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.