While it may seem like a company should have to make a profit in order to be considered successful, that’s not always the case. Take Amazon, for example. Although it was founded back in 1994, Amazon didn’t actually make a profit until 2001. But the company has been a major online retailer for years. Read on to find out how businesses can succeed even when they’re not profitable.
Why Amazon Is Considered Successful
In spite of its lack of profits, Amazon’s stock continues to rise. Although Amazonhas a very low profit margin, it tends to make a lot of revenue.
Amazon has some profitable businesses, but the money made from them is typically used as investments to fund other Amazon businesses and ventures. The companyinvests its profits in new lines of business and uses them to expand. In short, Amazon seems to value growth over profits.
But Amazon’s strategy may be beginning to pay off – literally. Amazon just posted its fourth profitable quarter in a row and its largest quarterly profit ever. The first quarter of 2016 was very profitable for the company.
For that quarter, analyst estimates projected a profit of 58 cents per share on revenue of $27.98 billion. Amazon pulled in a net income of$513 million, or a profit of $1.07 per share, on revenue of $29.1 billion. That was a 28% increase from the same period in 2015.
Shares went up more than 12% in after-hours trading after Amazon beat analyst estimates, as well as its own estimates. Some investors believed that Amazon was overpriced because profit traditionally has not affected the share price of Amazon’s stock.
How Did Amazon Last for So Many Years?
Amazon’s stock price is a reflection of investors’ expectations. Investors expected Amazon to be successful, so they bought Amazon’s stock. They were investing in Amazon’s revenue growth – not its profits.
Essentially, Amazon sold the value of its future potential for 20 years. The company promised investors that if they waited long enough, Amazon would eventually become profitable.
Jeff Bezos and his team convinced investors that Amazonwas pioneering – which it was. The company ran on promises and little else. It has actually started turning a profit and it looks like the company will continue to make money.
Amazon has never paid its investors dividends. And even though the company has finally begun to profit from its services, it might never begin to pay dividends. In order to pay dividends, the company would have to adjust its focus and its business model.
Bottom Line
A company can get by on high revenues and low or non-existent profits if investors believe that it will become profitable in the future. Amazon is just one example of a company that did that by focusing on growth and revenue rather than profit. Instead of putting all of its energy into making money, it put effort into making its customers happy and expanding its business.
Photo credit:©iStock.com/PeopleImages, ©iStock.com/AdrianHancu, ©iStock.com/mediaphotos
FAQs
A company can get by on high revenues and low or non-existent profits if investors believe that it will become profitable in the future. Amazon is just one example of a company that did that by focusing on growth and revenue rather than profit.
Can a company survive without profit? ›
Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent. No business can survive for a significant amount of time without making a profit, though measuring a company's profitability, both current and future, is critical in evaluating the company.
What happens if a business does not make a profit? ›
Businesses ultimately fail when they don't make enough money. The startup either can't afford to continue operations, or the owner quits to reclaim work-life balance and a better (more consistent) salary. Factors like mediocre products, lack of demand, and tough competition get the blame, which is rightfully so.
What is a business that operates to not make a profit? ›
Nonprofits are formed explicitly to benefit the public good; not-for-profits exist to fulfill an owner's organizational objectives. Nonprofits can have a separate legal entity; not-for-profits cannot have a separate legal entity.
What company has never made a profit? ›
Reddit has never turned a profit in nearly 20 years, but it just filed to go public anyway | CNN Business.
Do businesses exist solely to make profit? ›
Friedman introduced the theory in a 1970 essay for The New York Times titled "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits". In it, he argued that a company has no social responsibility to the public or society; its only responsibility is to its shareholders.
Why do firms stay in business if they make no profit? ›
Why Do Competitive Firms Stay in Business If They Make Zero Profit? Profit equals total revenue minus total cost. Total cost includes all the opportunity costs of the firm. In the zero-profit equilibrium, the firm's revenue compensates the owners for the time and money they expend to keep the business going.
How do you value a company with no profit? ›
One of the simplest methods to value a business with no profits is to look at its assets. This means adding up the value of all the tangible and intangible assets that the business owns, such as property, equipment, inventory, patents, trademarks, and goodwill.
Can a small business continue without being profitable? ›
A small business can survive without profit, but this depends on the nature of the business and the market it serves. The more capital a business needs to keep its doors open, the more time it will take to become profitable. Thus, the “staying power” of each business is different.
What happens if your LLC does not make a profit? ›
All corporations are required to file a corporate tax return, even if they do not have any income. If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.
Suggestions For Evaluating Expenses
- Itemize All Expenses By Line Item. ...
- Look At Recurring Monthly Expenses. ...
- Renegotiate Your Rent, Lease Or Mortgage. ...
- Renegotiate Debt. ...
- Evaluate Labor Costs. ...
- Reevaluate Your Marketing Spend. ...
- Explore Options For Earning More Customers. ...
- Reengage With Referral Partners To Boost Business.
Two to three years is the standard estimation for how long it takes a business to be profitable. That said, each startup has different initial costs and ways of measuring business profitability. A business could have enough cash to become profitable immediately or take three years or longer to make money.
What are the biggest companies that don't own anything? ›
"Uber, the world's largest taxi company, owns no vehicles. Facebook, the world's most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world's largest accommodation provider, owns no real estate.
How long before Amazon made a profit? ›
This can come at a hefty price. Amazon, one of today's biggest multinational companies dominating the e-commerce industry, only turned its first profit nine years after being founded.
Should you invest in companies that aren't profitable? ›
Investing in unprofitable companies is generally a high-risk, high-reward proposition, but one that many investors seem willing to make.
How do you value a company with no profits? ›
One of the simplest methods to value a business with no profits is to look at its assets. This means adding up the value of all the tangible and intangible assets that the business owns, such as property, equipment, inventory, patents, trademarks, and goodwill.
Is it possible to start a successful business with no money? ›
Starting a business with little or no money may sound farfetched, but it is certainly possible. Thanks to the abundance of free and low-cost resources to support small businesses and entrepreneurs — from online courses to grant programs — a growing number of people are launching businesses at their own kitchen tables.
