From Briefing.com..."
Updated 17-Dec-98
Amazon.com: A Study in Contrasts
America is on the verge of war with Iraq. The President is about to be impeached. Seven of the thirty DOW stocks have issued earnings warnings. But, Amazon.com (AMZN) goes up $46 on its way to the $400 five-year target set by an Oppenheimer analyst.
You've got to love this market.
Conflicting Truths
But explaining what is going on with Amazon.com is particularly difficult, partly because there are so many conflicting viewpoints which are all true. For example:
Amazon.com will be one of the biggest ecommerce companies. TRUE
There are few barriers to entry in the ecommerce internet market. TRUE
Amazon.com is grossly overvalued, based on its fundamentals. TRUE
Amazon.com's revenue growth continues to exceed all expectations. TRUE
Amazon.com has a large daytrader following, often a danger sign for long term investors: TRUE
Amazon.com has a large number of non-believers, as evidenced by the huge amount of stock shorted. TRUE
Amazon.com has been downgraded by 7 large Wall Street firms this year. TRUE.
Amazon.com has been upgraded by 7 large Wall Street firms this year. TRUE.
It seems just as easy to come up with arguments against Amazon.com as it does for Amazon.com. With that in mind, today Briefing.com offers a few thoughts about the company and the stock.
Diverse Investor Types
First of all, AMZN has at least four different types of investors right now.
INTERNET BELIEVERS: These investors got into Amazon early on because they believe primarily in the future of the Internet, and Amazon.com was one of the best Internet companies. They plan to hold forever.
MOMENTUM INVESTORS: There are plenty of these types, who buy stocks largely because they are rising. As Amazon keeps rising, its attracts more and more of them. They plan to hold until the tide turns.
DAYTRADERS: Amazon is one of the great daytrading stocks. All it takes is a quick hand sometimes.
ME-TOOS: We don't know what else to call this crowd. They've been hearing about the tremendous runup in Amazon.com and simply want to be a part of it. They don't know much about Amazon's revenue curve or business plan, but they used the service once or twice, liked it, and bought some because they want a piece of the Internet. Not around from the beginning, maybe not that experienced on the Internet, they buy none the less, and put it away.
Everyone of these categories has been rewarded for buying AMZN.
Part of the reason for the sharp rise is that there seems to be a continual stream of new investors to Amazon.com. As people learn about the Internet, Amazon.com is still one of the first sites they encounter. With a limited number of shares, more buyers naturally means higher prices.
The diversity of investors definitely helps drive the price and keep volume extremely liquid. The same cannot be said for many of the second-tier Internet stocks like Books-A-Million (BAMM). There are very few long term believers holding BAMM stock. (Even the CFO and Vice President have sold over 95% of their holdings. See yesterday's Story Stock.) When the daytraders leave BAMM, it falls quickly. (BAMM fell from over $45 to under $15 in one week after its runup.)
Amazon.com, by contrast, is likely to see more support from the long-term investors and the me-toos who will buy on a dip. The diversity of investor types is a plus for the stock.
There are also some categories of investors who aren't involved in Amazon.
VALUE INVESTORS: Do we even have to explain this one?
MUTUAL FUNDS: Amazon.com is remarkably absent from the portfolios of mutual funds. As of June 30, only 768,600 shares were held by 17 mutual funds (Source: O'Neil Datagraphs).
PENSION FUNDS: Large institutional advisors (money managers for pension funds) own just 10% (5.8 million shares) of Amazon.com. (Source: O'Neil Datagraphs).
In fact, for a company with a $15 billion market capitalization, institutional investment is remarkably slim. America Online (AOL), by contrast, has more than half of its entire outstanding stock owned by advisors (pension funds) and 40% of the float owned by 191 mutual funds. AOL is bigger, at a market capitalization of $42 billion, but the contrast is striking. AOL is now a blue chip internet stock. Amazon.com isn't.
Usually a strong institutional presence is necessary for rapid stock price rises. But Amazon.com has done it with little institutional ownership.
Not A Bookstore
The Internet's best known bookstore is not a bookstore.
From the beginning, Amazon management has consistently stressed that Amazon.com will eventually offer all types of consumer retail items. Books are only a tactical first step. Even while revenues have boomed on books alone, Amazon.com has moved quickly to work on this vision.
Briefing.com expects Amazon to soon announce the new "Shop The Web" service. Although this direction has been talked about for is nothing new about the service, the press release will likely cause another strong up day in the stock. To see the new service, go to Amazon.com's home page, then scroll down to a "Shop The Web" link on the left hand side
Ask anyone what Amazon.com does, and watch them say "Books on the Internet." But that isn't the Amazon.com vision.
Battle of the Brands
Another enigma is the strength of the Amazon.com brand.
Certainly "Amazon.com" is already one of the strongest brand names on the Internet. But does that mean success selling other branded items?
The future for Amazon.com is a "battle of the brands." Amazon.com will be a premier brand on the Internet, but how will other brands transfer to the Internet? Will you buy L.L. Bean or Disney items through Amazon.com? What about Scott's tissues? Amazon.com's Shop The Web service features Fredrick's of Hollywood. Victoria's Secret has its own web site. Will Amazon.com wind up selling only weak brands?
The answer is crucial to Amazon's future, but so far, there isn't much evidence to help answer this. Books don't have brand identity.
The Coming Seasonality
One thought has been forgotten about Amazon.com is that they are still retailers.
Although the internet changes the way we purchase retail items, it is foolish to think that everyone will purchase ten times more retail items simply because the internet makes it easier. Each of us will simply buy things from Amazon that we used to get somewhere else.
But the overall retail industry isn't a growth industry. Large retail stores, brick-and-mortar stores, don't have internet growth rates.
Amazon's future growth will, therefore, come from adding new types of items, and new customers.
Nevertheless, the retail industry universally shows a seasonality effect. When will seasonality hit Amazon?
The fourth quarter is always the strongest for retail companies. Even for growing companies, Q1 generally shows a drop-off in sequential revenue growth.
Amazon.com is likely to have a banner Q4. But what will happen to people's perception of Amazon if Q1 of 99 shows the seasonality of all retailers? Will Amazon suddenly be perceived as essentially a retailer with the Internet as its catalog?
Briefing.com isn't sure how this will be perceived, but we do think Amazon is now big enough to show a seasonality effect. At the very least, it will probably show up in Q1 as a sharp drop off in the sequential growth rates.
Briefing Summary
What to say about Amazon.com?
It's a growth company retailer. It's overvalued, but the stock keeps going up. It loses money, but revenues keep exploding.
It's hard to say something meaningful about Amazon.com without also saying, "On the other hand..."
But you can't ignore Amazon.com as a phenomenon. Everyone talks about it.
The middle-aged Russian lady in the dry cleaning shop, an immigrant here for less than two years, but already fascinated by the American stock market, asked us if she should buy Amazon.com stock. How do you answer that? She's clearly attracted to the concept and the recent strength. We believe in the Internet. But AMZN at $285 for struggling immigrants? It's amazing that the question even comes up.
On the other hand, we have readers sending in feedback all the time, expressing amazement at Amazon's continued rise. Here's one of the more eloquent:
I don't know, nor do I really care what market professionals may do or say, because based upon my calculations, even at today's price, Amazon.com is selling at a substantial discount to it's projected earnings for the year 2050. In fact, the next time the share price dips, I'm going to mortgage everything I own and put it ALL into Amazon.com
Amazon.com is a fascinating study in contrasts. There is nothing wrong with being on the sidelines if you don't have a position, but Amazon.com the business, and AMZN the stock should be followed by everyone.
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