Can someone please tell me why that wouldn't be a good long-term strategy (i.e. 5 to 10 years out)? In the long run, I don't see AMZN being worth 65 times Barnes and Noble. I could maybe see it being worth 2-10 times.
I mean, Barnes and Noble is huge. Presumably at some point, they are going to get back market-share and/or margins in relation to Amazon.
Note: I currently hold no position in either stock. I bought some BKS 12 months ago, and sold it after 6 months for a nice profit and have sat on the sidelines since...
I probably wouldn't actually implement the long/short strategy I'm describing - although I might do it a little bit - but still, I'm curious of anyone can point out some flaws in the thinking?
> "In the long run, I don't see AMZN being worth 65 times Barnes and Noble."
In the long run AMZN will be worth infinite time Barnes and Noble.
> "I mean, Barnes and Noble is huge."
Huge is relative. Amazon's annual revenue growth is now greater than B&N total revenue. In other words, Amazon grows more in 1 year than B&N has in it's entire history. How long before Amazon grows more in 1 quarter than B&N has in it's entire history?
> "Presumably at some point, they are going to get back market-share and/or margins in relation to Amazon."
Why would you presume that? It's been a one-way wipe-out since Amazon came into existence. And it's been getting worse and worse for BKS. Even as Borders revenues declined by $1B over the past couple years, how much of that did BKS pick up. Absolutely zilch. Not only did Amazon absorb all of Borders revenue decline, it's been eating away at BKS as well.
There's no saving BKS. It's just a question of how long it takes to play out.
Thanks for the input. I guess the question boils down to this: Will people continue going to brick and mortar bookstores, 5 - 50 years from now?
Maybe not, no?
Still, even if we do away with bookstores, and all sorts of stores, it seems like it would still be nice to have a retailer who selects products (Books, appliances, etc.) and allows you to view them in-person, with your own hands... It seems to me that both the selection and the ability to view them in-person bring a lot of value... It could end up being a more general retailer, instead of specifically a bookseller. The books they show you could be viewed on a Kindle, for instance, without the need to have the book.... You would still have a retailer that offers you cool things they have selected, ala Brookstone...
This wouldn't be a good hedge as the market caps and leverages (i.e. current ratios) of the companies don't match.
Stock prices tend to go up and down with the overall market, with large caps like AMZN being less volatile than small caps like BKS. The same is true for companies with lots of debt.
If the market in general goes up, BKS will benefit more than AMZN, but if the market in general goes down, BKS will be hurt more than AMZN. The fact that the market usually goes up is one of the main reason value strategies work.
So this would end up being a directional bet based on the direction of the market in general and the e-book/ book industry in particular.
If you're REALLY bullish on the industry you'd be better off just going long BKS. If you want to reduce risk, use a traditional gorilla game strategy on the rising e-book industry and invest in both companies (and any other major player) then sell off the also-rans only AFTER the digital market is mature (i.e. not growing by double-digit margins) or the company actually gives up (which would probably give that companies stock a short-term boost, due to the negative margins on e-books).
If your looking for a hedge, look for similar sized companies. Apple and Amazon might work. Or BKS and BGP.
Thanks for the input popnfresh, good ideas. Just going long BKS might be the better move.
Anyways, as for your rule of thumb "look for similar sized companies", that does sound like a great rule of thumb.
Of course, Rules of thumb were made to be broken, when the time is right :)
I think you're half right. If I shorted (which I don't), I'd short Amazon. It's way bloated right now.
To LONG BKS first means that you think it'll still be public in 5 years. On top of that you think it'll be back up in 5 years. Well, you could probably say that about any stock. We're just coming out of the hardest recession we've seen in quiet some time, and it's a jobless recovery at that. 90% of the stock market will be higher in 5 years.
I just know that if I don't look at their balance sheets and income statements, and instead only consider what I like, as a consumer I prefer Barnes and Noble over Amazon.com.
It's really refreshing to get out of the house and have a change of scenery, to show up at Barnes and Noble, thumb through some books in my own hands, maybe sit around in their chairs, buy some coffee, and finally buy a book.
I buy more books at Barnes and Noble than I do at Amazon.com. Is it just me? I do buy a good bit of non-book items from Amazon.com.
Anyways, couple this fact with a revenue comparison and market cap comparison, and we see that AMZN revenue is 5 times BKS, yet AMZN market cap is 65 times BKS.
Then again, Barnes and Noble's stores may all disappear, in the long run, or else continue to struggle to make a profit due to their overheard, while AMZN continues to make one handsomely?