Tom,
One of the more thoughtful pro-amzn posts have seen.
Here are some possible caveats:
1] Bookselling is a declining business, and it will decline faster if the Internet expands faster.
There is a sort of no-win bind about selling books on the Internet.
If the Internet penetrates world commerce as fast as some Internet optimists predict, than the world market for books will start to decline. The Internet competes with books for leisure time as well as information dissemination. There are a plethora of books now sold which will not exist in the Internet dominated future.
So if on-line bookselling becomes, say, 25% of world-wide bookselling in 2008 (a projection I have come to believe to be pretty optimistic) then it is almost certain that worldwide bookselling will be significantly less than 80billion.
2] On the Internet books will be commodities and this will dramatically effect margins.
B&N and especially Borders have succeeded in differentiating their products by building these extremely pleasant little oasis within which they sell books. In the land book business each store has a different stock.
On the Internet all booksellers will offer the exact same "ambience" and in very short order all booksellers will have pretty much everything, or pretty much the same things, in stock.
In fact the B&N site and the Borders site and the Amazon site will be relatively indistinguishable. There will come to be some specialty booksellers that will have some things that the majors dont find profitable to "stock" (however you cut it, it still costs to have a book available on your internet bookstore).
The only possible way to distinguish will be price and this may, probably will, lead to the kind of price war that will quickly eliminate any improved margin due to internet commerce efficiencies (which themselves are beginning to appear highly overstated).
3] Despite the slightly shaky finances of B&N and Borders they are fierce competitors with able and proven management. They will not concede the on-line market to amzn. Their name recognition in the larger world probably pretty much balances amzn's lead in the on-line world. Think that the most realistic appraisal will be that ten years from now the three companies will have equal shares of the on-line market.
4] As you know B&N and Borders margin is about 3% of sales.
5] Their combined sales are less than 8% of total world sales which says that in the land book business, where there is a steep entry hedge having to do with bricks and mortar and inventory, the two largest companies own only a fragment of the total business.
6] So lets crunch some numbers. Say that ten years from now the on-line book business is 20% of the 70billion total business (remember if the Internet is growing that fast the book biz is declining) or 14billion dollars. Say that amzn B&N and Borders equally split 50% of that business, each having slightly less than 2.5billion in on-line business. Say that the margin is the current 3%, the efficiencies of on-line commerce balanced by the price pressure true commoditization brings. So amzn will have 75million in earnings in 2008.
What multiple might they be selling at? They are in a declining, possibly fragmented commodity business. They have never made the kind of profits that will free them from the financial corset that makes life difficult for B&N and Borders. They have at least two, and possibly more, fierce competititor. It is hard to imagine them getting a multiple of much more than 10.
Which gives them a 2008 value of 750million or a 1998 value of about 250million or a per share value of ten to twelve dollars a share in 1998.
Sure it is possible they do better, have a higher multiple, a bigger share of the on-line market, maybe even a higher margin. But it is also possible they do much worse. The 14 billion on-line book sales in 2008 seems especially optimistic and the 3% margin also seems unlikely. There is also at least some chance they dont make it at all. Current projections seem to cut it pretty close on their present financing before they turn the corner. It wouldn't take much pricing heat for their competititor to eliminate them before they got started.
Seems to me the only way amzn can approach a 4billion value in 2008 (a value that would justify their present 1.4billion) is to sell things other than books. But why amzn? Why would they be a leader in CD's or electronic equipment? They barely have the bucks to keep their head above water selling books.
Just my thoughts. Interested in your rebuttal.
JS |
