yawn ... yet more death knells for those whose ears are not yet deaf to rational argumentation
Look at Amazon.com. At the recent price of 214, the market is implying
that Amazon's revenues will increase 59.6% a year over the next 10
years (table). That's the conclusion of veteran securities analyst Charles
R. Wolf of Warburg Dillon Read.
...
Critical to the analysis is the cost of capital. For Amazon.com, Wolf
estimates a cost-of-capital charge of 15%, a figure derived from such
variables as the risk-free rate of return, the extra return that equities
historically return over bonds, and Amazon's ''beta,'' or price volatility as
compared with the stock market.
Can Amazon.com achieve a nearly 60% average annual revenue
growth rate over 10 years? That's where investors must turn to industry
fundamentals and old-fashioned common sense. For instance, using
Wolf's calculations, Amazon should reach sales of $63 billion in 10
years. Is that realistic?
Not by a long shot. U.S. retail book sales in 1997 were $11.8 billion,
and they're not expected to be much higher in 1998. Even if the book
market expanded at 3% a year, it would be only around $16 billion 10
years out. True, Amazon is selling recorded music, but that market is no
larger than books, with growth prospects no better. ''Amazon has to sell
a lot more than books, CDs, and videos if it's ever going to reach the
revenue growth implied in the price,'' says Wolf. True, that's in the
company's plans. But as it changes from a bookstore to a mass
marketer, it will run up against competitors. Says Wolf: ''Barriers to
entry are low, and others can easily underprice them.''
The Internet is probably the most sweeping and potentially powerful
medium to come along since television. There's no question that
enormous growth is there, but how much should investors pay for that
potential? Whether you're weighing revenue projections for Amazon or
any other Net stock, it might be useful to note that at Microsoft Corp.,
perhaps the most successful company in recent history, revenue growth
averaged 43% a year since it went public in 1986. Keep that in mind
when you're tempted to buy a Net stock that reQuires a 60% growth
rate to justify its price. |
