TCS Daily


Adventures on the Amazon.com

By James K. Glassman - July 3, 2000 12:00 AM

Will Amazon.com run out of money in the next year? A recent report from Lehman Brothers said yes, causing the stock to swoon even further below its 12-month high of $113 per share. After positive comments from founder and CEO Jeff Bezos in recent days, the stock has recovered a bit, but at a recent $36, Amazon still has plenty of disappointed investors. Is the party over for the company that has defined consumer e-commerce?

Maybe not. Money-losing enterprises are not necessarily a bad investment, as long as they're building something valuable. This idea is not new, by the way. It's not a symptom of irrational exuberance. To examine the case for forgoing profits while growing a business, you can go all the way back to Sir Francis Bacon, writing roughly four centuries ago. He'll tell you that many people make the mistake of demanding profits from a tree farm too early in the life of the business.

What has changed in recent years is that many individual investors have decided that they want to be venture capitalists. So the market has given people what they want - lots of publicly-traded companies with no earnings, compelling upside potential and enormous risk. But the idea that a business might lose money for several years before turning profitable is not new. It's just that such businesses are now household names and widely-followed stocks, instead of budding projects belonging to large firms and wealthy individuals.

So, is Jeff Bezos building a business, or just serving up the all-you-can-eat platter to risk-hungry investors? As regular TCS readers know, I continue to be a fan of Amazon.com as a long-term investment, because Amazon delivers a fabulous customer experience. I think it's the best in e-commerce, and I think that will continue to drive growth in revenue and eventually, profits. Still, I understand that many people now want to focus on Amazon's cash flow and its financial prospects for the next 12 months.

Fair enough. One of the most interesting appraisals of Amazon was delivered last week by Legg Mason fund manager William Miller at Morningstar's annual investment conference. According to Marketwatch.com, Miller said, "I think Amazon is worth the mid-70s-80s." Miller added that Amazon is "cash-flow positive now, next year and forever. When that becomes visible, probably next year, it will be similar to what America Online was...the valuation went way up and the risk went way down." I'd call that a pretty solid endorsement. Oh, did I mention that Miller manages the only general equity fund that's beaten the S+P 500 in each of the last eight years?

Speaking of Amazon's numbers, there's another number that I find interesting - 20 million. That's the number of Amazon customers. And I think if you polled them you'd find that an extremely high percentage are satisfied customers. Bezos' company is still losing money, but I think Francis Bacon would approve.
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