I'm standing tall with my 100 shares.
>Amazon Will Stand Tall
By Robert Spector. Mr. Spector is author of "Amazon.com: Get Big Fast" (HarperBusiness, 2000), and "Lessons From The Nordstrom Way," forthcoming in November from John Wiley & Sons.
The current clucking over Amazon.com's falling stock price and ostensible fiscal woes is evidence that the company is now smack dab in the middle of Act II of its own market melodrama.
You know how this production goes.
Act I: A great/cool/innovative company, led by a brilliant founder/CEO turns an industry on its ear. The CEO's face is splashed across the covers of business magazines. The stock shoots through the roof.
Act II: The company stumbles. The market says, "Maybe it's not as great/cool/innovative as we thought. Kill the stock!"
Act III: Redemption. Overcoming adversity and market doubt, the company proves the naysayers wrong. Time for another cover story. As for the stock, accumulate, accumulate!
Headed for Success
Of course, some companies never survive Act I (see boo.com), and others die during Act II. Amazon.com, however, will make it to Act III.
That's partly because Jeff Bezos, Amazon's founder and CEO, anticipated the unpredictable machinations of the market for Internet stocks more than a year ago and acted accordingly.
"When the Internet bubble bursts," a shareholder queried Mr. Bezos at the company's annual meeting on May 18, 1999, "how do you see that affecting Amazon.com?"
To which the future Time magazine Person of the Year replied: "Amazon.com is very, very likely to trade along with the other Internet stocks. That's likely to account for the large bulk of the variance of our stock price on any given day or week. So, if the . . . bottom of the Internet market drops out, Amazon.com is likely to follow that very path."
With most Internet stocks falling out of favor and Amazon's shares currently trading in the mid-30s -- about 30% of its 52-week high -- Mr. Bezos has proved his prescience. But he was also smart enough to raise his money when the capital markets were still infatuated with the company.
So, contrary to the opinion of certain stock analysts, Amazon.com is not running out of cash. In the past year, Mr. Bezos had no trouble raising a couple of billion dollars in cash in order to carry out his strategy of "get big fast," which meant expanding so rapidly that he would leave competitors in the dust.
In 1999 the company announced a major new initiative or strategic move about once every six weeks (a pace that has barely slowed down this year), while adding product categories and services and ramping up sales volume. Amazon now operates 10 distribution centers world-wide with about three times as much capacity as the company will likely need to handle its sales volume this year. (Sales for 2000 are projected to approach $3 billion, almost three times last year's figures.)
Today, Amazon is sitting on more than $1 billion in cash, and it is expected to close out 2000 with at least $700 million.
Complaints about Amazon's quarterly performance don't add up either. If you strip away everything -- cool Web site, "Earth's Biggest Selection" (of merchandise) hype -- Amazon.com is just like any other retailer, which means it depends on the fourth quarter to make its year. Curiously, this realization appears to be just dawning upon some analysts, who are fretting that Amazon.com's second and third quarters won't achieve the analysts' growth expectations.
But the company's second-quarter revenues could reach $600 million, a jump of more than 90% over the same quarter a year ago and a 5% increase from the first quarter's $574 million. Expectations are for a $640 million third quarter. The fourth quarter is expected to generate revenues between $1 billion and $1.2 billion -- twice as much as each of the preceding quarters. Nothing wrong with those numbers.
With the shakeout of Amazon wannabes, moreover, Mr. Bezos's company has become the default Internet retailer for the Christmas 2000 shopping season because it has built the most recognizable brand, which was another element of the get-big-fast strategy.
Curiously, Lehman Brothers' chief convertible strategist, Ravi Suria, recently called this upcoming holiday shopping season for Amazon.com "arguably its most challenging." It's much more likely that last year was Amazon's most challenging, because the competition then was much greater. Remember all those ads for dot-com companies you'd never heard of? You haven't heard about them since. Those firms have either disappeared or been severely diminished.
Amazon will not have to spend as much on marketing as it did last year, and it has all its distribution centers and fulfillment systems in place. Customers trust Amazon more than ever, because it satisfied most customers during the last holiday shopping madness. It achieved this by overstocking its warehouses with inventory from its then-new businesses such as electronics and toys. As a result, the company incurred higher-than-expected inventory-related charges and write-downs -- $39 million -- for the fourth quarter.
Yet while that inventory cost a lot of money in the short run, it bought the long-term loyalty of a burgeoning customer base. During the last holiday season, my sister bought someone a couple of bottles from wine.com. The Web site fumbled the order, fumbled the billing and fumbled the follow-up. My sister's response? That's the last time she'll click on wine.com. One chance and done. Amazon took great pains to make sure that similar problems didn't happen to its customers.
So what have Mr. Bezos and Amazon.com gotten for the billion-dollars-plus the company has spent in its five years of existence?
State-of-the-art distribution and fulfillment systems.
A customer base of more than 20 million with an average annual revenue of $121 per customer.
Falling customer-acquisition costs -- now $19 per customer, less than other e-tailers.
The most powerful retail brand name on the Internet.
Profitable businesses in books, CDs and DVDs.
Arguably the best customer service on the Internet.
Pure-Play Risks
Even with these advantages, Mr. Bezos has long preached that investing in a company like Amazon.com is not for everybody. "Internet pure play companies, including Amazon.com, are extremely volatile," he said at that 1999 shareholders meeting. "I think that is highly unlikely to change any time in the near future. In fact, I believe that small investors should not have but the smallest portion of their life savings in [Internet pure-play companies]. Short-term investors should have no portion of their life savings in Internet pure-play companies."
While some of Mr. Bezos's harshest critics feel that Amazon.com is only slightly more reputable than a Ponzi scheme, everyone I have interviewed who is close to him believes that his most fervent goal is to create a legacy of success.
"Long-term, we are trying to build a company that is independent of certain 'Internet sentiment' -- how investors feel about Internet stocks," he told shareholders. "We're trying to build an important and lasting company that is, in the long term, valued on a price/earnings multiple just like any other company."
After Mr. Bezos gets through Act II, Amazon.com's Act III should be very, very interesting. |
