<What's Really Going On with Amazon?
In weeks Amazon's stock doubled, then tripled--even though nothing changed at the company. Partly it's just Internet mania, but Wall Street machinations are behind much of the rise.
Bethany McLean
Since May everyone who watches the market has been wondering, What's with Amazon? From about $40 on June 1, Amazon.com's stock doubled to more than $80 within 22 days. It hit $100 on June 24 and closed at 1392 on July 6. That's a thermonuclear return of 1,450% since the company's IPO last May. At its high, Amazon.com cost more than 30 times the past 12 months' revenues and had a market capitalization of about $7 billion, just a bit less than the New York Times'. All this despite the fact that no one knows when--or indeed if--the Internet bookseller will ever make a penny in profits (so far it has lost a total of $42.9 million).
The stock price wasn't reacting to new information--company-wise, nothing really happened in June. The last big news came on April 27, when Amazon reported quarterly sales up 446% from a year earlier (a growth rate the company itself noted was "not sustainable.") Sure, Amazon opened its online music store June 11, but everyone had known for eons that was happening.
On June 26, Dain Rauscher Wessels analyst Mitch Bartlett downgraded Amazon. To justify a $100 price, he calculates that Amazon would have to boost revenues at an improbable 100% rate for each of the next three years. What's been going on with Amazon stock is best explained by an old Wall Street maxim: "A stock and a company are not always the same thing."
Two phenomena are behind Amazon's amazing ride. The first is that a lot of investors decided they had to own the stock. Their infatuation was part of a larger mania for a small number of premier Internet stocks--AOL, Excite, Infoseek, Lycos, and Yahoo--that seized the market this spring. The rest of the tech sector was looking pretty ugly, so for portfolio managers, Net stocks became the place to put money (no Asia worries, no PC worries, no earnings worries). As the quarter ended, it became a self-fulfilling prophecy. Portfolio managers want to show that, yes indeed, they own the hot stocks in the hottest sector.
But the demand isn't coming from just professionals. The average number of shares of Amazon that change hands in any trade--the "print size"--is around 500, which means that individual investors are buying. Some are no doubt hoping they've gotten in on the ground floor of the next Intel or Microsoft or Wal-Mart, and some have already gotten rich owning Amazon or have heard tales of others who have. (In early June company founder Jeff Bezos made the short list of Seattle stock billionaires.) And sellers? (What are those again?) It's tough psychologically to sell something that seems to soar higher every day.
The other force propelling Amazon involves a trip to the darker side of Wall Street, where the short-sellers live and use lingo like "stock loan," "fail to deliver," and "buy-in." There are about 48 million shares of Amazon outstanding, of which only about 16 million trade (or float). As of June 15, about 8.7 million shares, or 54%, were sold short. That's a big number, and it creates a perverse dynamic that can push a stock (and has pushed many others) to incredible heights.
One way to think about it is that roughly 25 million shares (16 plus the 8.7) of Amazon have been sold, but only 16 million shares are available. That's possible because some institutions that own Amazon will lend their stock to Wall Street houses like Goldman Sachs and Morgan Stanley--a so-called stock loan. In turn, those houses lend the shares out to short-sellers, who sell them in hope the stock will fall. But if the stock rises enough instead, the shorts may incur such large paper losses that they have to cover. Or the real owner may demand the return of his shares. If the borrower can't find replacements--what's called "fail to deliver"--the broker will "buy in" shares at whatever the market price is in order to return them. Obviously, that drives the price yet higher.
Take Thursday, July 2, when Amazon rocketed in the early hours of trading. A rumor was making the rounds of trading floors: A buy-in was pending. But if you picked up the phone and called Morgan Stanley or Goldman Sachs, you quickly learned that there was not a share to be borrowed. Not one. "It's a Street-wide problem," says one trader. So those who were short rushed to buy stock to cover their positions. It happens all the time, but Amazon.com is as extreme an example as anyone has ever seen.
Someday Amazon will fall from grace. But Amazon is considered to have smart (and more important, Internet-smart) management. Which is why many Wall Streeters say they won't short Amazon: "In this market, it only makes sense to short fraud," says one trader.
So the saga continues. Amazon fell from an intraday high of $143 on July 6 all the way down to a intraday low of $102 (a 30% decline ) on July 8. As FORTUNE went to press, Amazon had slipped below $100. The moral of the story: Right now Amazon is for traders, not investors. > |
