The REAL Story on Amazon
Thursday, June 11, 1998
by David Gardner
ALEXANDRIA, VA (June 11, 1998) -- The Fool Portfolio continued its recent surge, painting the scoreboard black amid a sea of red. We rose 0.38% on a day that saw the market get beaten up. The S&P 500 lost 1.59%, while the Nasdaq lost 1.33%. The Fool Portfolio now exceeds both by 10 percentage points on the year.
Amazon.com (Nasdaq: AMZN) carried the portfolio today. We climbed aboard the back of that mighty river nine months ago, and today for the first time we get to sound the Triple Chime.
The Triple Chime?
Yeah, sure. Long-time readers of this column already know about our Double Gong, which is clanged loudly upon a new stock's first doubling for the Fool Portfolio. But after that, the sounds get quieter. When a stock triples, as just occurred with our AMZN investment today, we sound The Chime. When Iomega rises back over a 400% gain, as it did recently, it's just a tap on the triangle. America Online's status as a 23-bagger for this portfolio merits only the faintest whisper.
But let's get back to the Triple Chime. Let's sound it now:
OK, The Chime behind us, let's look more at the stock today. Amazon.com recorded one of its best days ever, rising $8 5/16 (+15.4%) to close bidding $62 7/16.
Long about 1 AM last night, amid my typical late-night meanderings across the Internet, I tapped into Amazon.com as I am wont to do and became one of the first people to see its brand new redesign. If you click in, you'll see the key change in Amazon, today and forevermore: It's not just books. In fact, you notice right there at the top the two tabbed options: Books and (now) Music.
(And there's already room for "Movies," next, and "Software," and who's to say they won't put "Computers" next to those one day too?)
Since the first day we bought the stock, our message boards both on the Web and on AOL have been vocal, regular, and bearish. Turbo bearish. It's hard to find any bulls on this stock. "Amazon's business model will never make money," we'd read, though the same people would then turn around and say, "Barnes & Noble and Borders are going to bury Amazon!" That was interesting to me because I find contradictions funny. You can't very well say Amazon's business model is inherently flawed, and then turn around and suggest that it'll get beaten by other companies that are suddenly trying to copy (not as successfully, I think) its business model!
The criticisms have gone on and on, whether it's that books were too limited a market or the company's recent bond float was a desperate financing ploy (rather than a way to get $320 million to grow its business with no strings attached for five years, without diluting long-term shareholder value). It all reminds me so much of our early investment in America Online, when the company "wasn't making money" and "would get killed by Microsoft" and had a massive short interest and the media all against it... the same media companies, in some cases, that are now paying AOL millions of dollars to be on its service.
Each of the stories I've read today on Amazon's move mentions only that the company opened up its music store today. What this shows you is a world full of online news sites whose journalists have only a superficial familiarity with what they're writing about. Because it's obvious to me that a significant short squeeze is at work, here.
The music store debut, eh? Was this news? Absolutely not. Amazon announced that it would offer a music store months ago. To those who'd followed the company closely, that announcement in itself wasn't news. Because for months before that announcement, Amazon had been offering various music CDs for purchase by anyone who cared to search and buy.
And even today, though no "official" announcement has been made, Amazon is selling movies and computer software through its site. The market knows all this, and we Fools know all this, even if all the stories up on Yahoo Finance don't. And when Amazon announces it's selling movies -- or that it's now the hub to purchase computer software -- you're going to see similar other Web retailers get knocked down in the same way that CDNow (the largest music "e-tailer") has recently lost 50% of its value and had to cancel a secondary stock offering.
Amazon is aggregating customers, preparing to try to become the Wal-Mart of the World Wide Web.
Case in point: As Amazon opens up music for purchase, it instantly brings 5 times as many online customers as its next biggest competitor.
Given all this, it's not surprising to us that the stock continues to rise even in the face of recently diminished earnings estimates. Fool reader Huibs pht has recently sent us a spate of brokerage estimate downgrades, that are worth mentioning here. He writes: "Everen Securities lowered 1998 earnings to -$2.10 and 1999 loss to -$1.15. Morgan Stanley lowered estimates dramatically, and now Robertson Stephens lowers to a loss of over 3 dollars for 1998 and over 2 dollars in 1999."
The market knows all this already, dear friends. The amounts that Amazon.com is losing are investments toward creating the dominant position in electronic commerce over the next 30 years. Too many Amazon.com bears look ahead only the next 30 minutes, or the next 30 days. The stock market is smarter than that.
Amazon isn't one of those stocks you apply Benjamin Graham's valuation multiples to, because you'll always be focusing on the past when investing in Internet startups needs to focus on the future.
Back to the main point, though: Given that large numbers of people have shorted the stock (that is, borrowed shares and sold them, hoping to turn a profit when they buy them back lower after the stock has dropped), Amazon is clearly benefiting from a fearful flight to close out those positions. This "short squeeze," described simply and effectively today in this post, is propelling the price up further, possibly creating an artificially high present price.
Possibly. Who knows? The only people who will "know" are those who use hindsight two months from now. If the stock remains up, they will say it was "clear" that the shares were being bid up in anticipation of further success. If the stock has dropped, it was "obvious" that it was in the midst of a massive short squeeze.
Either way, The Fool holds its shares. You see, we have not ever, are not, and never will be short-term investors in this stock or any other. Having tripled our money in the face of tremendous bearishness (from so many financial journalists, as well -- hello there, Alan Abelson!), we are in for the long haul. Amazon could get halved tomorrow in an incredible selloff following bad news for Internet stocks, or a market "realization" that the 40% rise this week is artificial value created by a squeeze. We'll still be there. This is just one of our 14 stocks, the highest risk one of all at this point. But we're not in there playing the Wise game. We're investing Foolishly.
To conclude, we worry not over short-term fluctuations high or low. If you do, dear reader, we suggest you report back to the Fool's School.
And finally tonight, check out our new Foolish 8 spreadsheet product, an answer to a long-term request from our readership for a product that gives them key information about stocks that fit our Foolish 8 attributes outlined in The Motley Fool Investment Guide. FoolMart is open for business.
David Gardner, June 11, 1998
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Day Month Year History FOOL +0.38% 6.18% 22.33% 310.55% S&P: -1.59% 0.34% 12.79% 138.78% NASDAQ: -1.33% -1.64% 11.42% 142.96% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 87.00 2292.45% 5/17/95 1960 Iomega Cor 1.28 6.69 422.29% 9/9/97 580 Amazon.com 19.11 62.44 226.71% 10/1/96 84 LucentTech 23.81 73.13 207.14% 8/12/96 130 AT&T 39.58 62.00 56.65% 2/20/98 215 DuPont 59.83 75.19 25.66% 1/8/98 115 S&P Depos. 95.91 109.41 14.08% 2/20/98 200 Exxon 64.09 68.06 6.20% 4/30/97 -1170*Trump* 8.47 8.56 -1.11% 2/20/98 270 Int'l Pape 47.69 44.81 -6.04% 1/8/98 425 3Dfx 25.67 22.38 -12.83% 8/24/95 130 KLA-Tencor 44.71 27.13 -39.33% 8/13/96 250 3Com Corp. 46.86 25.00 -46.65% 6/26/97 325 Innovex 27.71 14.13 -49.02% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 61770.00 $59188.13 9/9/97 580 Amazon.com 11084.24 36213.75 $25129.51 5/17/95 1960 Iomega Cor 2509.60 13107.50 $10597.90 10/1/96 84 LucentTech 1999.88 6142.50 $4142.62 2/20/98 215 DuPont 12864.25 16165.31 $3301.06 8/12/96 130 AT&T 5145.11 8060.00 $2914.89 1/8/98 115 S&P Depos. 11029.25 12581.72 $1552.47 2/20/98 200 Exxon 12818.00 13612.50 $794.50 4/30/97 -1170*Trump* -9908.50 -10018.13 -$109.63 2/20/98 270 Int'l Pape 12876.75 12099.38 -$777.38 1/8/98 425 3Dfx 10908.63 9509.38 -$1399.25 8/24/95 130 KLA-Tencor 5812.49 3526.25 -$2286.24 6/26/97 325 Innovex 9005.62 4590.63 -$4415.00 8/13/96 250 3Com Corp. 11715.99 6250.00 -$5465.99 CASH $11662.57 TOTAL $205273.35