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

To: e. boolean who wrote (9017)	7/6/1998 1:24:00 PM
From: Narotham Reddy	Read Replies (1) \| Respond to of 164684

The Motley Fool - July 06, 1998 12:51 July 6, 1998/FOOLWIRE/ -- Amazon.com (Nasdaq: AMZN) leapt $8 to $132 in yet another spectacular morning of trading for the online retailing pioneer. In less than 30 trading sessions, the stock has surged more than 80 points, tacking on more than $3.75 billion in market capitalization to a prior market cap that many short-sellers thought was insane to begin with. The company now has a market cap in excess of $6 billion, which doesn't even count a bunch of options that go "in the money" each quarter and with each large advance in the company's share price. The more value-oriented investor probably started looking askance at the market value of Amazon.com more than a couple ticks ago, wondering if it is past intrinsic value. For our purposes of intrinsic value, there are two definitions: 1) The specific current price that will yield an investment performance in line with a market average over a future time period, and 2) the net present value of all the cash that can ever be taken out of the business. If the price of the stock is set so that it qualifies for the second definition, theoretically, it should meet the first definition. There's no guarantee that those two will always match, though. Current Amazon.com bears point to the company's losses, wondering how a company could be priced at twice the market cap of more established competitors like Barnes & Noble (NYSE: BKS) and Borders Group (NYSE: BGP). It's pretty simple, though. Investment in working capital at the established chains is more intensive than at Amazon, which means that less shareholders' cash will be tied up in slow-turning inventory while vendors such as Simon & Schuster are kind enough to finance the booksellers' inventory at 45-90 days. Amazon has a competitive advantage because it can turn its working capital assets more quickly than its competitors. Amazon can also turn its fixed assets more quickly. (An investor has to bring the value of all these companies' lease obligations onto the asset side of the balance sheet.) All of this matches what investors want to see -- less capital invested in inventory and receivables and more capital invested in building the brand name. However, Amazon is being accorded a huge valuation bonus because of its pioneer status. Barnes & Noble is on the prowl, though, with advertisements that come at you with a pretty effective message. Borders is out there, too, but it appears that it is still tweaking things before it gets going with marketing its Web store. Amazon is excellent at execution almost every time a customer orders a book, and now, CDs. That's a crucial part of online retailing. B&N stumbles a little more often, according to our unscientific research. However, the others can learn how to execute, if they are worth their salt as major retailers. That being the case, investors might be overestimating the competitive position of Amazon down the road. To wit, the company may not be able to earn a super-normal return on invested capital for as many years as investors expect, especially in other retailing segments where receivables terms aren't set as irrationally and anachronistically as in the publishing industry. Amazon bulls should probably take stock here and reassess what they expect out of the company. It's a big wide world out there with lots of opportunities for Amazon to exploit, but at a certain price you can can get far ahead of intrinsic value.