillment, marketing, technology and content, generate and administrative costs. Same goes for revenue. Up big time in the States and abroad. Media's up (though modestly). So are sales of everything else Amazon sells as well as the "other" category, compared largely of Amazon Web Services.

So what's the problem?

People like to claim Amazon's not transparent. Bull. They might be the most transparent company in tech. While we don't know a breakdown of Kindle sales by model, we know exactly where Amazon's spending its money. There's no black box here. We see it in content deals, television commercials and every time we order something and it arrives in less than two days, often on Sunday. 

If you're a consumer you're happy. And Amazon represents one of the few cases where, if you're happy as a consumer, you should be happy as a long-term investor. Long-term meaning you didn't just stumble on what Amazon has been doing six months ago and buy the stock. That doesn't make you a long-term investor. That makes you an opportunist who played with fire and, if you didn't time it right, got burnt. But if you're really long-term -- with a reasonable cost basis on your position -- you're buying this puppy up on the way down because you realize the Amazon haters are merely holding faux victory celebrations right now.

It's the Amazon hater echo chamber. The media amplifies it and we just assume that everybody who said Amazon's growth at all costs, to hell with profits strategy would catch up with them was right.

In reality, Amazon runs a great business. A business that people love so much it's in perpetual hyper-expansion mode. What's Amazon supposed to do -- stop building fulfillment centers to satisfy these morons who misguidedly call for a profit? If Amazon did that, we would actually have something substantial to rip Jeff Bezos for.

Amazon's going to continue to invest in fulfillment (and incur CapEx costs, etc.) because it needs to. If it didn't it would hurt consumers who have come to expect an unprecedented level of service. And it would ultimately hurt the business, which would hurt long-term investors not people who rode the recent magic carpet ride or are chirping about how smart they are (even though they're not).

It's simple. If Amazon's growth opportunity ever moderates to the point where it can cut back on spending, it will -- most likely -- cut back on spending. I reckon it's building such a sticky base of loyal customers through Prime and other initiatives that revenue will remain stable. Why do you think it's putting considerable focus on everyday items and features such as Subscribe & Save? At a point where growth moderates, but revenue remains stable, you'll notice the impact of, say, a $1 billion reduction in operating expenses per quarter.

Plenty of richly valued tech stocks exist for you to go after. Chirp Pandora (P) for its reckless refusal to look beyond advertising revenue. Chide Netflix (NFLX) for telling us its originals are "hits" without providing precise numbers. But don't bag on Amazon because it's doing what it needs to do make sure you don't complain when your box isn't at your doorstep in 48 hours.

Being dominant in tech, in retail, in whatever space is a process. As much as the financial and tech media would like Amazon to neatly figure it out over a few days at an executive retreat, it doesn't work that way.

--Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is a full-time columnist for TheStreet. He lives in Santa Monica. Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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