...the long and short of it
by Jeff Fischer
ALEXANDRIA, VA (July 6, 1998) -- Only one Fourth of July holiday remains to be celebrated before the Year 2000, and the undercurrent of excitement as the new millenium approaches just might be, somehow, giving extra energy to the stock market. Today the S&P made a new high, while the Nasdaq is 20 points shy of the same.
The Fool Port whuuuuummmped the indices again due to Amazon.com and America Online, both of which are marching relentlessly forward while reciting a mysterious chant and holding flaming tikki torches overhead. As these companies blaze new trails through an otherwise dark night, short sellers are being set afire left and right. Eventually rain should fall and at least give the shorts some relief.
As for us?
Like Santa Claus checking his list of children, this week we begin to review our numerous Fool Port holdings. Which stocks are good and which are bad? Which ones might get booted out the door? We'll share our current thoughts on each Fool stock beginning now, advancing through them alphabetically and tackling one company every day that David Gardner or I write. (By the way, we'll do this summarized run-down every quarter.)
The first company on the list is probably the most difficult to address, given that the stock's recent advance has been monstrous, as well as lightning quick. Any fast-changing situation can be challenging to grasp, understand, and explain -- in fact, in times of tremendous change a person often reverts to old comforts, beliefs, or arguments. This might prove to be the case with Amazon today, though we'll try to approach the investment with a fresh perspective. The stock has gained $98 since June 1. Yep, $98. That logically makes people want to take the money and run, or just run period. The graph shows the three alarm fire set last month and makes one cry, "Get out before the roof collapses!" Well, let's consider some numbers.
Amazon.com (Nasdaq: AMZN) Stock Price: $139 Market Cap: $6.8 billion Trailing Sales: $219 million Price/Sales: 31 Price/Rev. Run-Rate: 19.5 Recent Gross Margin: 21.9% 5-year est. growth rate: 50% Earnings Estimates: ($1.63) in FY98 ($1.33) in FY99
With a $6.8 billion market cap, the company is trading at 19.5 times the revenue run-rate for the year (having $87 million in sales last quarter multiplied by 4 quarters). Factoring in growth, Amazon is trading at 14.5 times its likely 1998 revenue. We published our buy decision when Amazon was trading at 15 times trailing revenue and many people thought that we were nuts to buy the stock then (the degree to which people thought this is something that I haven't yet understood -- the $800 million market cap actually seemed reasonable for a company with the sales growth and potential of Amazon. It was the Fool's easiest buy decision to date, no matter how it turns out). Anyway, surely some people think that we're now insane to hold onto the stock. We were roughly hoping for a double in the shares by the year 2000, and we've gained 630% in nine months. So sell it now.
Yet, on one of the few measures that we have to go on -- sales growth, which intimates market share growth -- the stock is valued at nearly the same multiple as when we bought it. It's at 15 times 1998's potential revenue. We bought it at 15 times revenues last September. It's hard to believe, but there's essentially been no inflation in this multiple. Meanwhile, gross margins have climbed from 19% to nearly 22% since last fall, the customer base has more than tripled to over 2.2 million (as of March), and the company continues to demonstrate a giant lead over its largest online competitors with every quarterly report. Sure, people are reminding us of the rise and fall of Iomega (NYSE: IOM), as if that one story has any influence on the dozens of other stories happening now. It doesn't. Every situation is different. Drawing comparison is interesting, but not something on which to base a decision.
Although, yes, Amazon could very well fall 50% next week. Or more. But we've had that understanding from the very first day we bought shares. We're prepared. We're investors, not speculators. We accept the volatility in the same way that a child takes in the landscape passing outside the car window -- absorbing it without much reflection. I don't know what your typical child is thinking during a car ride, but we're thinking of the long-term destination and letting the near term do what it may. That the near term is doing this (sending Amazon to the moon) doesn't change our attitude about the long-term potential of Amazon.com the company, nor about Amazon.com the stock. Well, except in one way.
Now we're almost hoping that the stock falls. On the Amazon message board David Gardner recently wrote, "I hope it falls $20 in order to take out the momentum players." I agree. I wouldn't mind if Amazon fell $50. We've made our market-beating return on it for several years already. Yet, no, we're not about to sell it. Not as long as we believe that there is more benefit to come down the road -- meaning, years down the road.
By 2003 Amazon could easily have over $6 billion in sales and be quite profitable. By 2008, it could be the mini Wal-Mart of the Internet and sell, let's say, $20 billion worth of goods every year. (Wal-Mart has annual sales of nearly $120 billion right now.) Who knows? Amazon currently only has two revenue streams out of a potential... how many? Several. But about all that we know right now is that Amazon is the online leader in what it does and that the growth of sales and the loyalty of customers shows great promise.
We bought shares at $19 and we're holding for the long-term. It's that simple and it's Foolish. Buy what you know and understand -- and then hold. It takes a Fool to think at least five or ten years ahead and to keep holding, and we'll probably receive "I told you so" e-mail when and if the stock falls in the next few years. That's fine. We know our goal. We can't see what will happen in the next few years better than anyone else can, but we do foresee that Internet leaders have great potential over the next five and ten years -- and that's the time frame that matters to us. It's probably true -- if you want a short-term gain, you've probably sold by now. However, we don't care for a short-term gain. We're a long-term business partner. If you begin a business and it soars during the first few years, it's rarely a smart man or woman who jumps out and sells the whole thing. We consider this a business partnership. We'll even accept a few years of losing with Amazon.com now, and should the stock fall 40% the next few years, we'll still be winning the long-term game.
As for the valuation: This is a new industry and nobody has reliable valuation methods. Obviously expectations are high and the valuations match. But that we're up 600% in short order is almost of no matter to us if the ten-year story plays out as we hope -- if Amazon continues to lead. What happens in the near term isn't vital when it's the long term that matters to you. The near-term is a focus of the Wise. The Wise often obsess on the present moment and in the process miss the big picture. With the stock moving so much we too find ourselves writing about it every day as well, sometimes against our will. I actually wish the stock would cool off so that we could ignore it and let the business take its course. (But it is fascinating.)
Other articles. For more Amazon reading, this afternoon Dale Wettlaufer wrote about the stock's valuation in his Lunchtime column. For more Fool Port thoughts on the issue, I wrote about Amazon and touched on the theories of selling your winners or letting them run in recent Fool columns on June 12 and June 16. I do believe in letting your winners run -- if you have a winning marriage, you don't cut it short to look for a new spouse. If you have a great career that you love, you don't suddenly quit and return to school. One way to truly separate yourself from average investors is to have a few giant winners that you let grow for years and decades. Like Anne Scheiber or Warren Bufffett. For the Fool Port, America Online could be one such investment -- if the company is able to continue leading through changing environments. Could Amazon.com become such a company for us? We'll see. Today for the first time our Amazon holding surpassed our AOL holding in size. Of course, our initial investment in Amazon was over four times the size of our initial AOL investment, reflecting the growth in the portfolio over the time between the two purchases.
Would we still buy this stock? This is the question that people often ask us in e-mail, and it's the one question that I don't like to answer because some read into it as a stamp of approval. That we still own the stock says enough about our thoughts regarding the company -- for us. Your situation is entirely different -- your portfolio, your time horizon, your stomach for risk, etc. Maybe, yes, maybe the Fool Port would have bit the bullet with Amazon over the past weeks and bought in even now -- after all, it's still at about the same price-to-sales multiple on 98 revenue as it was when we bought last September. If anything, Amazon is now much more certain to survive as an ongoing entity than it was last year when we bought. The big competition has since hit the Internet and has yet to cause a large impact. The increased certainty probably has a large hand in the stock's recent increase in price -- just as AOL experienced a rapid ongoing price increase after Microsoft flopped in the online arena.
The Fool Portfolio doesn't have any answers for you, though. It's an example to learn from, not mimic. Only by making your own decisions will you be able -- like a small child -- to watch the landscape pass by the window and enjoy your investment life and the rest of your non-investment life, as well. We'll likely be rolling past that landscape with Amazon in the car with us for a long time. "Are we there yet?" might never be answered, "Yes, we're finally there. Get out of the car."
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Day Month Year History FOOL +4.97% 12.66% 60.78% 439.57% S&P: +0.95% 2.07% 19.26% 152.47% NASDAQ: +0.82% 0.78% 21.60% 165.14% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 113.25 3014.31% 9/9/97 580 Amazon.com 19.11 139.63 630.61% 5/17/95 1960 Iomega Cor 1.28 5.88 358.84% 10/1/96 84 LucentTech 23.81 86.38 262.80% 8/12/96 130 AT&T 39.58 55.31 39.76% 2/20/98 215 DuPont 59.83 78.19 30.67% 2/20/98 200 Exxon 64.09 73.31 14.39% 4/30/97 -1170*Trump* 8.47 7.38 12.92% 7/2/98 235 Starbucks 55.91 58.06 3.85% 2/20/98 270 Int'l Pape 47.69 43.75 -8.26% 1/8/98 425 3Dfx 25.67 16.88 -34.26% 8/13/96 250 3Com Corp. 46.86 28.94 -38.25% 8/24/95 130 KLA-Tencor 44.71 26.94 -39.75% 6/26/97 325 Innovex 27.71 13.38 -51.73% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 80407.50 $77825.63 9/9/97 580 Amazon.com 11084.24 80982.50 $69898.26 5/17/95 1960 Iomega Cor 2509.60 11515.00 $9005.40 10/1/96 84 LucentTech 1999.88 7255.50 $5255.62 2/20/98 215 DuPont 12864.25 16810.31 $3946.06 8/12/96 130 AT&T 5145.11 7190.63 $2045.52 2/20/98 200 Exxon 12818.00 14662.50 $1844.50 4/30/97 -1170*Trump* -9908.50 -8628.75 $1279.75 7/2/98 235 Starbucks 13138.63 13644.69 $506.06 2/20/98 270 Int'l Pape 12876.75 11812.50 -$1064.25 8/24/95 130 KLA-Tencor 5812.49 3501.88 -$2310.62 1/8/98 425 3Dfx 10908.63 7171.88 -$3736.75 8/13/96 250 3Com Corp. 11715.99 7234.38 -$4481.62 6/26/97 325 Innovex 9005.62 4346.88 -$4658.75 CASH $11876.47 TOTAL $269783.84