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

To: Glenn D. Rudolph who wrote (14620)	8/25/1998 8:08:00 PM
From: llamaphlegm	Read Replies (2) \| Respond to of 164684

From TMF Boston, Aug. 25 (Bloomberg) -- A few days ago, I talked about a few stocks (Thermo Electron Corp., Avnet Inc. and Mark IV Industries Inc.) that look like potential buys based on price relative to book value. Today let's look at the other side of the coin -- the stocks that look most overpriced based on the same measure. Three of the most overpriced stocks, according to this yardstick, are Amazon.com Inc., Earthlink Network Inc. and Times Mirror Co. Amazon.com recently sold for a monstrous 170 times book value, and Earthlink for 157 times book value. The price/book ratio on Times Mirror is about 65. Book value is a corporation's net worth -- its assets minus its liabilities. When investors use the phrase, they're usually talking about book value per share, which is book value divided by the number of common shares outstanding. For most purposes the phrase book value can be used interchangeably with stockholders' equity. Obsolete Measure? Critics say that book value is an obsolete measure, because write-offs, stock buybacks and various changes in accounting rules have distorted it. In my opinion, there has been some distortion, but book value still remains a useful stock-picking guide. In any case, I doubt that partisans of Amazon.com or Earthlink can argue that the stocks would look cheap except for distortions in book value. These stocks look expensive based on virtually any yardstick. The only coherent case that can be made for the stocks is that they will exhibit such terrific growth in the future as to justify their high current prices. But even that argument is wrong in my opinion. I predict that both Amazon.com and Earthlink will underperform the market over the next three years, and that at least one of them will be an investment disaster. Amazon.com, based in Seattle, was a pioneer in selling books over the Internet. It offers a huge selection of 2.5 million book titles, and lately branched into music, videotapes and other products. It offers online tools that will, for example, help a person who likes a particular book find others in the same genre or by the same author. All in all, it's a nifty company. But it's a ridiculous stock. A Triple In 1997, Amazon.com lost $27.6 million on sales of $147.8 million. It has never shown a profit. But investors value its stock at $6.7 billion. The stock price has tripled since the end of May, zooming from $44 a share to $134.75. Total sales of books in the U.S. are about $21 billion a year. Based on its 1997 revenue, I figure Amazon.com has a market share of about 0.7 percent. Let's suppose it can improve that 20- fold. It would then hold a 14 percent share. A 14 percent share of a $21 billion market equates to sales of $2.94 billion. Assume a 3 percent after-tax margin (which is way better than Amazon.com has now), and you have profit of $88 million. Apply a generous price/earnings ratio of 30 and you can justify a market value of about $2.6 billion.