Amazon's Margins
...don't forget the margin for error

by Jeff Fischer (

ALEXANDRIA, VA (Sept. 21, 1998) -- "In Africa a thing is true at first light and a lie by noon..."

That line is from Ernest Hemingway's next book -- his final unpublished novel -- that should be released in the summer of 1999. The lengthy manuscript has been under glass for the past three decades (compounding in value, surely). Titled True at First Light, the book is a fictionalized account of an African safari taken in the 1950s. Today, the line quoted above describes the stock market perfectly: What was true at first light was a lie by noon.

Stocks fell out of bed to begin the day, down sharply by the time most people were pouring their second cup of coffee. By noon the situation appeared different. A few hours later, the morning was proven a lie. Stocks rebounded and began to rise from Friday's prices, ending the day higher as the waning afternoon sun descended from its zenith. The S&P gained 0.37%, the Nasdaq added 1%, and the Fool Port roared ahead 3.4% due primarily to strength in Internet stocks.

One of only two Fool investments to lose ground was Starbucks (Nasdaq: SBUX). The company is now trading at its lowest valuation (to book value and forward earnings estimates) since coming public on June 26, 1992. Starbucks trades at 24.8 times management's earnings projection of $1.20 per share for fiscal 1999 (which ends next September), and the company is priced at 3.5 times its book value of $8.50 per share. For reference, the $1.20 per share estimate is the low-end of management's range and it represents 35% growth over 1998.

Although the near-term stock movement doesn't represent the company's business success, many Fools are still asking, "What's goin' on?"

This weekend I'm going to Seattle for the annual Starbucks analyst conference. At the conference, we'll hear from the company's management -- the CEO, COO, CFO and many others -- and we'll be updated on the new and ongoing happenings at Starbucks. The main meeting is all day next Monday, the 28th. Upon returning, we'll have the latest scoop on the bean leader. I only know three things for certain right now: 1. There will be free coffee at this conference. 2. It will be very good coffee. 3. I'm looking forward to the event. Oh, and number 4: We'll probably still own this stock come the year 2008, and happily so, assuming that management continues to execute. In the meantime, I love what the company is doing.

Yes, I said that: "Love."

You often hear people state, "Don't get emotional about your investments." Of course, they should be saying, "Don't get emotional about your investments beyond a state of reason." Other than that, you should very well be emotional about your companies -- always. You should believe in them, love and respect what they're doing and what they stand for, and you should know them like a great old friend.

If you want to invest without any emotion, we have little to talk about. I don't know any age-old investing genius who achieved success without using his or her brain and making investment decisions based on genuine knowledge -- and with knowledge comes emotion.

Speaking of emotions... (Nasdaq: AMZN) added over $5 without reason but for volatility. The stock continues to waffle. A few weeks ago, I began some Fool-analysis on the company and today -- ta da! -- it continues. On our Amazon Web message board, I posted margin analysis from 1997 to 2001, with everything beyond the last quarter being estimates, of course. The numbers also show customer account growth and average spending per account estimates, so that anyone can determine the estimated revenues and losses over the years. (It comes to over $1 billion in revenue in 2001.)

Over the past month, analysts have lowered Amazon's earnings estimates due to acquisitions as well as interest expenses acquired. I've also tweaked my numbers as compared to the ones shown here three weeks ago. The analysis of the business's possible margins is based on analyst numbers and competing bookseller numbers, and assumes the forces of economics and size.

Generally, these numbers (that I'll link to in a moment) show the possibility for profit in 2001. Of course, remember that these are only estimates, and that the Fool invested in expecting losses until the year 2000 or later. We invested in the business initiative that Amazon is showing (while knowing that start-ups are usually money-losers for years) and on the premise that eventually the business model will reap reward.

Even though the margin analysis is interesting (in my opinion), the initial story for Amazon in its unprofitable years is one of cash flow. Last quarter the company was cash flow positive in the face of growing losses. We'll continue to discuss this and we'll see, soon enough, how the third quarter developed. As long as Amazon is cash flow positive, the prospects for growing its business are much better. As for net earnings: other leading booksellers achieve them. Amazon could too, once it needn't spend so much.

You can study the numbers on our Web board by clicking here. Of course, feel free to post any response or question on the message board. We'll continue this thread with more explanations after you look over the numbers today. Finally, a note: I'm deciding on last week's contest winner among a few remaining posts, and I'll share the winner and email the Amazon gift certificate to them the next time I write this column.

Next up:

3Com (Nasdaq: COMS) continued its mini-rally. The company will announce first quarter earnings tomorrow (or Wednesday) and $0.20 per share is expected. As shared in the June conference call, 3Com began fiscal '99 with a brand spanking new product line. The company is expected to earn $1.29 per share this year -- it trades at 24.8 times that estimate. The first quarter could provide great insight as to the estimate's worth.

Finally, today KLA-Tencor (Nasdaq: KLAC) announced a new inspection technology. Last week I said that we don't write about the company often, or know enough about it. That statement bore fruit. Within a week, we'll run a Fool column written for us by a Foolish KLA-Tencor employee. He'll soon explain various aspects of the business and its future right here.

Check out the message (linked above) and please share any thoughts.

Fool on!

[Correction: Friday's column initially stated that Iomega announced the sale of its 15th millionth Zip "yesterday." In fact, this announcement was made at the end of August. The Fool apologizes for the error, which was corrected on Saturday.]

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09/21/98 Close

Stock Change Bid ---------------- AMZN +5 13/16 85.50 AOL +4 29/64 102.38 T - 15/16 58.06 DJT + 1/4 3.25 DD + 1/4 58.19 XON + 1/16 68.19 INVX + 5/16 10.94 IP --- 43.56 IOM + 1/16 4.19 KLAC + 15/16 23.31 LU +1 1/8 73.88 SBUX - 1/4 29.81 COMS +1 5/8 32.06 TDFX + 1/4 9.38
Day Month Year History Annualized FOOL +3.39% 11.79% 28.69% 331.88% 42.52% S&P: +0.37% 6.93% 5.51% 123.36% 21.49% NASDAQ: +1.00% 12.09% 7.01% 133.33% 22.78% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 102.38 2715.26% 9/9/97 580 19.11 85.50 347.39% 5/17/95 1960 Iomega Cor 1.28 4.19 227.04% 10/1/96 84 LucentTech 23.81 73.88 210.29% 4/30/97 -1170*Trump* 8.47 3.25 61.62% 8/12/96 130 AT&T 39.58 58.06 46.70% 2/20/98 200 Exxon 64.09 68.19 6.39% 2/20/98 215 DuPont 59.83 58.19 -2.75% 2/20/98 270 Int'l Pape 47.69 43.56 -8.66% 8/13/96 250 3Com Corp. 46.86 32.06 -31.58% 7/2/98 235 Starbucks 55.91 29.81 -46.68% 8/24/95 130 KLA-Tencor 44.71 23.31 -47.86% 6/26/97 325 Innovex 27.71 10.94 -60.53% 1/8/98 425 3Dfx 25.67 9.38 -63.48% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 72686.25 $70104.38 9/9/97 580 11084.24 49590.00 $38505.76 4/30/97 -1170*Trump* -9908.50 -3802.50 $6106.00 5/17/95 1960 Iomega Cor 2509.60 8207.50 $5697.90 10/1/96 84 LucentTech 1999.88 6205.50 $4205.62 8/12/96 130 AT&T 5145.11 7548.13 $2403.02 2/20/98 200 Exxon 12818.00 13637.50 $819.50 2/20/98 215 DuPont 12864.25 12510.31 -$353.94 2/20/98 270 Int'l Pape 12876.75 11761.88 -$1114.88 8/24/95 130 KLA-Tencor 5812.49 3030.63 -$2781.87 8/13/96 250 3Com Corp. 11715.99 8015.63 -$3700.37 6/26/97 325 Innovex 9005.62 3554.69 -$5450.93 7/2/98 235 Starbucks 13138.63 7005.94 -$6132.69 1/8/98 425 3Dfx 10908.63 3984.38 -$6924.25 CASH $12005.75 TOTAL $215941.56

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