BOSTON CAPITAL
Reading between the lines at Amazon.com
By Steven Syre and Charles Stein, Globe Staff, 07/27/99
Jeff Bezos has made losing money fashionable.
The founder of Internet retailer Amazon.com has repeatedly said that his
young company shouldn't worry about earning money while it is in a
building stage. ''It would be a terrible mistake to be profitable now,''
he told CNBC recently.
For the most part Wall Street has bought the argument. Investors have
greeted Amazon's losses as a necessary evil, the price the company must
pay today for future greatness.
But attitudes may be changing. When Amazon last week said it lost $138
million in the second quarter, and forecast growing losses in the
quarters ahead, the stock lost 15 percent of its value in a single day.
It fell further yesterday. At 105 15/16 a share, Amazon is down 50
percent from its April high.
Which raises an interesting question: When does losing money stop being
a good thing and become something to worry about?
Amazon certainly isn't the first company that has forced investors to
confront the question. Entire American industries have been built on a
foundation of red ink. Cable television is a prime example.
Cable companies have borrowed billions to wire America's households. The
huge borrowings - and big interest payments - all but guaranteed the
companies would lose money. When AT&T bought Tele-Communications Inc.
last year, the cable giant was still racking up quarterly losses. Yet
that didn't stop AT&T from paying $31 billion for TCI.
How come? Like other investors, AT&T figured that when the industry's
building phase finally ends, cable's losses will morph into big profits.
AT&T made a similar calculation when it paid $12 billion in 1993 for
McCaw Cellular Communications, a big cellular company. As an independent
company, McCaw never made a dime. Once again, construction costs
overwhelmed everything else. But AT&T bet, correctly in this case, that
cellular would make money down the road.
Few industries have tested investors' patience like biotechnology. New
drugs can take more than a decade to develop, and during that phase,
biotech companies don't even have revenues to show for their efforts.
Consider the case of Sepracor, a Marlborough company that tries to
produce safer versions of existing drugs. The firm has lost money every
year in this decade. In its most recent quarter, Sepracor lost $36
million, twice what it lost in the same quarter a year ago.
Yet the firm has a market value of more than $2 billion. In effect,
investors are willing to make a leap of faith that Sepracor's
investments will eventually produce drugs and profits.
In a recent interview, Bezos mentioned USA Today and CNN as examples of
businesses that took a long time to produce profits. He could have
mentioned Sports Illustrated, which lost money for a decade before going
on to become a great success.
Howard Anderson, president of Boston's Yankee Group, expects Amazon.com
to evolve in a similar way. ''Bezos is doing exactly the right thing,''
he says. ''He is building warehouses, he is hiring the right people.
Whether he makes money or loses money is irrelevant.''
Amazon mentioned big investments in warehouses and a one-third hike in
staff, to 4,200 people, to explain its $138 million loss last week.
But others aren't so sure the Internet retailer is on the right track.
Put Larry Haverty in the camp of skeptics. A senior vice president at
State Street Research, Haverty can't see where Amazon's big profits are
going to come from. He says there has never been a retailer in history
that reached Amazon's current size - over $300 million in quarterly
sales - that didn't make money.
He calls most of Amazon's products ''commodities,'' and questions the
firm's decision to sell such a wide range of wares. ''No retailer in the
world is competent enough to master all those businesses,'' he says.
Amazon started out as a seller of books but has since expanded into
music, auctions, toys, and electronic products.
Nick Moore sees another problem. A money manager with Jurika & Voyles in
Oakland, Calif., Moore points out that while Amazon's sales are still
growing explosively, the rate of growth is slowing at a time when
expenses are rising.
''If you give investors time, they will do the arithmetic and there will
be a reversion to sanity,'' he predicts.
It would be nice if there were some simple way for investors to sort out
the ''good'' losses from the ''bad'' ones. Alas, life is not that
simple.
In truth, the investor in fledgling companies is in much the same
position as a scout trying to assess the prospects of young pitchers.
Which hard thrower is going to turn into the next Sandy Koufax and which
ones are going to ruin their arms or never learn to put the ball over
the plate?
Will Amazon.com be the next Koufax or the next overhyped phenom? It's
hard to say - which is what makes baseball and investing so much fun to
follow.
The Red Herring
PP&L Resources Inc., a Pennsylvania-based electric utility with
increasing interests in New England, has agreed to purchase privately
held Western Mass. Holdings Inc. of Springfield for an undisclosed sum.
Western Mass. Holdings is a mechanical contracting group with annual
revenue in excess of $50 million that provides construction,
maintenance, and technical services to large clients in Massachusetts
and Connecticut. No cuts to its work force of 200 are expected,
according to PP&L chief executive William Hecht. Western Mass. Holdings
is the fifth mechanical contracting and services firm acquired by PP&L,
the first outside Pennsylvania. PP&L said it expected the acquisition to
add to the company's earnings in its first year.
PP&L purchased most of Bangor Hydro-Electric Co.'s electric generating
assets in May and is negotiating to build a power plant in Wallingford,
Conn.
Steven Syre (929-2918) and Charles Stein (929-2922) can also be reached
by e-mail at boscap@globe.com.
This story ran on page D1 of the Boston Globe on 07/27/99.
© Copyright 1999 Globe Newspaper Company.
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