>>Boston, Dec. 22 (Bloomberg) -- Amazon.com Inc. Chief Executive Jeffrey Bezos recently got into a tiff with Wal-Mart Stores Inc., which was mad because Bezos had stolen away some of its executives.
I think Amazon.com will prevail on that one. But investors in Amazon.com ought to be thinking about Wal-Mart for an entirely different reason.
Wal-Mart provides a classic example of what happens when investors deify a stock. Even when the company's performance is first-rate, if it doesn't live up to investors' ridiculous expectations the stock gets punished.
What made me think about this was the absurd 46-point one- day rise in Amazon.com stock on Dec. 16, followed by a 31-point jump yesterday. The first spurt came after CIBC Oppenheimer & Co. analyst Henry Blodget said the stock would rise to $400 in a year. The second one followed publication of a Barron's article containing favorable comments on Amazon.com by Mary Meeker, an analyst at Morgan Stanley Dean Witter & Co.
Growth for Grown-Ups
Amazon.com, based in Seattle, is a pioneer in selling books over the Internet. Lately, it has branched out into selling music, videotapes, audiotapes and other items. Its stock is selling for about $320 a share, which is about 40 times the company's revenue for the past four quarters. (It has no earnings as yet.)
Let's think back a few years. In the summer of 1991, when Wal-Mart was one of the hottest stocks in the country, I chatted with Ralph Wanger, the salty-tongued manager of Acorn Fund. Were present trends to continue, Ralph said, Wal-Mart would be doing ''all the retail sales in the U.S.'' within about a decade.
''Oh, and you think that's absurd, Ralph?'' I said.
''No,'' he replied breezily. ''But once they do become the sole retailer in the U.S., their growth rate will have to drop!''
That's one of the points the star-struck fans of Amazon.com are missing. There are natural limits to growth. It doesn't dawn on these people, many of whom are inexperienced investors, that grown-ups do not shoot up as fast as infants and teenagers.
Amazon's sales were less than $1 million in 1995 (the year I first heard of the company from a frightened friend of mine who runs a conventional bookstore). Sales were about $16 million in 1996 and about $148 million in 1997. This year sales for the first three quarters were about $357 million.
Swollen Expectations
The growth rate, then, was 1500 percent in 1996 and 825 percent in 1997. If the company has sales of $600 million this year, the growth rate in 1998 would be 305 percent.
Shucks, growth is already slowing.
Wal-Mart's stock had roughly quintupled in the six years before my 1991 chat with Ralph Wanger. In the five years 1992 through 1996, it fell 29 percent.
While the stock was falling 29 percent, Wal-Mart's earnings rose from $1.29 billion (in 1991) to $2.74 billion (in 1996). There was absolutely nothing wrong with the company's performance. It's just that investors had a case of badly swollen expectations.
Amazon.com is an innovative and energetic company. Its CEO, Bezos, deserves all the credit in the world for coming up with the concept of selling books, music and tapes on line, and for designing an attractive and well-organized Web site to do it.
Give him a medal? Sure. Value his fledgling company at $17 billion? Hell no.
Pair of Deuces
If you value the company at $17 billion now because it might be worth that much someday, how will you value it in 2003 or 2008 or whenever (if ever) it does have sales and earnings commensurate with its 1998 stock price?
It reminds me of the first time I ever played poker. We were playing a game in which a pair of jacks or better were required to open. Confused, I opened with a lesser hand, thinking that I had a good chance to surpass the guideline when I drew additional cards. After I won (on an inadvertent bluff), I had to show my opening cards. ''No,'' howled the friend who had invited me to the game. ''You don't need jacks or better some day. You need jacks or better now!''
Right now, what Amazon.com has is more like a pair of deuces. For the first three quarters of this year, it lost $75 million.
Let's contrast that with the results of a few other companies with a market value of about $15 billion, a little less than Amazon's. Caterpillar Inc. earned $1.67 billion in 1997 on sales of $18.9 billion. Cigna Corp. earned $1.09 billion on revenue of $20 billion. General Reinsurance Corp. earned $968 million on revenue of $8.25 billion.
Small Margins
Each of these companies had profits much larger than Amazon.com's sales. When Amazon.com grows up to have profits some day, its profit margins will presumably be those of a retailer. Wal-Mart, for example, earns about 3 cents after taxes for every dollar of sales.
Oh, by the way, while Amazon.com stock was soaring this month, nine Amazon.com insiders filed their intention to sell 424,998 shares of stock. In November, according to Securities and Exchange Commission records as reported by the Washington Service (an insider-trading information firm), eight Amazon insiders did some selling. Among those whose sales were significant in relation to their remaining holdings were director Tom Alberg (sold 110,000 shares, kept 74,000), vice president Richard Dalzell (sold 25,000, kept none), vice president John Risher (sold 35,000 shares, kept 18,000) and vice president Kavitrak Shriram (sold 30,000 shares, kept 46,448).
I guess they don't want to put too much faith in that $400 forecast.
13:22:53 12/22/1998<< |
