Bezos: Buy Amazon's Stuff, Not Its Stock
By Fred Barbash
Sunday, October 29, 2000; Page H01
If someone had bet you three years ago that Amazon.com might outlast AT&T--or, more accurately, AT&T as we knew it--would you have taken it seriously?
Not me. Definitely not Jeff Bezos, Amazon's founder, chairman, CEO and top optimist.
But that appears to be what's happening.
Was this why Bezos was smiling when I lunched with him last week? Probably not. This man is perpetually smiling.
He was fresh from his third-quarter earnings report, when he still had no earnings to report, as expected. Nor did he appear at all fazed by the informal inquiry by the Securities and Exchange Commission into an Amazon accounting practice.
Rather, he pointed to improved inventory efficiency, better sales per customer, better revenue than analysts had predicted (79 percent greater than the same quarter last year) and, most notably, numbers that he believes prove that Amazon has plenty of cash, contrary to claims by Lehman Brothers analyst Ravi Suria that the company is running out, claims that Suria repeated anyway in what is becoming a bit of a cross-continental grudge match.
For those in the media who had renamed it Amazon.bomb, Bezos could now boast of 25 million "active" customers and projected revenue for 2001 of $4 billion.
Combating "myths" about Amazon has become a routine part of his job, Bezos said. The fact is that the company is still expanding, not to mention still standing, amid a mounting heap of e-tailing failures. This is Bezos's single greatest weapon.
"The business as a whole is at a point now where even some of our most durable critics are starting to see that maybe this does work," he said.
But, I asked, what about the stock?
"Since you write a column for individual investors, I do not recommend buying Amazon.com stock for smaller investors. That's not based on any absolute level of the value of the stock but simply based on the volatility of the stock," Bezos said.
"I don't think Amazon.com, and for that matter Internet companies in general, are appropriate for small investors, except, perhaps, for long-term investors in the smallest portion of their portfolio. These are not go-to-bed-and-sleep-at-night stocks for small investors."
I can't say that I've ever gotten that response to that question from any top executive of any publicly traded company.
At the start of our conversation, my mission was to draw Bezos into a defense of "the new investing" and the "new economy," specifically the dot-coms.
I think that Amazon is a symbol of both, which is why the heat of the argument over its success or failure is disproportionate to the company's actual place in the universe.
That's a good column idea, Bezos agreed. But he wouldn't really play.
Some dot-coms, Bezos said without naming names, were fake businesses. "Some of them were trying to build stocks rather than trying to build companies," he said.
Others just did it wrong. "I think a lot of companies that hung their shingles up on the Web did not pay sufficient attention to customer experience."
And still others were just born too late, during "abnormal times" of "hype," which afforded them easy money to get started but no means to survive when the going got tough, he said.
"When we started in 1994, we had no idea if it would work. We had to approach 60 people to raise a million dollars. It took me three months of doing nothing else. Contrast that with 1999, when a single phone call could raise you $60 million in venture capital with your business plan being to spend half of it on television advertising. . . . There are thousands of companies that built business plans based on having access to a certain amount of capital."
When "their ability to raise capital came into question," Bezos said, they had nothing to keep their businesses growing.
By contrast, Amazon has built "a very strong cash balance," a base of 25 million customers, "a very strong brand name" and a network of distribution centers already in place.
"Our culture was formed in a completely different era," Bezos said. "Our timing was good."
As for investment philosophy, he places himself squarely in the traditional camp of the late Benjamin Graham, the investing mentor of Warren Buffett.
Since I believe that buying Amazon stock is faith-based investing, I pursued that one. As I read Graham, nobody else who reads Graham would call putting money in a money-losing company "investing."
"I'm not sure about that," Bezos said. "Benjamin Graham certainly understood the concept of putting out some money now for more money later. The interesting thing about Amazon.com," he said, is that it's doing it on a huge scale, while publicly traded. Historically, big companies went public after reaching critical mass--profitability--and not before.
Three and a half years ago, "when we first went public, we had annualized sales of about $60 million a year," Bezos said. "We had a certain number of software engineers. We could work on projects that drive growth or projects that drive operating efficiency and profitability.
"Let's say the project that drives efficiency gets you a hundred basis points of operating efficiency, which is huge. Well, a hundred basis points of $60 million is $600,000 in a year. So if you choose to focus on that, instead of that project that will get your sales to be larger, then you're crazy. It's just a poor business decision.
"On the other hand, when you have $2 billion a year in realized sales, then getting a hundred basis points in operating efficiency means you're saving $20 million a year. That's what operating leverage is. When people talk about operating leverage, they're talking about the fact that when you have a high sales base, very small improvements in productivity give you huge improvements to the bottom line.
"That's exactly the position we find ourselves in."
So when's the profit coming, I asked? Bezos won't project publicly, he said, only internally. How about the valuation? "I never comment on that."
Then tell me, I said, how big will Amazon be in 10 years?
"We have to wait and see," he responded. "But the e-commerce industry as a whole will grow at a compound rate approaching 50 percent a year. That doesn't mean 50 percent a year. Some years are going to be 70 [percent]. . . . There's no guarantee, of course, that that will be our path, but of course we are a leader in that space."
I don't go for 10-year growth projections. Indeed, if Amazon's revenue followed that pattern, by my calculations, it would have sales of about $115 billion in 10 years, roughly the sales of General Electric now.
I'm not sure I buy it.
On the other hand, if it got anywhere near that level, I'd certainly want to know why I shouldn't buy the stock.
But as far as I could tell, Bezos doesn't much care what I buy--as long as I buy his stuff.
I informed him that after going to his Web site for his third-quarter numbers, I came away also with $112.07 worth of electronics I didn't know I needed, some silly Palm appendages that had popped up in my face from Amazon's home page, which knew and remembered that Barbash had bought his Palm there.
In response, from the mouth of Bezos, from his diaphragm, from the deepest recesses of the human sound mechanism came a deafening emission the likes of which I've heard only at Redskins games:
"Yeah, baby!"
Fred Barbash can be contacted at barbashf@washpost.com
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Regards,
Barb |
