Rumble in the Jungle
The Bull Argument
By
Jeff Fischer (TMF Jeff)
The bull arguments for Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> are well-versed. Amazon is the leading consumer e-commerce retailer. It has more than 23 million registered users and at least two-thirds are fairly regularly returning customers. The company should near $3 billion in sales this year, and sales could reach $5 billion in 2001 (as projected by Motley Fool Research). The Amazon brand, despite a recent pricing snafu, is easily the best in the business. Finally, e-commerce alternatives are dwindling as competitors close shop.
The latest developments at Amazon add new fodder to the bull argument. The company has teamed with Toys "R" Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %> to open an online toy store. The upshot: Toys "R" Us will stock the inventory, Amazon won't. This plays on both companies' strengths. Last year Amazon mis-stocked its toys during the holiday season, resulting in a loss. Now Amazon won't need to worry about any fickle, cyclical toy inventory.
Amazon also signed an inventory-free deal with its minority-owned partner, Greenlight, to sell cars through Amazon. This business doesn't make as much sense to me, however, and I don't believe that it's worth much consideration now anyway.
The common bearish arguments for Amazon are well-versed by now, too. The company is losing money. It has long-term debt of $2.1 billion. Some bears claim that its cash won't last until profitability. Amazon says that it will end 2000 with $800 million. Where will the cash stand by the second quarter of 2001, bears ask?
Other bear arguments are that retail is a low-margin business; online fulfillment costs are high; brand loyalty loses to price loyalty on the Internet -- shoppers just look for the lowest price. To remake itself, Amazon should focus on inventory-free sales (electronic files) rather than lawn furniture. (And I agree -- I didn't see the need for Amazon to rush to sell lawn furniture before all the competition beat them to it!) Finally, no matter what, the bears say that Amazon will never be profitable enough to justify its $13 billion valuation, which is 20% higher than century-old Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>.
The Amazon bull and bear arguments are now in a stalemate -- or in a wait-and-see mode. Until the company releases more financial data, as it will on October 24, there is nothing new to chew on. Amazon must begin to show, using only numbers, that its business will work.
The company's management models long-term return on invested capital (ROIC) in the triple digits, or three to four times higher than a traditional retailer. The company's investment base will be much smaller than other retailers that move just as much inventory. Some believe that free cash flow at the company will fund operations and growth indefinitely, and could even earn enough interest to start paying down debt. Finally, management states that profitability will come when the time is right. Bulls must put their trust in management's word and in their own assumptions for the future of e-commerce and its leaders.
I assume that consumer e-commerce will be very, very large, all around the world. So far, Amazon is the leader. The Rule Breaker Port invested in Amazon with a 10-year outlook. It has been three years. There are several more to go. For now, the bull argument must still be one about the promise of e-commerce, while admitting the risks. As an investor with a strong opinion on the subject, you either see long-term potential for e-commerce and for Amazon in particular, or you don't find the model attractive or even viable. Both sides of this argument remain largely subjective and almost entirely unproven. So this, by necessity, is the starting and ending point of my argument today. There is no definitive right or wrong yet. There are only beliefs about potential or the lack of it.
That said, my bearish opponent, Paul Commins (TMF Buster), is likely going to provide us with one of the best bear arguments that we've ever read about Amazon. Paul is thoughtful, deliberate, and very thorough. I'll do well to save the rest of my words for a rebuttal to his argument.
The Bear Argument »
