|
BUSINESSWEEK ONLINE: Business Week ebiz | |||||||||||
| |||||||||||
 |  | |
 | |
 |
||||||
Amazon: Believers and Critics Have Their Say Investors who responded to our "Great Amazon Debate" offered thought-provoking arguments -- including some that the pros may have missed The nearly 80 responses to a recent story on Amazon.com (AMZN) contain the makings of an interesting, albeit very unscientific, study. "The Great Amazon Debate: Should You Keep the Faith?" (Business Week e.biz, Nov. 4, 1999) outlined both sides of the debate over whether to own Amazon.com's stock and then asked readers to send in their thoughts. First, the tally: Out of 76 responses, 44 were clear Amazon "believers" (in the convention of the story), 24 were "doubters," and 8 seemed to have mixed feelings. For those who like percentages, that's 58% believers, 32% doubters, and 10% mixed. Answers came from a range of investors, including Web executives, overseas investors, admitted Internet amateurs, and those who pick stocks for a living. Most of those who answered either own the stock now or did at one time. Many offered original, thought-provoking arguments -- in some cases bringing up interesting issues the Wall Street pros may have overlooked. What follows is a summary of my overall findings, including examples culled from individual letters. I've also included a few of the most original letters at the end of this column. All letters were edited for clarity, and some were shortened. The Believers: The main reason these Amazon boosters own the stock is because they like the shopping experience at Amazon. "Buy what you know, buy what you use," wrote Anne Marie Marino. "Amazon.com is by far the best e-commerce site out there. It's the fastest and easiest to use. I have 10 brothers and sisters calling me everyday asking to find things on Amazon. I am staying with my investment. Who knows? Maybe one day it will be part of the Dow 30." Cindy, a self-described "novice" Internet user wrote: "I can't think of using anything but Amazon for purchases because it was my first experience online and it just worked so well. I trust Amazon. I trust AOL. I don't really trust the other sites -- at least not yet. I plan to do some holiday shopping on Amazon, and I do own 50 shares of Amazon, but only because I believe in the site." Several respondents have high hopes for the holiday season. After admitting he was disappointed about profit margins and worried that Amazon could be crushed by Wal-Mart and others, Jim Cantoni wrote, "but wait, what am I saying? Has Christmas been canceled? In three weeks, the Christmas season starts in earnest. If Amazon has really built the type of customer loyalty that we all assume, they should begin to benefit from this and maybe surprise the market with better-than-expected sales." They also believe in Bezos. One wrote simply, "I love this company! Jeff Bezos rocks." EnergyP@aol.com wrote: "Given Bezos' past, we have to let him do his work. He sees things you and I don't see. At this point we have to have trust and give him the time he needs. This company will do well." "I'm keeping the faith for now -- but probably not for the right reasons," another respondent wrote. "I just believe in Jeff Bezos, and I love the experience of Amazon.com itself. I stumbled onto the stock accidentally but have really enjoyed owning it. I won't buy more, but, again, I am rooting for Jeff Bezos." Some of the Amazon believers shun the traditional valuation measures used by some analysts. Take Jeffrey Antisdel, director of e-commerce operations at FurnitureFind.com: "I think that the underlying debate really comes down to the fundamental problems in determining the value of an Internet-based enterprise. 'Off-balance-sheet' intangibles, such as business-franchise value or brand name, are often deeply discounted by analysts who typically are focused on valuation models deeply rooted in 'rear-view-mirror' thinking. Amazon has built one of the most powerful online brand names, one synonymous with honesty and a convenient customer-shopping experience. I find it ludicrous for analysts to reduce the intrinsic value of the firm to support a "fair value" of $20 per share (for instance), based upon multiples to revenue, price to sales, etc. Investors following similar metrics in the building of other terrific business franchises missed out. Remember how the analysts howled about Microsoft's p-e multiples in the early years?" Perhaps most surprising among respondents who were bullish on the stock is how many still expressed some doubts about the company. One wrote: "With the Internet so new, I don't really know truthfully what to think. We are being told that the Internet is the wave of the future and the future is now. I, for one, will bite the proverbial bullet and hold onto Amazon and ride out the storm." Don from Sebastopol, Calif., who says Amazon represents about 2% of his portfolio, wrote: "I don't think anyone really knows what will happen to e-commerce in the future. Amazon is in a position to take advantage of the opportunity as it unfolds. The risk of not owning this stock far outweighs the risk of owning it. I give Amazon a 50% chance of success. I would give Wal-Mart a 25% chance of success and would definitely not own the stock." Others note that Amazon has come roaring back from dips before. "Amazon went through a similar sell-off around the same time a year ago, then lifted its head with vengeance," wrote Jey K. Jeyapalan. Don Raffaelli's strategy is to buy on the dips: "I continue to dollar-cost-average into Amazon. Bezos has too much of a database that even if he isn't as prosperous as he believes, some company will have to make a deal with him eventually. Buy the leaders in the industry when the price goes down." EnergyP@aol.com offers this advice: "True Amazon investors should all have the same thing in common. They should be young with lots of time for the stock to recover. They should have the vision to see trends, not fads. And they should all have a five-year supply of Pepto-Bismol!" The Doubters: Perhaps it would be more accurate to call this group outright critics, rather than just doubters. While the Amazon believers often expressed ambivalence about the stock, these writers were usually quite sure the company was heading down the tubes. One naysayer wrote: "Sorry to tell you, but the emperor doesn't have any clothes!" Doug Malcolm wrote: "I think Amazon is the ultimate, albeit legal, Ponzi scheme. Investors put in money (i.e., debt and equity) to pay off earlier investors -- the original shareholders and venture capitalists. Everyone keeps calling Bezos a genius, an e-commerce God. What kind of intellect does it take to continue to amass increasingly larger quarterly losses in an attempt to capture sales and market share? I think I'll start a new Web business selling new cars for 50% off of list price. Of course, we will lose our shirt. But who cares? We will rapidly become the fastest growing auto retailer in the country, and Wall Street will throw us billions of dollars so that we can continue to lose more money. Sound familiar?" Many in the doubters group were incredulous that a company with such a huge market cap (nearly $26 billion to date), was so far away from posting a profit. Steven Zucker, a certified public accountant from North Miami Beach, Fla., wrote: "I know I'm just a sole practitioner CPA, but if I had a client that continued to lose money year after year despite massive marketing efforts and that faced increasingly sophisticated competition and price-savvy consumers, I'd suggest that this may not be a viable business. In the haze of Internet euphoria, it seems we've collectively lost sight of the three things that ultimately matter in business -- profits, profits, and profits." And some predicted that a big downturn in Amazon was on its way. John Spicer wrote: "I am very puzzled by the fact that it is not turning a profit by now.... I think that it has enough name recognition that Bezos could cut back on some marketing. He needs to turn a profit, or I think investors are going to bail out big-time." Joan, who says she made big profits in Amazon before getting out, was one of the more tempered in her remarks. "The market will tolerate losses from 'Nets' for longer than most, if not all, other sectors (biotech gets away with it, too). But Amazon looks to have crossed some kind of time threshold in the minds of investors. So I sold the last of it -- and just in time I might say. It looks to me like a huge sell-off might be coming as established Internets become valued more by revenues, sales, earnings, or percentage increases than they were formerly. Amazon helped build my portfolio, and for that I'm grateful. I'm not bashing it at all. I'm still watching it. If and when it starts improving the bottom line, or divesting, or doing something to tighten up instead of merely expanding, then it will be time to think about hopping back on." Nor do the doubters have much faith in Bezos. "The only thing Bezos has proven is that he knows how to spend money and lose money," wrote one. Larry Center wrote: "Profit first, then expansion. That's the only way to go. Amazon is trying to expand first, without figuring out how to be profitable. Ultimately, I think they will fail because their leader is a dreamer and not a real businessperson." The solution, he suggests, is to force customers to pay some kind of annual membership fee. "There has to be a steady stream of income. That has been the success of AOL and others. Since there is no steady stream and since they are losing money, they will always keep expanding in the hopes that 'someday' profits will return." Another wrote: "I agree that Bezos is the king of e-commerce, but in my mind that really means he's the king of hype... Maybe the new business model that e-commerce brings us is one where actually making a buck is irrelevant. In that case, Amazon is the true champion." The main anti-Amazon argument was that Wal-Mart and other big-name brick-and-mortar retailers would win out once they got their Web strategies in order. Sheldon D. Liber, president of investment firm Capital Innovations in Santa Monica, Calif., wrote: "Non-electronic businesses will continue to eat away at Amazon's position because they are profitable now, and they will slowly move onto the Web like the tortoise overcoming the hare. Amazon's position can be undermined by too many competitors. Time is not on their side." Mark Vampran wrote: "I believe the giants like Wal-Mart, Sears, Target, and Kmart will eventually get serious about online retail and rule the Net using their brand-name familiarity and, of course, offering the lowest price." Scott Johnson wrote: "The new millennium will usher in a rash of competition from national retail chains that will really expose the ultimate weakness in Amazon's model -- inferior distribution -- and send it reeling. The big, established retailers have wisely been waiting for Amazon and others to build the Internet market to a critical mass where the return on investment will come more quickly to the bottom line. That time is fast approaching." Other respondents believe Amazon owes its early success to its steep discounting and the fact that customers don't pay sales taxes on purchases. They think the discounting can't go on. Ken Bowers, a director at a bookstore that serves University of California at Santa Barbara students, believes Amazon will also lose out to smaller niche players [perhaps like his own company]. "Eventually, Amazon will have to raise prices to become financially viable. When the price distinction goes away (or sooner), Amazon will become nothing but an automated catalog company or just another niche player, if it survives at all. The beauty of the Internet is that it makes the small guy equal [in access to the customer] with the big guy. As Web services develop for small players -- and they will -- there will be no substantial advantage to being the size of Amazon, and Amazon will cease to be a dominant player. The Internet will be dominated by smaller players offering specialized products and services to a global market. It should be interesting to watch!" Another wrote: "Instead of "brick and mortar" or "traditional" or "old economy" retailers, why not call them what they are, and what their disadvantage is vis-a-vis Amazon: tax-paying. Take away this incredible advantage, and you change a whole bunch." Some Amazon detractors wonder how the company will hold up if there is an economic downturn. Michael Convery, who says he admires Bezos' vision, wrote: "My biggest concern is for the one unknown that should scare Amazon the most -- the U.S. economy. We are in the midst of the greatest prosperity in several decades. What happens when we have the next inevitable recession and this freewheeling spending frenzy starts to disappear? With the likely dwindling sales growth, will Amazon be able to cut costs and prices and achieve already elusive profitability? I would venture that if Amazon cannot make money in the next year with this very strong economy, they may be doomed to severe financial problems in any economic downturn." Some letters worth reading in full: Four reasons why Amazon may never be profitable: There's absolutely no guarantee that Amazon's business model will eventually be profitable enough for its investors, now or in the near future. Here's why: 1. The cost of running a top-notch e-commerce site will continue to be even higher. Qualified techies are hard to find and quite expensive to hire, especially if you are based in the Seattle area, where Amazon is located. 2. As soon as the traditional brick-and-mortar retailers finally gear up for e-commerce, online shoppers will for sure try out these new sites and do comparison shopping, just as they did before we had e-commerce. Loyalty in the e-commerce arena is even more suspect than in traditional shopping, where the shopper actually gets to know the sales staff, at least by face. Wal-Mart's e-commerce site could be a fierce competitor in this area. 3. If and when Amazon expands into the high-end, high-margin items, they will find that shoppers will mostly still prefer to buy these items from their neighborhood boutique-type retailers, where they can interact with sales staff. 4. Lastly, and most importantly, as Amazon tries to capture even larger sales volume, they will have to invest in two areas entirely new to their culture: warehousing and inventory management. These areas can be very tricky and costly. It takes years to develop "bullet-proof" in-house systems and the skill-sets required to manage them. Wal-Mart has spent millions of dollars over the years developing and fine-tuning their system, which makes them the envy of the retail industry. Amazon cannot accomplish this overnight. No company can. This could very well be their Achilles' heel. This can make or break any company. Julius V. Corazo Amazon as global play: What those so-called analysts don't mention when they downgrade Amazon.com is what a great position the company is building worldwide. In April (for which I obtained the latest figures), Amazon.com was the No. 1 site in Sweden, beating out the local bokus.se. Like Warren Buffett, I prefer to be patient and ignore Wall Street (which is not always right). I have held this stock since September, 1997, and will continue to accumulate it. It is a better strategy in a fast-growing industry to increase market position instead of concentrating on profits. Had Amazon.com shown a profit right now, it would probably have ended up as a footnote in the dot-com history book instead of the global brand it is. Terenzio G. al-Cantara Amazon and write-offs: Whether you are a bull or a bear on the stock -- in the interests of full disclosure, I am a bear and short the stock -- analysts, it seems to me, have been avoiding asking Amazon about another item that shows up in their quarterly earnings. That is the all-encompassing figure that includes goodwill, write-offs, merger expenses, and losses on investments. This number has been quite substantial in the last few quarters and takes on added significance because it represents the difference between the actual earnings and the "pro forma" earnings that the company always seems to be steering analysts towards. I have not been able to ascertain exactly what portion of this mysterious figure is exactly represented by each category, i.e, goodwill write-offs (maybe we ignore that for this purpose), merger expenses (maybe we ignore that, too), and share of losses from investments, like drugstore.com. It is that last category -- which is unquantified -- that to me makes further investigation necessary. It is not only that the company is losing money on its own operations but that all the investments they have made are also losing money on an operating basis as well. To be fair, shouldn't Amazon's share of those losses show up as well and be talked about? Geoffrey M. Lewis Amazon primed for strong winter sales: Thanks for your great article. I am a 25-year-old business graduate and used to work as a broker for Merrill Lynch in Austria before I joined Granville Private Equity in Germany at the beginning of this year. I'm with you in my feeling that Bezos is right in what he is doing. This year's winter sales will be big. The Internet already has a substantial penetration rate and is increasingly accepted as a means of shopping. Plus, Amazon is better known than ever before. The importance of winter in terms of seasonal sales should not be underestimated: Amazon is associated with books. In winter, people tend to read books, buy books as Christmas presents (with the Internet and Amazon being the ideal means), spend lots of their time on the Internet, get or buy a computer and Internet connection around Christmas, and test the computer and surf on the Web following that. Amazon has the biggest brand name in the Internet and has built the infrastructure to handle large volumes and succeed. Some analysts seem not yet to have overcome conventional fears focusing on profit-making. Amazon is growing, and profits will follow. The right time for Amazon to concentrate on increasing operational effectiveness will be in the spring next year rather than now. Generally speaking, it should be a great opportunity to buy Amazon stock since uncertainty in the stock is making it sell for a discount. Uncertainty should vanish next year, and the stock price will rise again, on the basis of astonishing sales and further market-share growth in the winter season. Efficiency and profits will follow. Christian Mueller Amazon spreads trust for e-commerce: It's still too soon for Amazon to be too worried about making a profit. It will definitely be interesting to see what effects the zShops have on their bottom line. Also, as they get into big-ticket items (electronics and hardware), their profit margins may grow. I'm guessing that the biggest-selling items on their site are books and music -- both of which have very low margins. As the other items make up more sales volume, things may change. What I'm tired of in the e-commerce world is people thinking that Amazon.com will be the one and only place people go to shop online. Yes, Amazon is a threat to any competing retailer, but they aren't going to crush everyone else. I believe that Amazon will increase the overall pool of Internet shoppers in all categories. When Amazon starts carrying an item (toys, for example), the general public tends to think that it's safe to purchase that category online. The public likes Amazon, and they probably trust them more than any other online retailer. By expanding their offerings, Amazon will bring more and more people online for their first purchase. As these consumers grow more and more comfortable with using their credit cards over the Net, they will begin to explore what other online stores have to offer. This should increase competition, and help second- and third-tier sites build their customer base. Andy Miller Stone is an associate editor at Business Week Online. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
| |
 | |
 Amey Stone covers the markets and investing for Business Week Online RELATED ITEMS BW e.biz, Nov. 4, 1999: "The Great Amazon Debate: Should You Keep the Faith?" BW Daily Briefing, Oct. 12, 1999: "Commentary: Is Amazon Shopping for Profits at Its Zshops?" BW e.biz, Sept. 30, 1999: "Amazon and eToys Pump Up for the Christmas Rush" BW e.biz, Sept. 16, 1999: Q&A with Jeff Bezos | ||||||
