Why this bubble will burst! (Revised)
One day this bubble will burst. The question is who is going to be holding the empty bag?
The analyst says $400 in 12 months and we make it $400 in a week. Let's take a look at it. It is said - 10 Billion revenues in five years. May be. A profit of $10/share? We don't even know how many shares are going to be there. There is going to be a lot of dilution - AMZN needs money! The cannot keep on taking losses. Even assuming there is no dilution, that puts the total profits of about $500 million (approx. 50 million shares outstanding). So, that is 5% profit margin. Now how many retail stores have 5% profit margin? Currently AMZN has -21% margin. Wal-Mart with all its superior supply-chain management has a margin of about 3.2! Every household knows about Wal-Mart and it the best run retail store.
Let's discuss a bit more about margins. When I do shopping for a specific thing, I go around searching for the cheapest. I guess all of us do. How hard is it to search for something on the net? Well, Macy's is next to my house, but I drive down all the way to an outlet mall to buy something at cheaper price. I drive down a mile to fill gas at CostCo for $1/gallon since I don't want to pay $1.25 at the nearest Shell. Searching on the net is a lot easier, don't you think?
What are the barriers to entry here to prevent competetion? Well, it is hard for me to compete with Walmart because I need a HUGE capital to set up shops, warehouses and develop a supply-chain. Starting something like AMZN is very involved and expensive, I agree, but still a lot cheaper than competing with Wal-Mart. If you can guarantee 5% margins, I bet I will put everything I have to start a Web-Shop. So, will many big companies! There isn't anything proprietary here.
AMZN might become the greatest online shop, but there will be thousands of online shops. Nike will sells its own shoes. SONY will sell its own TVs just like DELL sells its computers. There will be a lot of speciality shops all over (CDNow, BYND, etc.). There are many online bookstores that sell for cheaper prices. Alright, AMZN is the most well known, but would you always buy your book at Barnes and Noble if your friend tells you he got it cheaper else where? I don't think so. That's what will happen. As the net matures, people will get to know where to buy what. In a new city I go to Macy's to buy my dust bin, but in my native town I know where to buy it cheap. My friends, the Net is going to be native to everyone. I don't have loyalty to a particular web address.
And that will bring down the prices of everything. Consumer is the winner. The margins will shrink, doesn't matter how efficiently you run your business, someone else will try to beat you.
All the BS about digital delivery increasing margins isn't worth it. First of all, you cannot deliver my teddy bear digitally. As a matter of fact, it costs $5 to send it to me which I may want to buy from a local store because I can feel it before I buy. Digital delivery of books is an interesting idea if we ever reach there, but there too you will have an immense competetion. Just because technology enables something doesn't mean the margins will be higher. If so, Ford would have 50% margins with all the advancements in manufacturing technology over the century. You have better margins if you have some technology that your competetion doesn't - otherwise, the story is the same. New technology only opens up new avenues for new businesses, it doesn't guarantee high margins.The same can be said Electronic Commerce paradigm as a whole. Overall, the customer benefits, not the company. Such statements by the analyst shows his lack of reasoning skills, nothing else.
I love Amazon and it is a pioneer in Electronic commerce. They will do very well, no doubt. They probably are developing technologies that'll make their supply chain efficient. Their shop-the-web (from Junglee's technology) is good, but not unique (YHOO has that as well). AMZN is a growth company, I give that. But the growth is limited and it should be valued just like any other company since it isn't unique in any sense. Let's say a growth rate of 150% and let's give a P/E ratio of 300. Get the idea?
My main point is AMZN is a distribution channel, not a manufacturer of unique products. If they are efficient, they may have good margins. But my friend, there are going to be tons of competetors bringing down those margins. And competetion is universal on the Net. There is no monopoly there. Just the way Internet makes it easy to reach billions of buyers, it also allows buyers to reach millions of shops.
AMZN isn't MSFT with monopoly and a technology base that cannot be thrown away. It isn't a drug company with patents to let it enjoy the protection for a couple of decades. AMZN, my friend, is a shop, perhaps a good one.
Are there any other business models for AMZN? Are they going to be a technology company? Are they going to be a shopping directory?
Finally, Let's say they will have $10/share profit in five years (which is very unlikely). Let's say they will maintain an explosive growth rate of 70-80% in the future as well. Let's say a P/E of 100. What's the price? $1000/share in five years (that's already about 60 Billion market cap). That's a triple from here. The stock appreciation of about 25% per year.
And what's the basis for $400 target? Go figure. It's easy to paint a rosy picture and be very aggressive in predictions. That's like saying if I invent a medicine that lets you live forever..... Not going to happen. Analysts are supposed to provide cautious guidance in selecting investments, not to encourage gambling for seemingly selfish motives. I laughed at it when an analyst put a target of $150 for EBAY because his earlier target of $90 was reached too soon. That's the level of thinking these braindead analysts are capable of. They are the shepherd and we are the sheep. As long as you can find a BIGGER FOOL to unload your shares, you got nothing to lose.
This bubble will burst. It's only a matter of time.
All comments are welcome.
- JC
====
A joke I heard:
Conversation between a venture capitalist who financed a new Internet startup and the CEO:
VC: "I cannot take this much longer.. 2 Million dollars burn rate every single day."
CEO: "You mean we are going Chapter 11??"
VC: "Are you kidding? We are going IPO!"
----
|
