Amazon as C-K?
No way, but...
by Tom Gardner (

ALEXANDRIA, VA (Oct. 28, 1998) -- Two announcements before diving into today's column on

First, imagine my embarrassment when I arrived to the office this morning to learn that I'd blundered on a key number in yesterday's report. Ely, on our web message boards, correctly pointed out that Coca-Cola's earnings actually declined to $888 million from $1 billion in the same period last year. This means that while gross margins did rise, the company's net margins actually fell 12%. A result of difficult currency translations and Coke's ongoing climb into new markets, the decline in net margins is a concern, but not a catastrophe. I apologize for the blunder.

Second, if you'd like to see me make fewer errors in this column, and if you enjoy the tone and content of this corner of Fooldom, consider applying for a full-time job to help manage and edit the Cash-King Portfolio. Effective this week, The Fool will be hiring a full-timer to help administer to and guide the ongoing affairs of this portfolio. If you'd like more information on this, please e-mail and we'll forward the job specifications out to you tonight. We're looking for a few good people with the mettle to be Fools.

And now, on to (Nasdaq: AMZN).

In mid-October, Rob and Al continued a debate that David and I started on The Motley Fool Radio Show two weeks ago. We asked Foolish listeners which they believed would offer investors greater returns over the next five years, or Microsoft. In response to that, Al wrote I'll Take Microsoft. Then Rob followed up with A Vote for Amazon.

Today, I'd like to dig around into why has been so successful up to this point, whether Cash-King investors could've spotted it, and how to manage an investment like this in your portfolio.

For starters, it's very clear that doesn't offer investors Cash-King qualities. The company's gross margins are just 22.6%. Net margins are non-existent. Through six months of this year, has lost more than $30 million (AMZN Snapshot). And the company matches cash and long-term debt, dollar for dollar; Amazon has around $330 million of both cash and debt. In the altered words of Lloyd Bentsen, "I've met Mr. Cash-King, and I can assure you, Mr. Amazon is no King."

At the same time, Amazon is up around 300% over the past year (Amazon Chart), outperforming every single company in this portfolio. While the company doesn't meet many of our criteria and doesn't belong in this portfolio, heck, neither did America Online in 1994. AOL appeared to be losing money, fighting to finance its survival, and in danger of fierce competition from large media and telecommunications companies. Since 1994, though, the stock is up more than 25 times in value (AOL Chart).

Let's be very clear on this point: There are a lot of great and potentially great companies that don't meet all or even many of our Cash-King criteria. In past articles, we've talked about this in relation to Dell and Wal-Mart and Home Depot. These have been enormously successful businesses. Any one of them could've driven an investment portfolio to the moon and sent your family to an early retirement. While not Cash Kings, they merit our and your attention.

In fact, the great mistake that many in the financial media have made over the past five years is to measure the success of start-up Internet businesses with tools that should be reserved for evaluating corporate titans. Even if we choose never to invest in these sorts of mosquito companies, my advice is to never dismiss them out of hand just because they don't meet our standards for a mature business.

So how might you look at a company like Amazon?

First by studying's direction. The company has grown sales from $28 million in its first quarter as a public company, five quarters ago, to $116 million in its most recent quarter. Gross margins have climbed from 18.6% to 22.6% today. The company's Flow Ratio has always been below 0.50 -- the result of non-existent receivables and the tight management of inventory. Finally, the company has grown its customer base from the hundreds of thousands to the millions in just two short years. is no Cash-King. But there's probably something here worth studying.

My second suggestion would be to recognize that, as has been the case with so many great young companies, earnings are not yet the priority. Amazon would appear not to have lost $30 million in fiscal 1998, but to have invested that money into infrastructure and brand building. All told, in a few clear ways, has been strengthening its position through this period of dramatic growth. Substantial customer growth, gross margins edging higher, a brand gaining momentum, and tight management of the model (the low Flowie).

Mind you, I don't think the online retailer is a shoe-in for success or a lock for being the Wal-Mart of online. Amazon is now saddled with over $330 million in long-term debt during a period that the business model is not yet spinning profits. Simultaneous to this, Barnes & Noble and Bertelsmann have pumped a $200 million investment into Finally, the world of online is a fluid thing -- the leader today can so easily be the laggard tomorrow.

What might you keep your eyes on the months and years ahead? Investors in a stock like Amazon could do the following things:

1. Be rigorous in their quarterly analysis of the fundamentals;
2. Base buying and selling decisions on the direction of the financials;
3. Largely ignore the weekly fluctuations in the stock price;
4. Follow the progress of the business as a customer;

No, is certainly no Cash-King. But it may be something wonderful nonetheless. It has been since going public in 1997. But will it be a has been someday? The answer is in the numbers. And the tools to measure those numbers must fit the age of the company.

Tomorrow, I'll analyze the worldwide brand, Playboy, and talk about why it hasn't proven to be a Cash-King. And on Friday, I'll be reviewing one of the Gap's lead competitors, Abercrombie & Fitch.

Fool on!

Tom Gardner Cash-King Strategy Folder
Cash-King Companies Folder

10/28/98 Close

Stock  Change    Bid 
 AXP   +  1/16   87.00 
 CHV   -  5/8    78.50 
 CSCO  +2 1/8    62.88 
 KO    -  3/8    67.56 
 GPS   +  3/4    55.13 
 EK    -  1/8    74.50 
 XON   +  11/16  70.25 
 GM    +  1/2    62.44 
 INTC  +1 29/32  89.22 
 MSFT  +  1/4   105.69 
 PFE   -  3/4   105.56 
 SGP   +1 3/4   102.00 
 TROW  -  13/16  31.13 
                  Day     Month   Year    History 
         C-K      +0.72%   2.67%   8.12%   8.12% 
         S&P:     +0.26%   5.03%   6.18%   6.18% 
         NASDAQ:  +1.15%   2.57%   4.26%   4.26% 
 Cash-King Stocks 
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    105.69    35.03% 
     2/3/98   22 Pfizer        82.30    105.56    28.27% 
     5/1/98   37 Gap Inc.      51.09     55.13     7.90% 
    6/23/98   34 Cisco Syst    58.41     62.88     7.64% 
    8/21/98   22 Schering-P    95.99    102.00     6.27% 
    2/13/98   22 Intel         84.67     89.22     5.37% 
    2/27/98   27 Coca-Cola     69.11     67.56    -2.23% 
     2/6/98   56 T. Rowe Pr    33.67     31.13    -7.57% 
    5/26/98   18 AmExpress    104.07     87.00   -16.40% 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     74.50    17.98% 
    3/12/98   20 Exxon         64.34     70.25     9.19% 
    3/12/98   15 Chevron       83.34     78.50    -5.81% 
    3/12/98   17 General Mo    72.41     62.44   -13.77% 
 Cash-King Stocks 
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2536.50   $658.05 
     2/3/98   22 Pfizer      1810.58   2322.38   $511.80 
    6/23/98   34 Cisco Syst  1985.95   2137.75   $151.80 
     5/1/98   37 Gap Inc.    1890.33   2039.63   $149.30 
    8/21/98   22 Schering-P   2111.7   2244.00   $132.30 
    2/13/98   22 Intel       1862.83   1962.81    $99.98 
    2/27/98   27 Coca-Cola   1865.89   1824.19   -$41.70 
     2/6/98   56 T. Rowe Pr  1885.70   1743.00  -$142.70 
    5/26/98   18 AmExpress   1873.20   1566.00  -$307.20 
 Foolish Four Stocks 
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1490.00   $227.05 
    3/12/98   20 Exxon       1286.70   1405.00   $118.30 
    3/12/98   15 Chevron     1250.14   1177.50   -$72.64 
    3/12/98   17 General Mo  1230.89   1061.44  -$169.45 
                               CASH    $120.62 
                              TOTAL  $23630.81 
 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98