Posted at 06:56 a.m. PST; Wednesday, December 30, 1998
Is it time to bail from Amazon.com? Investors, analysts have different views
by Jay Greene
Seattle Times business reporter
Some investors think Tulip.com might be a better name for high-flying
Amazon.com these days.
The online retailer's stock price has quadrupled in the last four months,
prompting comparisons to Tulipmania, the notorious buying frenzy of 1634, when
Dutch speculators pushed the price of tulip bulbs into the stratosphere, only
to see them crash just as quickly back to earth.
"The investors in Amazon.com will make the tulip investors of the 17th century
look like value investors (people who flock to safe stocks)," said Rick Berry,
a stock analyst with J.P. Turner & Co. in Atlanta. He recommends that
Amazon.com investors sell now.
Whether or not Amazon.com stock is worth its current value - shares closed at
$332.31 yesterday - investors have gone on a buying frenzy in recent weeks.
Amazon.com, which started trading at $9 in May 1997, eclipsed the $100 a share
mark Oct. 19 only to catapult past $200 a share a month later. On Dec. 21, the
company cracked the $300 barrier.
As Amazon.com's price has blazed past investing mileposts, opinions about the
company have become more polarized.
Investors and analysts either think the company is wildly overvalued or a
tremendous bargain given its long-term potential.
The reason for the wide divergence of opinion is that no one is quite sure how
to value the company. Amazon.com is the leading retailing brand name on the
World Wide Web, selling books, music and videos. At the same time, the company
has yet to earn a penny. Even though analysts expect company sales to top $500
million this year, they estimate that Amazon.com loses an average of $4 to $7
per book ordered.
To some stock analysts, that's a formula that seems to guarantee continued
gallons of red ink. J.P. Turner's Berry said the math simply doesn't add up to
a company valued at $18 billion, larger than such established retail giants as
Sears and Costco.
"All manias will end," Berry said. "This one is lasting a little longer than
usual."
Of course, that's easy for Berry to say. He suggested that clients sell the
stock in July when it was trading near $125 a share. Amazon.com has climbed
more than $200 since then.
At the other end of the spectrum are analysts such as Henry Blodget of CIBC
Oppenheimer in New York. Two weeks ago, he told clients that Amazon.com would
trade at $400 within 12 months, a prediction that sparked a one-day, $50-a-
share rally. Blodget believes that Amazon.com eventually will be a company
worth a high stock price as it becomes an even more dominant online retailer,
selling music, toys and other items.
"Because there is so much money to be made in the Internet space, you have to
be willing to bet on these companies before the business model has been
proven," Blodget said.
Amazon.com's stock, though, will be "wildly volatile" as it approaches $400,
perhaps even losing half its current value along the way, he said.
No one is quite sure who is buying Amazon.com shares as they climb higher and
higher. The company's shares are trading at a lofty 97.4 times sales, while
the company it is often compared with, Wal-Mart, trades at 1.6 times sales. A
ratio that high generally rules out big institutional investors, such as
pension funds and insurance companies, whose bylaws often preclude investing
in companies so richly valued.
Individual investors, on the other hand, need significant sums of cash to play
the Amazon.com stock game. On Tuesday, for example, the average size of a sale
was 333 shares, worth roughly $110,000.
"That's clearly not an individual investor buying for their 401(k)," said
Steve Weinstein of Pacific Crest Securities in Portland.
The buyers are more likely to include wealthy "day" traders, speculators who
buy big blocks of the stock and sell them for modest gains within a day or
two. Buyers also may include a handful of mutual-fund money managers looking
to pick up a hot stock to make their portfolios look better as the year
closes, and some wealthy individual buyers trying to jump on a fast-moving
train before it rockets by them.
One of Amazon.com's largest investors, Transamerica's Premier mutual funds,
won't say if it is buying. But Philip Treick, who manages Transamerica Premier
Aggressive Growth Fund and Transamerica Premier Small Company Fund, said he
isn't selling.
That means that Treick is willing to bet that Amazon.com will blossom into an
online retailing giant.
So far, it's been a good bet. Treick's two funds rank among the best
performing in the country this year with returns approaching 70 percent.
Their success has come largely from the eye-popping performance of Amazon.com.
Transamerica's nearly 1 million Amazon.com shares, acquired at an average of
less than $50 a share, are its largest holding.
Ryan Jacob is a bit more sanguine. Jacob manages The Internet Fund, another
mutual fund, which has posted a 216 percent return this year by focusing
solely on the stock of online companies. Amazon.com had been a larger part of
his portfolio than it is now. While he likes the company, Jacob gets nervous
at such lofty prices.
"I don't think it's such a tremendous value right now," Jacob said. "Amazon's
price is reflective of very optimistic forecasts." |
