I don't now how the rumor originated that Bertelsmann would stop selling books to Amazon, but it's ridiculous. A publisher will want to make a sale however possible. They would never discriminate against a specific retailer or do anything to discourage sales. Even if they refused to sell to Amazon directly (which I don't think they even do now on a large scale), Amazon would still be able to get Bertelsmann's books through Ingram or Baker & Taylor.
Mind you that I think AMZN will sell for under $20 within the year and it will likely go bankrupt eventually, but it's still important to keep facts and rumors straight.
From the 10-K:
<<As of December 31, 1997, the Company employed 614 full-time employees. The Company also employs independent contractors and other temporary employees in its editorial, fulfillment and finance departments.>>
I know that they use literally hundreds of temp and part-time workers at their Seattle fulfillment center. They have an even larger warehouse in Delaware. Based on conversations I've had with Amazon employees, I would estimate the total number of people working for Amazon to be between 1,000 and 1,200.
<<My question. What is the likelyhood that they will fill those positions in a tight job market?>>
Tight job market?! Where else could a starving software developer work in Seattle?
Amazon will gain employees the same way all start-up, high tech companies do: they'll pay low salaries and dole out huge stock options. Unfortunately for Amazon, an $85 strike price is not drawing the very few unemployed coders in Seattle. (I believe the unemployment rate is under 3% in the metro area.) A potential Amazon employee would get a low salary and worthless stock options. I'll think Amazon will have seventy openings for quite a while.
Moreover, consider what is a fair value for the stock and how long it has been trading above that price. I don't want to start a new argument, so *bear* with me and let's say a fair value would be under $30.
Amazon has been trading above $30 since last July, I believe. They must have hired well over half their staff since then. For all those employees hired since then, the options would be worthless as the strike price would be above the market value.
Perhaps someone familiar with labor law can answer the following questions: can the strike price of stock options be adjusted to market value, or is it constant? Is it common for employees to re-negotiate their stock options? How would Amazon respond to employees if a drastic drop in the price of the stock was to occur?
This could be a major issue Amazon will have to face in the future. Another gem from the 10-K:
<<Competition for qualified personnel in the Company's industry is intense, particularly for software development and other technical staff. The Company believes that its future success will depend in part on its continued ability to attract, hire and retain qualified personnel. See "Additional Factors That May Affect Future Results -- Management of Potential Growth" and "-- Dependence on Key Personnel.">>
It's ironic that the longs who so emphatically believe in Amazon's future are partially responsible for destroying it.
<<??After three years: sales tax will be applied more broadly on mail order and Internet purchases -- i.e. new taxes.<<
This is a possibility, not a certainty. It's still up in the air at this stage if I read the article correctly.>>
The article states that the House bill will:
<<Set up a congressional commission to find ways to tax Internet and mail-order sales.>>
Notice how it doesn't say ". . . find ways to NOT tax Internet sales." This is definitely a plan for new taxes. You're right in saying that new taxes are a possibility not a certainty, but "find ways" sounds like a certain possibility to me. And those new taxes will now come in three years, not six. There's no way this announcement could be interpreted as good news for Amazon.
<<The Supreme Court has ruled that businesses can't be required to collect state and local sales taxes unless they have a physical presence in the state. That has made it impossible to collect taxes on most mail-order sales, and states feared the same rules would apply to Internet sales.>>
Notice the language: states FEARED. . . That sounds like the states aren't very happy with the present system. Why? Their citizens get away with making purchases that they don't have to pay sales tax on. A state is going to fight for the right to collect more sales taxes, not less.
<<The commission would have two years to devise a plan for taxing Internet and mail-order sales.>>
Most mail order sales are not being taxed right now, but the states want to. The moratorium would basically hold off from collecting any new taxes for three years so the Feds and National Governors' Association can come up with a plan to apply the new taxes fairly.
This is not good news for Amazon. One of the few advantages they have over BKS is that they charge sales tax in less states. (One vs. Four) This bill would level the playing field, i.e. bad for AMZN, good for BKS and BGP.
<<In any event, the moratorium is still three years, so that's a 3 year tax free guarantee :) >>
If you read the bill, it just means that the status quo will remain in effect for three more years. The status quo is not "tax free" Internet sales. Internet sales are taxed in the same manner as mail orders.
In the meantime, the government is going to come up with a plan to collect sales tax that will satisfy all the states. State governments are not happy with the "physical presence" clause and would prefer to collect sales tax on any purchase made by each state's respective citizens.
Next three years: same laws as now -- it's a moratorium banning new taxes, not old ones.
After three years: sales tax will be applied more broadly on mail order and Internet purchases -- i.e. new taxes.
I think that long-term holders are going to lend calls before the derivative earnings options expire, which the shorts will sell before June 1. Then again, I think that this stock will drop to less than $20.
Borders reported Q4 sales of $858.8 million. Q3 sales was $477 million. That's an 80% increase in Q4 sales over Q3. Their P/S ratio is 1.1.
Amazon reported Q4 sales of $66.0 million. Q3 sales was $37.9 million. That's a 74% increase in Q4 sales over Q3. Their P/S ratio is 13.3.
I'll let you figure out the rest.
<<Sounds like they are doing a fabulous job at one thing...
raising the price of their shares. But then that's why a lot
of people take their ideas public. That's where the money is.
Take any small business with a grand plan, sell it to the
public, and vwalla! $$$$$ And they scored big on this one.>>
What would make you say something like that? Amazon is in the business of selling a stock instead of books? You make it sound like Bezos used to be a hedge fund manager or something.
At last, somebody else who's still interested in assessing Amazon as a company! I grow tired of debating the same "Is Amazon overvalued?" question because, IMHO, the answer is so obvious.
The relationship between Amazon and Ingram is very strong. (Actually, the relationship between Ingram and just about any book seller in this country is strong.) Ingram has been supplying about half the books that Amazon sells, but Amazon doesn't get any better discounts from Ingram than any other retailer. That is to say, the relationship between Ingram is "strong", but not "special."
Even though I'm extremely bearish about the future of AMZN, even I would think about buying it (at $15) if Ingram bought out Amazon. Ingram has the distribution network; Amazon has the Internet reputation. They would be a great match. Too bad that AMZN is trading for about five times what it is worth, making a buyout impossible.
The higher the price of the stock, the less likely Amazon will find long term success. Stock options become worthless if the stock is commonly recognized as being extremely overvalued, which makes it hard to attract top-notch employees. Moreover, the high price of AMZN makes a buyout by a company like Ingram impossible. It's ironic that the people who believe the most in Amazon's potential are the ones who are ruining it.
I discussed the relationship between Ingram and Amazon in more detail in a post on the Motlet Fool board. Read it at:
Four events that can cause the bubble to burst:
1) The price of AMZN gets so high, no shareholder can resist selling.
Timeframe: any day.
Scenario: Shorts squeeze the price so high that even devout long holders of AMZN can not ignore 50% - 100% easy profit.
People begin to sell, nobody is around to buy. (There are only a limited number of Fools.) If this happens at this level (low
$70's), it will likely happen this week. Many people who still believe in the long term success of AMZN are beginning to find these
sky-high prices very tempting. However, if the price holds out for a couple of weeks, then the bubble won't burst until another
squeeze or another event like those below.
2) Growth rates are lower than hyped-up expectations.
Timeframe: next quarterly report.
Scenario: The dramatic Q4 increase in revenue due to Christmas sales leads to a seemingly lackluster Q1 report. Revenue increases minimally, or worse, decreases over Q4. A decrease would shock many investors back to reality -- high growth can't continue forever and there's a ton of competition stealing market share. However, if Amazon has another quarter of double-digit growth, investors may not face reality for another quarter.
3) Cash begins to run out and Amazon must obtain more money to survive.
Timeframe: within the next twelive months.
Scenario: Amazon never progresses from their start-up phase and continues to post increasing losses. They spend the last of their funds in a last ditch mega-advertising gain to boost sales and distract investors from the reality of #2. Operating losses continue to grow and investors begin to lose patience. However, revenue growth may be lower than expected, meaning lower losses (since they lose money on every sale), allowing Amazon to survive.
4) The internet bubble finally bursts.
Timeframe: should have happened six months ago.
Scenario: Investors finally wake up from their delusional worlds and realize that companies like YHOO, ATHM, AOL, and even the venerable MSFT are not money trees. An industry wide shakedown occurs, bringing down AMZN with the others. Same effect could happen with the inevitable crash in the overall market. However, if pigs begin flying, hell freezes over, and the Franklin tree blossoms, there would be some credibility to the new paradigm that says the market will never stop going up.
<<You are incorrectly assuming that they are spending a fortune on shows like Seinfeld, etc.>>
It's ironic that you would say that because I SAW just an ad for Amazon last night on Seinfeld.
Note to self: proofread your posts
<<You are incorrectly assuming that they are spending a fortune on shows like Seinfeld, etc.>>
It's ironic that you would say that because I just an ad for Amazon last night on Seinfeld.
Next time you need an out of print book, go to:
They have over *3.4 million* out of print books. No mark ups on any of the books by Interloc. Out of print book dealers pay a subscription fee to have the right to post available books on the site.
All Amazon does is search all the other out-of-print websites for the book you're looking for. They make most of their purchases at Interloc. They buy the book, mark it up at least 20%, some times more, and re-sell it to the ignorant consumer. (A little Amazonian bird told me about this.) They have very few direct relationships with out of print book dealers. Why do you think they can never give you a price or expected availability date for out-of-print books?
Just of curiosity, check Interloc to see if you're book is available there and to see how much cheaper the price is. Also notice how Interloc tells you exactly who is the holder of book, a detailed description of the condition, and a price.
Do you still want to buy the stock of a company that took advantage of your ignorance?
<<I begrudgingly sold 1/2 my position.>>
What happened, Ron? Did you finally sit down and work out the numbers and find out that they just don't add up?
Congratulations on your winnings! You made a killing. If I remember, you got in under $30. Even if you hold the other half, you'll come out even, at least. You're lucky to have been able to cash out at the peak of hysteria.
Don't forget, there's no such thing as too much money. Don't let the rest of it spoil.
My sincere congratulations again.
I've been wrapped up in a debate with Jeff Fischer of the Motley Fools. The debate is centered around many of the same issues being discussed on this board. Check out my response at:
"I agree with Fredboy. All of a sudden they need $75 million for distribution facilities? That is a hell of a lot of money for what sounds like 'buildings'."
What?!! You mean to tell me that Amazon has to build distribution facilities?! I thought the entire business could exist at a URL. Gee, they have to build physical things too? That must give B&N and Borders a huge advantage since they've had distribution facilities in place for over a decade. I thought Amazon had the head start...
Okay, now we can talk about FACTS! Here's my responses:
"1. Gross profit is 19.5 %"
This is good? All this number means to me is that Internet bookselling is a low margin business. Compare this number with gross profit margins of 35.9 % for B&N. Amazon may avoid costly things like superstores and espresso stands, but they give up a huge chunk of the profit in return.
Moreover, they are take on additional expenses such as multi-million dollar servers (literally), very high-priced programmers, hundreds of grunts who must hand pack each book, the cost of shipments gone awry, and ads to spread their name to the other 99% of the population that have never heard of Amazon.com. This is evidenced by the fact that operating expenses have been running about twice the levels necessary to break even.
Fourth quarter is typically the only profitable quarter for most booksellers, and Amazon wasn't even close to making a profit last quarter. They spent $22.7 million for $12.9 in gross profit. If they could've cut expenses *in half*, they would've made a whopping $1.5 million. Even if they could make that much every quarter of the year, the P/E ratio would still be a sky-high 250!
Think about those two assumptions I made to arrive at that number: I assumed expenses could be half of current levels, and they could have Christmas four times a year. All that to come up with a P/E ratio of 250! Doesn't that seem completely absurd to you, even for a high-growth company? They are high growth, aren't they?
"2. AMZN added 570,000 customers in 4th qtr 1997"
And your point is? To obfuscate the pitiful levels of revenue? To ignore the fact that sales growth isn't spectacular? In 1997, Q3 to Q4 revenue grew 74%. Make the same Q-to-Q comparison for B&N and Borders in 1996. (1997 numbers will be released later this month.) B&N revenue grew 66%. Borders revenue grew 76%. I'll say it for the hundredth time, 74% revenue growth is seasonal. Neither you nor the Fools have ever responded that argument.
This company relies on very high rates of growth before it's business model will be successful. They need to triple revenue, at least, in order to even break even. They're growing at the same rate B&N and Borders was at this time last year. Same growth rate, but AMZN has a price-to-sales ratio of 10, whereas the other two have a P/S ratio around 1 and they'r making money! Why is it so hard to understand what's wrong with that?
"1. Cash on books of 125 mil is not creative accounting. They got the financing in December and hadnt spent it yet."
Ron, I'll give you that one. It's not that you're right, but it's just not worth arguing over. It won't make much difference in the long run, at least not compared to the above issues. I didn't mean to imply that there are top secret meetings where the board of directors conspires to dupe the investment community. Hey, this isn't Canstic writing this post......;^)
My intention was to point out that they are waving around $125 million in cash that was borrowed at high interest rates or
left over from their IPO. (Compare AMZN's LIBOR + 3.5% to 4.0% with B&N's LIBOR + 0.675% credit line.) So they can borrow money,
big deal. Judging from the interest rates, it is money that was lent reluctantly. I'd rather see them make some. Also consider
that their current liabilities account is now running at $44 million. If they don't start making money real soon, then that $44
million is going to have to come from that pile of borrowed money. Besides, as you pointed out, the cash is just a blip on the radar
screen. AMZN is a high-flying jet that is running out of fuel. That's the real story.
Whew, Ron, I'll need a few days to rest! I expect to see some numbers from you soon.
"One other thing, you and Rimpinth bash the valuations, ask questions about the apparant absurdity of the accounting and operations, yet, neither of you ever answer back to the rebuttals to your questions."
Ron, settle down! I didn't know you were sitting in front of your computer waiting for me to respond to your rebuttals. Usually, your rebuttals are based on hype and unproven speculation, so there's no way for me to respond to them. I like to use numbers and reason, you spew out speculative visions of the future that are impossible to disprove.
About a month ago, I asked you to tell me revenue levels, profit margins, and a P/E ratio which could justify $60 a share. I asked you to tell me in how many years it would take Amazon to achieve those levels. Look at the post again:
Here's what you said with some my rebuttals:
"If the company continues to grow at lets say 100 percent a year (they grew 800 percent last year) for 3 years , they will be over a billion in sales."
How can I prove that Amazon will *not* grow at, let's say, 100% per year for the next three years? That's like proving that
there's no unicorns living on Neptune. I already stated that Amazon's posted a 74% gain during Christmas, which is worse than
Border's 76% growth during the Christmas quarter of 1996. ('97 numbers haven't been reported yet.) I can say that there's no sign
that Amazon will triple revenue three years in a row, but I can't *prove* that they won't. You can make up the most fantastic
sales figure you want, and there's no way that I can prove that you're wrong.
"I think with their higher gross profits, non cash charges due to their intense capital outlays now, new business ventures (music and videos) that they can do just fine."
Again, the same issue here. It's all speculation about the future. Amazon still isn't selling CD's, videos, or advertisments. They still don't have high gross profits. That's all I can say. You can say whatever the hell you want about the future and there's no way for me to prove that you're wrong. Dream on, Ron.
I'm still waiting for some concrete numbers from you. Tell me the following five things and how you arrived at them:
1) Sales. What rates of growth, over how many years, and to what levels? 100% a year for three years is vague and you don't give any reasoning why you came up with that number.
2) Profit Margins. What percentage and why? "Higher gross profits" is vague again. What other businesses are you basing this number on? And don't tell me that Amazon is a completely new business model and that you can't compare it to any other company. Book sellers and mail order companies have been around for a hundred years. The only thing new is that the catalogue is made of bits and bytes rather than paper and ink.
3) PE ratio. Just give me a number and tell me why you're using it.
4) A general timeframe. You'll be speculating (as usual) of what will happen in the future. Tell me when you expect Amazon to achieve the levels of revenue and profit margin that you're predicting above.
5) Finally, calculate [(Sales * Profit Margin) / (Shares outstanding)] * PE Ratio. That number should be a fair estimate of what the stock is potentially worth within the timeframe you specify.
I can't disprove your fanciful dreams, Ron. Stop repeating your same-old, same-old visions of "better times to come" and let's work with some numbers so that we can have a serious debate.
P.S. I think that the market will provide the mother-of-all-rebuttals for me.
On Wednesday, AMZN traded at its lowest volume -- 90,000 shares -- since October 13th, 1997. (December 26th excluded.) I don't know exactly what that portends, but it is an unusual event in any case. A little over two weeks after that day, the stock traded at its all time high of $66. Hmmmm. . .
The stock traded at its highest volume on September 22nd with 1.4 million shares traded. That day was exactly two weeks after the Fools buy announcement. During those two weeks, the stock climbed from 36 to 54 -- an even 50% gain. That's the equivalent of Microsoft climbing to $235 two weeks from now.
I'm sure it was just a coincidence. Definitely not investor hysteria.