It is near impossible to "demonstrate" that any company will be profitable in the future.
Al, if companies are valued based on "future activities" as you suggest, yet it is "impossible to demonstrate" future profitability, just what future activities do you suggest are the basis for valuation? I respectfully submit that any company that can not be shown, under a reasoned set of assumptions, to provide a return to its investors is worth only the liquidation value of its assets.
"Demonstrate", in this context, does not imply proof or any sort of guarantee, just some set of assumptions under which the future revenues, expenses and capital needs of the business can be projected. Each assumption may have certain risks associated with it, some of which may be external factors beyond the control of management, but those factors under its control, like advertising expenditures, must be assumed at levels that are achievable. This is not generally a difficult task. In Amazon's case, many securities analysts have done it. We may disagree with some of their assumptions, particularly about advertising expenditures, but at least we can see what those assumptions are and the future profits -er- losses that result.
You, apparently, would have us base valuations on some unquantified expectations of undefined "future activities" and go on to suggest that, as long as the "fundamentals are not collapsing", that the valuation will not fall. By this, I take it that you mean as long as the company continues to meet some set of investor expectations, even though those expectations are constantly being revised downward, that the stock can not fall. Are investors' memories so short that as soon as they revise their expectations, they forget the old ones and, therefore, can never be disappointed?
Allow me a question - If the expectations of losses of a business are growing such that analysts would revise estimates to reflect bigger losses than previously expected, can it reasonably be argued that the "fundamentals are not collapsing"? Or at least are not falling shy of expectations?
Also, if a stock can not fall just because its "fundamentals are not collapsing", yet the future profitability can not be demonstrated at a level that would even remotely support the current valuation, would it simply move sideways in hopes of the fundamentals improving and eventually catching up, even if that takes five to ten years under optimistic assumptions? What about opportunity cost? What about a return for assuming the risk that those fundamentals may never catch up?
Allow me another - Can you name any business that depends on brand recognition to bring in customers and which expects to grow rapidly, much faster than the industries in which it operates, that has been able to do so while dramatically slashing advertising/marketing expenditures? For AMZN to grow, in any of the product segments in which it may operate, it must gain market share. In a rapidly growing market, a competitor could lose share and still grow its actual sales, but AMZN's primary product segment is an industry that has been and is expected to continue growing slowly. For AMZN to grow rapidly in a slow growth industry, it doesn't just have to take share from the competition, it has to take actual sales dollars. In other words, competitors have to shrink for AMZN to grow by the numbers most analysts and other bulls assume. Just how do you expect them to do that without advertising? Remember, existing and future competitors, some with much deeper pockets and with market share to protect, will not just roll over and play dead. They will not assume that just because the last book I bought came from them that the next one will too. No, they will advertise and otherwise expend dollars to make sure I keep coming back. They will do so heavily. In fact, they are now.
Al, if you want to argue that there are simply more fools, or perhaps traders who all think they won't be the ones left holding the bag (they expect to be the lesser, as opposed to greater, fools), demanding shares than there is supply of shares, I'd agree with you. That seems fairly obvious. However, to argue that buying is based on any rational, reasoned set of expectations about the future of this company is simply ludicrous.
When will we get to the greatest and last available fool? I don't know, but when we do, it will be quite entertaining.
Bob |
