Thanks, Weby... <<OT: Sunday Special... Extended Excerpt...>>
An extended excerpt from today's New York Times' Business
section, page 4, an article entitled, "Does Amazon=2 Barnes & Nobles? Market Values May Not Be So Crazy" by Cynthia Mayer.
Typing this... so there may be some mistakes...
" Imagine two companies in the same business. The sales of
Company A are one-nineteenth those of Company B. Company A has never shown a profit and is expected to report on Wednesday even bigger losses than had been forecast, while Company B is enjoying a strong quarter and figures to be solidly profitable for the third consecutive year.
Company B's market capitalization ought to dwarf Company A's,
yes? And investors ought to be piling into Company B, and watching Company A nervously, right?
Wrong. The market value of A (Amazon.com, the online bookseller) has rocketed past that of B (Barnes & Noble, king of brick-and-mortar bookstores) over the last six weeks. While shares
of Barnes & Noble have gained a respectable 34.3 percent since June 1, Amazon is up a spectacular 179.9 percent, even after a decline from its July 6 peak.
It all may sound like speculative mania. But there may be a more rational explanation for why investors are willing to pay more for little
Amazon than for its giant counterpart.
"They have the better business model," says Paul Sonkin, an adjunct professor of securities analysis at Columbia University who also is a money manager.
Mr. Sonkin does not own Amazon because at $119.8125 a share, the current valuations scare him,; but he has become a recent convert to the Amazon game plan after hearing Joyce Covey, Amazon's chief financial officer, and other Amazon executives make their case last month at a conference at BT Alex Brown in New York.
Like Dell Computer and other direct sellers, Amazon enjoys some advantages over traditional retailers.
The most obvious is minimal inventory. Retailers like Wal-Mart have been shaving inventory levels for years, but Amazon has carried the idea further. Though it recently added a second warehouse, it still carries in inventory only a small fraction of the books it sells. Most titles are not ordered from the distributor until a customer has placed an order. So Amazon turns over its inventory about 26 times a year, 10 times as fast as Barnes & Noble, and avoids immense carrying costs.
But, behind the spare inventory is an advantage that excites Sonkin and other analysts: a negative operating cycle. Mot retailers--most businesses, in fact-- must buy goods and supplies before selling them. Cash goes out to suppliers before it can come in from customers, obliging the company to continually finance the gap, often equal to one month or two's worth of sales.
Not Amazon. It charges a customer's credit card account as soon as it ships a book, and the credit card company usually pays Amazon within a day. Amazon, meanwhile, takes an average of 46 days to pay its suppliers, the book distributors. Instead of having to pay to finance sales, Amazon profits from having the use of its customers' money for a month and a half.
And Amazon plans to stretch that float even longer as it uses its growing buying power to repay publishers even more slowly, Ms. Covey said in an interview.
Such an advantage, of course, is not unique to Amazon. It is shared by other Internet sellers like CD Now, which sells music, and
Cyberian Outpost, which sells computer equipment, and build-to-order manufacturers like Dell. Even Barnes & Noble has it on a small scale through its internet arm, Barnesandnoble.com, which sold $14.6 million in books last year. "
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