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Technology Stocks : Amazon.com, Inc. (AMZN)

AMZN 237.58

-2.7%

3:59 PM EST

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To: Candle stick who wrote (1440)	2/4/1998 9:09:00 PM
From: Tom D	Read Replies (5) of 164684

Some arguments against selling Amazon short. I have enjoyed reading this thread. AMZN is a fascinating company. A lofty market valuation with tremendous short interest. I detect a trace of bitterness on the thread whenever the stock rises-so many claims that the rises are fraudulent market manipulation. I wonder how open-minded some people here are to the risk that the stock might never go below 50 again? There may be many readers of this thread who know more about AMZN than myself. But I have read a few institutional analysts research reports about AMZN (acknowledging their usual bullish bias). I do not have a lot of sophisticated knowledge about the internet or book selling. But maybe some of my arguments represent new information for some people-that is my only reason for making a posting outside my field. Maybe Candlestick or some other readers can point out where I am wrong, as appropriate, and we will all learn. It seems the reason for shorting the stock is not that it is a bad business plan or poor management. Its a question of valuation. The first reason which may support such a large market valuation is that the company has consistently exceeded sales projections. Analyst reports from June '97 projected Q3 '97 revenues of $25M (vs. actual $38M) and Q4 of $35M. Company also exceeded more recent, upwardly-revised projections for Q4 quite handily. We must not lose sight of the fact that the global book market is $80 billion annually; I do not have any figures for the compact disc/music market (which AMZN appears to be entering) nor for the computer software market nor video markets (which are may be areas for possible future expansion). Some institutions promote AMZN as a staple which belongs in every long-term portfolio-with enormous potential for return on investment once the business grows enough to take advantage of the economies of scale. How likely is it that AMZN could have earnings of $1 billion on revenues of $5 billion in ten years? It does not seem that implausible to me. What market cap would that bring? Will the internet be as ubiquitous as the telephone in ten years? Candlestick speculated that books could be obsolete in 5-10 years. So far the computer has not replaced newspapers and books because the latter are so cheap, portable and markable with highlighters. We'll see. But I think there is a subset of investors who have 5 or 10 year or more time horizons. I have not seen another issue discussed in the last few hundred postings. That is the fiscal weakness of AMZN's competition. In brief, BKS and Borders use off-balance-sheet operating leases to finance most of their stores. Their true debt-to-market-capital ratios are around 60%. In recent years their return on invested capital exceeds their weighted average cost of capital-meaning that they are not creating value over time. This precludes a scorched-earth policy of deep discounting. Land-based competitors are also threatened by cannibalization from their own internet sites. I am unsure how much synergy exists between land-based stores and their internet counterparts since state laws require corporations which have a physical presence in a state to collect sales taxes. This means no URL's in stores. AMZN has a formidable advertising budget and has succeeded in convincing investors that it is acceptable to lose money in 1997 and 1998. In addition AMZN offers publishers a refreshing break from resellers abuse of the unlimited-returns policy-if this catches on, it could jeopardize the land-based resellers business model. Somebody recently posted that "all the good news on AMZN has already been reported". Possible additional good news would be that 1) revenues continue to exceed predictions-i.e. Q1'98 could exceed Q4 `97-it happened a year ago and AMZN is an exponentially-growing company. 2) Insiders may not sell. There were a lot of predictions on the thread that there would be massive insider selling when the shares were unlocked: where is this selling? Insiders should be racing to be the first to get out at the highest price. I would have expected it to have happened already. Can anybody offer any plausible explanation why it hasn't happened but will happen soon? What if the institutional insiders and venture capitalists are holding on for five years-where does that leave the shorts? Think what a disaster this will be for the short-sellers if #1 and #2 both come true. IMHO the upside potential makes this a risky short. I hope nobody gets burned too badly on this. Nobody seems to argue that AMZN is a bad concept or bad management. The debate is over valuation. Maybe this is too good a company to be a safe short. Best Regards, Tom D

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