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Jeff Bezos’ Castles in the Air

http://www.fool.com/investing/general/2013/12/18/jeff-bezos-castles-in-the-air.aspx

Daniel Jennings
December 18, 2013

In his investment classic, A Random Walk Down Wall Street, Burton G. Malkiel described some stocks as "castles in the air." The idea is that the value of some stocks is based on the hopes and dreams that investors have for those issues.

Now Jeff Bezos of Amazon.com (NASDAQ: AMZN) has come up with a literal castle in the air. Last week Bezos showed 60 Minutes how he plans to use miniature drones to deliver packages in the future. The idea is for a "drone net" to achieve same-day delivery of goods at a very low cost because the drones run on electricity rather than gas.

Bezos' drones are, of course, a classic castle in the air, perhaps even a flight of fancy. They also give us a really good opportunity to test Malkiel's theory. How do share prices actually respond to such speculative claims?

Mr. Market doesn't like castles in the air
Judging by the charts, Mr. Market doesn't like castles in the air very much. 60 Minutes showed Bezos and his drones on Sunday, Dec. 1, 2013. Amazon.com closed at an all-time high of $393.62 a share on Friday, Nov. 29. On Monday, Dec. 2, 2013, Amazon fell to $392.30. By Thursday, Dec. 5, Amazon.com's shares had fallen to $384.49. That means the company lost almost $10 per share in value.

To be fair, the entire market fell during that week, and investors may have been responding to reports of weak retail sales over the Thanksgiving weekend. At the end of the day, after all, Amazon.com is a retailer.

Yet I do have to wonder if investors are getting skittish and afraid of a tech bubble. Google also reported a slight decline early in the first week of December before rising to a new high of $1069.87 a share on Dec. 6, 2013. Amazon.com also regained some of its value, but not nearly as much as Google did.

The market, it seems, wasn't that interested in Mr. Bezos and his wild claims. Instead, the market seemed to be focused on overall economic news as it fell because of reports of poor retail sales early in the week and it rose on a good jobs report on Friday.

Is Amazon.com for real or a castle in the air?
The question remains, though: is Amazon.com just a castle in the air? Not if you look at its trailing-twelve-month profit to equity ratio, which was an astronomical 1358.14 on Dec. 6, 2013. That figure alone seems to justify Amazon.com's stock price. Amazon.com's revenue is also impressive; it reported TTM revenue of $70.13 billion on Sept. 30, 2013. That's impressive considering the fact that another investor favorite, Netflix (NASDAQ: NFLX), reported revenue of just $4.145 billion on the same day.

Like Amazon.com, Netflix can also be described as something of a castle in the air. Much of the interest in the company stems from its unproven business model of producing television shows that will be released directly to the public.

At the end of the day it looks like Malkiel, like many experts, was both right and wrong about castles i