Fuelled by cheap electricity and Chinese hardware, households across the region are furiously mining cryptocurrency as a crackdown looms FEBRUARY 10, 2022 by Polina Ivanova
Here’s a puzzle: Did Amazon’s fourth-quarter profit rise or fall? Depending on what you read, it could be either. One metric, Amazon’s net income, nearly doubled while another, slightly nerdier metric called operating profits, fell by about half. It might sound confusing. But all anyone needs to know is that the net income increase was absolutely meaningless. It was simply a result of Amazon recording a huge profit on its 18% stake in electric truck maker Rivian, which went public in November. And as Amazon hasn’t sold any Rivian shares, reporting the gains as part of net profit is simply a theoretical exercise—one that might cause more confusion this quarter (on that, more later). This isn’t the fault of anyone at Amazon. We can blame accounting rule-makers who several years ago decreed that companies should calculate the ups and downs in the values of equity stakes they hold as part of their quarterly profit statements, regardless of whether they’ve sold the stakes. Why should we care? Well, net income is meant to be an indicator of a company’s financial performance. Some companies, including big tech firms, are valued on a multiple of their net profits. Grandstanding politicians love to pontificate about net profits. Unfortunately, accounting rules like this one make net income useless as a measure of anything. Accounting expert Bob Willens told me that when the rule on equity stakes was first proposed, it encountered a lot of opposition from companies, precisely because it was expected to add volatility to profits. But the problems with the rule are more apparent now for the tech sector, where it has become more common for tech companies to invest in other tech firms. While companies like Salesforce and Alphabet have done so for years, now so do other firms like Snap, Shopify, Coinbase and Stripe. Increases in the value of these stakes have had a big impact on earnings. Snap, for instance, last week boasted of its first ever quarterly net profit (despite an operating loss) because of gains on equity investments. Now that stocks are falling, we can expect to see the reversal of many of these gains. Rivian stock, for instance, has fallen 44% since Dec. 31. Unless the stock recovers, Amazon will have to write down the investment for the quarter ended March 31 by several billion dollars, hurting its earnings. Wall Street mostly ignores these ups and downs but not everyone does. The bottom line, it seems, is that we need a new way to think of the bottom line. We conclude with this on Energy Transformation in Our World:
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