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November 2, 1999

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Amazon.com

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Subject:  Re: Bears, Bulls, and Beanies
Author:  RJMason

coralville wrote:
An analogy would be to think of AMZN with its still developing business plan as being like a new born baby. Imagine now having to project the future income potential or "value" of the infant once grown. [AMZN bears] measure the baby's coordination, language skills, IQ, etc. and in their future projection, they simply imagine a larger version of the newborn. Clearly, a big, 30 year old infant is not going to earn all that much.... Bulls on the other hand recognize that the maturity of the infant will involve qualitative as well as quantitative changes, many of which will not be predictable.

Coralville, your analogy suggests that the over-quantitative bears have never seen a baby grow to adulthood before. But in fact, we have countless informative examples of other companies' life cycles. We know that the great majority of companies die in infancy, a small fraction grow to be healthy adults, and a tiny, tiny percentage become super-fit, world-beating, record-breaking specimens, like Olympic athletes.

So, consider the AMZN baby. The extreme bears see it dead in a couple of years due to overeating and competition from bigger babies. The moderate bears see it maturing but ending up as a homeless person or in prison. The extreme bulls assume it will become wealthy and successful, eventually ruling the most of the civilized world. Then there are the rest of us who check every quarter to see how healthy the baby is and whether it is still developing okay.

By this yardstick, anyone who plans to hold Amazon stock for the long term is an extreme bull. If Amazon is going to grow into a moderately healthy, mature retailer, then there is no point whatsoever to buying AMZN stock at these prices. You would only buy AMZN with the belief that this is a baby in a million, a baby truly unlike ordinary babies.

To extend your analogy a little further, consider the Amazon infant at conception, or birth. At the outset, there is no particular reason to think that this baby will not grow into a healthy, productive adult. Other babies of the same general sort (catalog retailer) have been known to thrive and grow. It has, at least, as good a chance as other babies of having a good life.

But then the notion spreads that this baby's fitness and health go beyond the norm--this baby will grow to be a highly-paid professional sports star, a world champion. The child becomes surrounded by a crowd of Don-King-like hypesters and hucksters, trying to get a piece of the child and cash in on its eventual success.

In some ways this is good for the baby. It gets a lot of attention, it is given things that most infants are not given.

But in other ways the weight of expectation is a terrible burden on the child. Under the influence of its supporters, the AMZN baby sacrifices ordinary profit, takes on a billion-dollar debt load, and spends, spends, spends to "build mindshare." This is like the infant athlete being subjected to an adult-style weightlifting regimen and given anabolic steroids. Paradoxically, instead of creating a super-athlete, this may merely destroy the ordinary development of the child and prevent it from becoming the normally-healthy adult it could have been.

If, instead of becoming a moderately-profitable retailer, Amazon does end up filing for bankruptcy, I think the AMZN hypesters will be responsible, for egging it on to its demise.