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Nearly 2. 0 Years In Business And It Still Doesn't Make Money, But Investors Don't Seem To Care. This is the first of a three- part series examining Amazon’s business model.

On Thursday, we will probe the company’s labor practices, and on Friday we will explore the company's impact on small retailers. So what's with Wall Street’s love affair with Amazon. The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet, investors continue to pour into the stock, pushing up the company’s share price to $3. September 2. 00. 8. At that time, Amazon’s net profit margin was 2. By September 2. 01. A year later, it was losing $2.

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And in the latest quarter, ended Sept. Amazon. com spends a lot of money to generate its revenue growth. The company's net profit margin has broken one billion dollars only once in the past nine years, in 2. After reporting a loss last year, the world's largest online store is expected to end this year with $3. That's close to the profit it made in 2.

Photo: IBTimes from company filings. The net result of nearly two decades in business is that Amazon’s trailing 1. Compare that to consistent profit earners with significant online retail operations such as Google (p/e 2. Wal- Mart Stores (2) or e. Bay (2. 5), and it’s easy to be confused by investors’ hunger for Amazon.

Even Amazon’s strongest supporters can’t explain it.“People have been buying ‘AMZN potential’ for a decade,” noted James Walker, a lecturer of business statistics at The King’s College in New York, in an email. He owns Amazon (NASDAQ: AMZN) stock because he’s certain that he can sell it at a higher price than when he bought it. Watch The Battery Online The Battery Full Movie Online. Walker expects that trend to continue as “AMZN continues to execute well toward becoming the world’s largest ‘store.’”Investors like Walker may be bullish, but some insiders at Amazon apparently are becoming a little more restive, which is never a good sign. Since the company’s third- quarter earnings were released on Nov.

CEO and founder Jeff Bezos unloaded between Nov. Nov. 5, raking in more than $3. Among the sellers were Amazon’s Chief Financial Officer Thomas Szkutak, who sold nearly 1. Jeffrey Wilke, senior vice president of Amazon’s consumer business, who parted with about 2. The Amazon insiders wouldn’t comment about why they sold the stock, but they may be concerned about how well the shares will hold up after the e- tailer’s fourth- quarter report in January. Estimates for Amazon earnings in the all- important holiday period have declined 1.

Thomson Reuters. The forecasts are declining in part because Amazon is cutting prices ferociously on its products as Christmas shopping picks up, to levels that are break- even or below. For example, on Cyber Monday this year, Amazon slashed the prices of its Kindle Fire by upwards of $5. LCD tablet. And although Amazon is tight- lipped about Kindle sales, Bezos admitted to the BBC last year that “we sell the hardware at our cost, so it is break- even on the hardware.”And then there’s Amazon Prime, which offers customers free two- day shipping for a one- time annual fee of $7. Amazon is characteristically hush- hush about its profits (or lack of them) from this program and won’t even disclose how many customers are signed up for the service. But the number of Amazon Prime customers is growing. According to a recent survey of 3.

Amazon customers by Consumer Intelligence Research Partners (CIRP), Prime had 1. September, or 4. 0 percent of Amazon’s customers, up from 9. We estimate that Amazon Prime customers spend approximately $1,3. Amazon Prime customers, and account for 5.

U. S. product sales,” said CIRP partner and co- founder Josh Lowitz. They do so because Amazon Prime customers buy more than 5. Amazon Prime customers, and they buy more expensive items.” That means that the shipping expenses Amazon incurs for these customers, which by all estimates far exceed the annual subscription fee, has an outsized impact on the e- tailer’s bottom line. In other words, the more items Amazon sells to Prime members, the more money Amazon loses. It’s those types of skewed profit- and- loss models, routine aspects of Amazon’s business plan, that led Slate blogger Matthew Yglesias to describe the company earlier this year as “a charitable organization being run by elements of the investment community for the benefit of consumers.”Yglesias continues: “The shareholders put up the equity, and instead of owning a claim on a steady stream of fat profits, they get a claim on a mighty engine of consumer surplus. Amazon sells things to people at prices that seem impossible because it actually is impossible to make money that way.”Investors are buoyed by analyst reports that promise considerable earnings growth for Amazon after 2.

However, shareholders hoping to get some of this money in the form of dividends will be disappointed. Amazon has no plans to divide its profits – should they ever materialize – with investors anytime soon. We intend to retain all future earnings to finance future growth and, therefore, do not anticipate paying any cash dividends in the foreseeable future,” the company says on its investor relations Web page. That may be a moot point anyway.

Amazon faces significant headwinds that could throw the lofty income- growth estimates well off course. For one thing, Amazon’s ability to make a profit depends largely on its delivery costs. A huge portion of its expenses – nearly 9 percent of net sales – are tied up in shipping; that comes to about $5. Sept. 3. 0.“We expect our net cost of shipping to continue to increase to the extent our customers accept and use our shipping offers at an increasing rate,” Amazon said in its annual report last year. But this doesn’t account for the rate increases coming next year from Amazon’s shippers. On Jan. 2. 6, the U. S. Postal Service will start charging noticeably more for the small Amazon packages it typically carries.

For example, a one- pound box will cost 6. Similarly, United Parcel Service Inc.

NYSE: UPS) will increase North American shipping rates by an average of 4. Fed. Ex Corporation (NYSE: FDX) plans to increase prices by 3. These higher shipping costs, which analysts have apparently ignored in their earnings calculations, could amount to a hit of hundreds of millions of dollars to Amazon’s bottom line. If delivery expenses go up by about 5 percent, Amazon would be paying about $2.

That alone would absorb a major portion of the $3. Amazon will make next year. The company offsets some of its shipping expenses with revenue generated from what it charges third- party sellers that use its Fulfillment By Amazon (FBA) service. But it’s unclear how next year’s higher shipping costs will be passed on to fulfillment customers, or how these higher costs will affect the company’s fulfillment business. Meanwhile, competing online retailers aren’t standing idly by as Amazon attempts to dominate the e- commerce world with its "revenue now, profits later" strategy. Wal- Mart Stores Inc. NYSE: WMT), in particular, is making online sales a high priority moving forward.

The world’s largest retailer recently began offering same- day- delivery services in select U. S. cities, including San Francisco and Philadelphia, and in an investors presentation in October, Wal- Mart cited increased e- commerce business as one of the reasons for its 3. Oct. 3. 1. Most analysts believe that Wal- Mart’s online sales are growing at about a 3. By contrast, Amazon’s quarterly revenue growth is only about 2.

And Wal- Mart has something Amazon doesn’t have (yet): brick- and- mortar stores from which customers can pick up the items they pre- order online. Other large online merchants are also gaining ground – especially Google Shopping, which is enjoying annual sales growth of about 9. Channel. Advisor, the e- commerce optimization company. Google’s gains are thanks largely to the fact that third- party sellers pay only for the search advertisement, vs.

Amazon takes as its cut.