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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: cellhigh who wrote (2743)	4/3/1998 3:03:00 AM
From: Satellite Mike	Read Replies (2) \| Respond to of 164684

Congratulations, Ron, on your success with AMZN. You've played this one like a pro! Mike

To: cellhigh who wrote (2743)	4/3/1998 7:50:00 AM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

The Motley Fool - April 02, 1998 18:20 DELL AMZN V%MFOOL P%TMF Jump to first matched term April 2, 1998/FOOLWIRE/ -- A number of Internet-related businesses saw their share prices make strong moves today. Although lumping them together tends to obscure some essential qualitative and quantitative differences among them, the companies do share some common characteristics. The meteoric rise of the "Internet" stocks over the last several months (ironic because meteors actual fall) has given many investors pause, primarily to consider: How fast can these companies grow? While share price can always get ahead of valuation, and sometimes in really absurd ways, there are definitely limits on how fast an actual business can grow -- and we're talking the mechanics of the business here. Although the management of growth is a highly complex subject, worthy of a great deal more space than even a year's worth of these columns, it is also true that a discussion involving the basics of the endeavor can elucidate why the "Internet model" holds such promise. Whether or not demographics and proper managerial execution can make good on that promise is another question. Taking a look at a "traditional" business, the financial limits imposed on a company are dictated in no uncertain terms by its sustainable growth rate -- that is, according to some qualifications that will be outlined below, the maximum rate at which a company can grow its sales without depleting its financial resources. Growing faster than this rate can literally end up in a situation described as "growing broke" where cash needs outstrip available resources. Almost as many companies go broke due to overwhelming sales as they do to no sales, and how depressing that must be! Surprisingly, many companies, through the exercise of some financial acumen, actually put a break on growth in order to shore up their financial strength. Dell Computer (Nasdaq: DELL) is a great example of this. At one point in 1993 Michael Dell confronted a cash position that was down to $20 million, which was enough for roughly two days, and he realized that it was time for a change. Dell had to move away from that mantra of "growth at any price" (not to be confused with the highly unsuccessful stock picking strategy of the same name) and toward sustainable growth. Executives get fewer heart attacks that way, and as we all know, in the ensuing years everything went pretty well for Dell on the growth front. Again, back to the "traditional" company. If a firm wants to increase sales in a given year, it must also increase its assets, namely: inventory, productive capacity, and hopefully accounts receivable (and not by extending collection periods). First, however, we are going to have to make some assumptions to illustrate a point Don't worry, these are very "real-world" assumptions. Here goes: Management is unwilling to issue new equity and wants to grow as rapidly as market conditions permit. As well, management has a target capital structure that it wants to maintain. As equity grows, liabilities can increase proportionately without an alteration to the capital structure. Combined, the growth rate in equity and the growth of liabilities determines the rate at which assets expand (since Assets = Liabilities + Equity). Remember, coming full circle, the growth in assets will determine the growth in sales. Following the logic here, the funding of new assets to grow sales is done through new borrowings (remember -- no equity) and since Assets - Liabilities = Owners' Equity, the possible growth rate in sales for a company is nothing more than the growth rate of owners' equity. Without getting into the actual sustainable growth rate equation and mathematical proof at this time (however disappointing that may be), it should become clear to investors that Internet companies are a different kind of animal altogether. The biggest benefit, as far as investment in assets to sustain growth goes, is that they are extremely productive. What sales can they generate on their assets? Taking a look at Amazon.com (Nasdaq: AMZN), on a trailing 12-month basis the company generated $147.76 million in revenues on $9.265 million in fixed assets, or for every $1.00 in sales, approximately $0.06 in fixed assets were used. It is obviously not a capital intensive business. So, what are the implications for sustainable growth? That is a difficult question to answer because the metrics that are used to evaluate the constraints on growth require profitability. With the real benefits for Internet companies coming from superior marginal returns on capital, once a certain critical mass has been reached, growth and profitability becomes a clouded picture. And that is an issue we'll deal with in future columns. -- by Alex Schay