And speaking of Amazon.com, as I was yesterday and frequently have in the past ….
I noticed last week that the day after I jumped back in to short a bit more (eager for a tax loss and a good night’s sleep, I had largely covered my short position when it plunged in The World’s Briefest Bear Market That Let’s Hope But Not Assume Is Over) … yes, the very next day, AMZN jumped 22-1/2 points. In one day. And that was just for starters. I had shorted it at 128-7/8 on Monday; it closed the week at 180-5/8.
I am not paranoid. And I am not superstitious. So how can one possibly account for this 51-point jump? I actually have an answer:
I am not paranoid, I am not superstitious – I am stupid.
That must be it, because it couldn’t possibly be the other explanation – that Amazon had finally added the VIDEO tab to the top of its home page.
Could this possibly have surprised anyone? Could anyone possibly have thought AMZN was fairly priced, at $128 a share ($6.5 billion for the whole thing – more than triple the value placed on Barnes & Noble), based solely on its ability to sell books and CDs? Surely any investor in the company realizes that one day soon Amazon’s home page tabs – once just BOOKS – will resemble:
BOOKS MUSIC VIDEOS SOFTWARE BATTERIES PHONES LENSES FLOWERS CARS INSURANCE MORTGAGES ANYTHING-ELSE
As a very happy Amazon customer, I look forward to it. But as an Amazon-valuation skeptic, seeing nearly $3 billion tacked on to the company’s worth in four days with the addition of the VIDEOS tab left me wide-eyed (yet again).
True, by Friday there was another astounding positive development – a three-for-one stock split was announced.
Who would have dreamed the stock would split? Such fantastic, unexpected news! Like the news that Christmas will come again next month! Or the news that you can actually get four quarters for every dollar. (“We’re rich, Ma! Our dollars have been split into quarters!” [Or, in this case, into thirds.])
I have previously made the case for how, if everything goes right for Amazon, it could conceivably be worth even five or ten times more in a few years. To a short-seller, that is assuredly scary. (PROMISE ME YOU WILL NOT TRY THIS AT HOME. IT’S MY JOB TO DO THE STUPID, RISKY THINGS AND TAKE THE PAIN FOR YOU.) But scary as it is, the key phrase here (or so I tell myself) is “if everything goes right.” So much has to go right.
CEO Jeff Bezos is a very smart guy and he may pull it off. That he himself filed to sell 180,000 shares recently – 540,000 of the post-split equivalent shares – means nothing, because he’ll still have a zillion shares left. But as I say, there’s a lot that has to go right.
To begin with, Amazon has to, some day, turn a profit. A quick check of earnings estimates for 1999 shows The Street expecting a loss gaping toward $2 a share. So at 180, the company has a projected p/e of better than 90, except it’s not E that’s projected (as in price/earnings ratio), it’s L (as in price/LOSS).
The second thing that has to happen is that a great many others who would like to be our primary-source-for-purchasing-everything have to figure, “Oh, what the heck, let’s go out of business and let Amazon win.” This includes all the obvious players, like Barnes & Noble and Borders. But also the less obvious players, like Yahoo (why can’t IT put little tabs across the top?) and Netscape and Dell and Intel and Microsoft and Citigroup and NBC and Sears (well, Sears may be too sleepy ever to get it) and dozens and dozens of others.
Let’s start with the book business.
I noticed that after a very lackluster TV ad campaign, Barnes & Noble rolled out a pretty snappy print ad. It showed how many more titles B&N had available in stock than Amazon (a lot more) and how many more it had in its database (a lot more, still). Yet Barnes & Noble is clearly the underdog in Wall Street’s eyes, accorded what is now barely one-fifth Amazon’s market value. So for those who like to root for the underdog, giant Amazon no longer has that edge; Barnes & Noble does. And it has hundreds of thousands more obscure titles you might be looking for.
In a way, Barnes & Noble really is the underdog. All those physical stores and employees, all those windows to polish and books to rearrange after the author has been by to take his book and put it face out at eye level (mum’s the word!) – it all costs money.
To the extent that people are willing to come and pay for the experience, and maybe have coffee, their 504 stores are a great asset. But to the extent bookstores become merely a “showroom” for Amazon – see the book at the bookstore, then go home and order it on the Web to save money – well, that’s gonna make the bookstore business even tougher than it already is.
(One small plus in this: How much people spend on books each year is not fixed. You’re not going to buy extra cars once it’s easy to buy them online, or extra refrigerators or pacemakers. But you may well buy more books. I certainly do. In other words, it’s not entirely a zero-sum game.)
But even if Amazon got 50% of the world’s retail book business – and that’s just not going to happen – it wouldn’t be worth 180. The book business is just not that big.
So an investor has to try to figure out how much of the world’s total business will funnel through Amazon. Will it become a place to go to buy anything? Probably. And will there be other such places aggressively competing for your mouse click? Probably. And might, indeed, every popular “channel” of the future Internet not have an icon for shopping, so even if you’re watching Seinfeld reruns on MSNBC.com, you can click on the MSNBC peacock and buy anything? I think so. And will Amazon have better Seinfeld-like reruns than other channels, better news broadcasts than CNN and Bloomberg, more popular original shows than Fox? I doubt it. But will Amazon possibly make deals with some of these to provide the “back-end” for shopping when you do click the peacock to shop? That would make sense.
And so how do you even begin to value a future like that?
Let’s work backwards. At $180 for each of its more than 50 million shares, Amazon is pushing $10 billion in market cap. And the people buying it certainly aren’t viewing it as a conservative investment on which they hope to earn 7% a year. No, they’re gambling on, let’s say, at least a five-fold increase over the next decade. So let’s say they’re looking for a company that will be worth $50 billion in ten years, based on profits and dividends at that point, not dreams. How much annual profit justifies a $50 billion valuation? Well, pulling a generous large-company multiple of 20 out of the air, that’s $2.5 billion in annual after-tax profits. How much commerce has to pass through Amazon’s portal to produce such profits? Well, that would all depend on the profit margin it could eke out of each kind of product or service. If it can pull 3% after-tax down to the bottom line (right now it loses 25% or so, but there are reasons for that), that would require sales of $80 billion. If the distribution becomes even more cutthroat competitive than that and only 2% can be cleared, $125 billion in sales.
It could happen.
And imagine if, on many products and services, it didn’t actually have to do anything other than funnel the orders through to the supplier (the car company or the life insurance company) and for that got a commission. No bricks or mortar to maintain, no humans at the cash register – just a sort of computerized money machine.
All of which is why some people do pay these crazy prices for stock in Amazon.com and why, if writing this column scares me into covering my short at a four-day 51 point loss (maybe more by the time you read this!), I just might be one of them.
A third thing Amazon may have to worry about is – what if the suppliers Amazon relies on want a piece of the bonanza? For example, how many different ways has Amazon got to ship you stuff? Twenty eager cutthroat competitors? Or just, principally, three: the post office, UPS, and FedEx? What if they want a bigger piece of the pie?
I suppose the answer is that Amazon (and its competitors) could just pass on the extra cost to consumers. Or it could buy FedEx. At Friday’s close, Amazon.com’s market value slightly exceeded that of little brother FedEx. Yes, FedEx does have a top-notch worldwide reputation and $15 billion or so in sales, half a billion or so in profits. Yes, it has some pretty good technology, some amazing distribution facilities and a huge fleet of vehicles and aircraft. But it’s no Amazon.com. Amazon.com has a Web site!
Sarcasm aside, Amazon has done what it’s done so well that it may be earning ownership of one of the key leverage points in the new economy. If it gets to control a reasonable share of the order flow from the consumer, through Amazon, direct to the goods or services desired – cutting out the middleman and lowering costs in the process – it may indeed be able to take a nice little sliver from a simply enormous, enormous pie. And even though it will have lots of competitors, there will still be plenty to go around.
But is it already worth more than FedEx? A lot has to go right.
In the meantime, I am launching one of those pricey Investment Advisory services that faxes or pages you the instant I make a market call. Had you been one of my clients, you would have known within 15 minutes that I had shorted Amazon.com. Based on my prior expertise with short sales generally and Amazon in particular, it would have been your signal to buy.
Quote of the Day
If I had thought about it, I wouldn't have done the experiment. The literature was full of examples that said you can't do this.~Spencer Silver on the work that led to the unique adhesives for 3M Post-It Notepads.
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