AMZN and Dell:
Henry Blodget:
TheStreet.com held its Net Stock Summit last Friday in its lower Manhattan offices. This is the fifth installment of the edited transcript of the Summit, which TSC is publishing throughout the week. (Click for Part 1, 2, 3 and 4.) This segment asks the question "Will Amazon.com ever make a profit?" An archived audio version of the Summit is available here.
Dave Kansas
Dave Kansas: Let's go on to question five here so we can be sure to get to everyone's stock picks. Question five was -- we said "Amazon.com (AMZN:Nasdaq) will never make a profit." Twenty-six percent agreed -- that's pretty amazing -- and 73% disagreed, meaning that they thought they would make a profit. Now I would like to know if people think Amazon.com will make a profit, but how long will it take if you say yes, not just, 'Yes, sometime in eternity'? You just wrote about them today, Henry. What do you think?
Henry Blodget: We think they will make a profit. We think the management team has made a decision and it's been a great strategy thus far, which is to build for shareholder value in year four, five and six, not year one, two. And we really believe that the company actually could show a profit right now if they wanted to, if that was the goal. And unfortunately, if they did, what that would mean is that the shareholder value in year four and five would be much lower than it will be if they continue to do what they're doing, which is investing for a much larger future.
Henry Blodget
You obviously have to have a lot of faith to buy into that, and part of my faith in Amazon is having spent time with the management team. I think they're brilliant, I think they're motivated by a lot more than money, and I think they're doing the right thing. And I would just point to an America Online (AOL:NYSE), which for years was the joke of the Street because they couldn't make any money, and Steve Case was always saying, 'We're not running the company for Wall Street. We're running it for market share.' And now it's the blue-chip of the Internet, and they are huge. And I think Amazon has the same potential.
I think there is risk that the bear story on the margins is right, and they will have trouble making the kind of profit they were looking for. But at this point, we're still comfortable with the long-term strategy, which is build for long-term shareholder value.
Kansas: So year seven or eight of their history, you see profitability?
Blodget: I see profitability with them when it makes sense. They have convinced the Street, and I think they've done a great job of it, that they are a very disciplined management team. They have the tools necessary to make the right financial decisions for long-term value, and when those tools tell them that it's time to start cranking back on the expense leverage and starting to show a profit, I think they'll do it.
Herb Greenberg: Well, Henry, how do they keep those profit margins nice and fat when shopping.com is advertising in The Wall Street Journal its books at some low price and everybody's undercutting them -- very, very steeply undercutting them? And on the software side, you have the same thing. How are they gonna overcome that hurdle?
Blodget: I think there are two main points on price. One, I think for a big percentage of the online shopping population, Amazon's value proposition is a lot more than price. Price is a big component, but you also have service, ease of use, reputation, end-to-end delivery -- and basically your confidence in the brand. There is clearly a segment of the online population that will always shop on price. They will try to buy the lowest price at any time. Amazon, I would argue, doesn't want those shoppers as customers. Leave them to buy.com or shopping.com. That's the first thing.
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"I think for a big percentage of the online shopping population, Amazon's value proposition is a lot more than price. Price is a big component, but you also have service, ease of use, reputation, end-to-end delivery -- and basically your confidence in the brand." -- Henry Blodget
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Second thing, if any company is positioned well to compete on price, it is the volume leader, and Amazon is the volume leader in the sectors in which it competes. And I think they will extend that lead over time. What Jeff Bezos has always argued is that the winner in this space will have the lowest prices and the highest profit margin. I agree with that, and I would look at a Dell (DELL:Nasdaq) as an example of a company that, simply because they are out ahead of the competition -- and again, Dell's value proposition is not that they make better computers. It's that they are much better at the direct model than anybody else.
Look at the difference in their profitability vs. Gateway (GTW:NYSE), which isn't all that far behind, and it's doing the same thing. Dell's much more profitable. It's because their whole value proposition is better, cheaper, faster, and they do it better than anybody.
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