>Even Amazon.com (AMZN), with enough stock and moxie to buy every e-tailing concept in Christendom, won't survive without a physical presence, says Rubin.
Glenn,
Survive? How about Amzns investments?
From BW
>The Tech Meltdown's Other Victims
Computer and Internet giants are seeing staggering losses in their own tech portfolios
Jeff P. Bezos, the founder and chief executive of Amazon.com Inc., is more than the top retailer on the Net. He's also the leading evangelist for the movement. Besides building his company into a retail giant, he has invested heavily in similar companies. But now Amazon's portfolio of e-tail investments looks like a who's who of dot-bombs. The stocks of Drugstore.com Inc. and Ashford.com Inc., both major Amazon investments, have dropped about 90% from their peaks. Pets.com Inc., which went public in February at $11 per share, is trading at less than $3. Amazon is still in the black with its holdings, since it often took early positions at low prices. But the decline in the value of its stakes is staggering: Amazon's holdings have dropped by at least $1.4 billion in recent months.
While Amazon is an extreme example, a company doesn't even have to be profitable to have a venture fund. Amazon which lost $720 last year, is paying for its investments largely from debt offerings.
Like Dell, Amazon has been making venture investments for strategic reasons. By taking stakes in other e-tailers, it has been able to broaden the variety of products it can offer its customers without investing in inventory and distribution. That helps Amazon even if the investments themselves don't pay off, Bezos argues. In addition, Amazon gets money back from companies it invests in. Over the next three to five years, Amazon expects to collect $600 million from affiliated companies that rent out space on Amazon's site.
Still, a detailed look at Amazon's portfolio raises questions about the financial merits of its venture program. Begin with Pets.com. Amazon pumped a total of nearly $58 million into the company and, after the stock's recent tumble, its stake has declined to roughly $24 million. Amazon also has lost money on its investment in audio-books provider Audible and on its purchase of warrants in Internet credit-card provider Nextcard Inc., according to Business Week calculations.
STEEP DROPS. Even the profits on Amazon's money-making investments have declined in recent weeks. Amazon's 24% stake in Drugstore.com, worth $868 million last year, now is valued at $108 million, a decline of $760 million. Since it paid an average of $6.04 a share, Amazon is still about $33 million ahead on the deal. The value of its stake in Ashford.com, an online merchant of jewelry and other luxury goods, dropped from $260 million last year to $21 million. And Amazon's holding in HomeGrocer, a Net grocery store, is worth $128 million, down from $443 million in March.
In hindsight, analysts are critical of Amazon's venture strategy. ``It does round out their product offerings, but they could have done that more cheaply,'' says analyst Dalton L. Chandler of Needham & Co. Simply selling screen space to niche retailers may have made more sense, he adds. ``Cash investment wasn't the way to go.'' Lauren Levitan, an analyst with Robertson Stephens, recently wrote a report saying that Amazon's venture investments could add to the volatility of the company's stock because the company's value ``is increasingly based on not only Amazon's core business but its incubation model.''
Bezos is undeterred. He says he still sees the strategic value of Amazon's venture deals. He also contends that the decline in e-tailers' stock prices may result in even more attractive investment opportunities. ``Warren Buffett always says he likes it when stock prices go down because he's a net buyer of stocks,'' says Bezos. ``If there's anything you're a net buyer of, you should be happy when it goes down.''
DEJA VU. It's worth noting that earlier corporate venture cycles have ended badly. This is the third major wave of such investing, according to Josh Lerner, professor of business administration at Harvard Business School. The prior two waves also came in the latter years of major bull markets. But bear markets in 1973-74 and 1987 short-circuited both corporate venture thrusts. ``Many of the programs were discontinued after market downturns,'' says Lerner, noting that companies like Exxon and Amoco suffered in the shakeouts. He acknowledges that the same could happen again, though he stresses that it's too early to tell.
When markets peak, the most recent investors get hurt the most. Such is likely to be the case in tech venture funds. Veteran corporate investors like Intel and Microsoft will suffer dented portfolios and, at worst, lowered expectations for asset-sale contributions to earnings. But latecomers, such as Amazon, are not likely to get off so easy.
By Norm Alster in Boston, with Jay Greene in Seattle |
