ALEXANDRIA, VA (August 2, 1999) -- The potentially healthy purging of our once momentum-driven monster stocks continued unabated. Amazon, eBay, and America Online wilted today in the face of a wilting market for fast-growing, interesting, new age companies.
Henry Blodget, an Amazon.com (Nasdaq: AMZN) bull at Merrill Lynch, wrote after Amazon's second-quarter earnings announcement: "Revenue increased a modest 7% sequentially to $314 million, in line with consensus. This was by far the slowest growth in the company's history, and should send any remaining momentum investors leaping out of the stock."
Leap, leap! Please leap if you're not a long-term investor.
Following the second-quarter report, the stock actually rose at first, but soon it began its 21% decline from $120 to today's $94. Too many investors associate a stock's direction with the direction of a business, however, so it serves to remind that the company isn't doing anything incorrectly; it isn't making horrendous mistakes; and it didn't take a turn for the worst. It is following its plan. The stock has the emotional problem, not the company. And it isn't even the stock's fault.
The overly emotional activity behind Amazon's stock has been driven by generally emotional people. In April, investors valued the company at more than twice today's price -- over $30 billion. The fact that Amazon went from $2 billion to $30 billion and now back to $14 billion in value should certainly put to rest the notion that the stock market is always efficient in the near term. It isn't. It is often idiotic in the near term. Over the long-term, it becomes highly efficient. But it usually can't be efficient with young, unpredictable companies. There is no way to accurately measure the volume of an ever-changing sea.
Just as there is no way to predict when human sentiment will again swing to the opposite side of the forest. David touched on the topic of human nature last week. Human nature is to want to buy a stock when it is rising, and avoid at all cost a stock that is falling. The urge to buy Amazon, for example, at $200 as it is rising daily is usually much stronger than the urge to buy Amazon at $94 when it is falling day after day. If you're a short-term investor (or a so-called trader -- a moronic name for someone who essentially gambles), these kind of urges make sense. For an investor, they don't. An investor would rather buy at the lower price, if at all. And they wouldn't want to sell when the stock is falling, unlike traders who trip over themselves to not be the last one out.
The "last one out" connotes a turnaround, or that the bottom is near, and that's the funny thing. Imagine everyone rushing to exit a movie theater only to turn around and rush back in after everyone has exited. That is much like active trading: stupid. Investors who believe in what they're doing should stay seated and let the frenetic activity swirl around them.
The stocks of Amazon, eBay and America Online are now being purged from the holdings of less than long-term portfolios. With each stock more than 60% below old highs, upward momentum is surely gone. Enter, stage right: downward momentum. The stocks might bounce without news at some point (because like gains, declines are often overdone), but eventually, as stocks always do, these will trade on the merits of the underlying business and not much else. That's why you buy a business, not a stock. And that's partially why we state in our eBay (Nasdaq: EBAY) buy report that this investment was by far our most risky to date. Buying into eBay's business at $12 billion was risky. It could easily underperform the S&P 500 over the next three to five years. Buying Amazon at $800 million was arguably less risky.
So, what's up with these three stocks -- these three princes turned witches?
eBay's sheen went dank after the business suffered an all-day blackout. The stock never quite recovered, indicating that many people did not own it for the long term. And many people are still exiting their eBay positions now, along with most other newly public and mainly Internet-based companies that are also being pushed off a cliff. Eventually, strong companies such as eBay should be held mainly by strong hands, to use industry-speak, and the stock's volatility will lessen -- at least as much as a new business model will allow. Amazon should eventually reach a plateau of respite as well.
Amazon's stock began to decline after management shared that losses will be larger than analysts predicted. Note: that doesn't mean that the business is failing, it means that analysts didn't account for this much business expansion. Higher losses pushed the potential for profitability further into the shadows, and that sent many shorter-term owners fleeing with fright. However, the fact that Amazon is thinking larger, rather than smaller, should be comforting -- if anything -- to long-term investors.
The last of the Three Witches, America Online (NYSE: AOL), declined as broadband concerns arose. Those concerns will likely prove overblown. With about nine times more subscribers than the second-place ISP, AOL is in the best position to lead in broadband services, even if it must rely on DSL technology to do so. Meanwhile, America Online's stock is approaching a price range that looked reasonable last quarter on a subscriber-based valuation: $78 to $88. That valuation, however, assumes that revenue from subscribers will remain intact. I believe that this is a realistic assumption overall, but the stock market is not as comfortable on the issue.
This weekend Barron's ran another negative article on Amazon. I wrote a response to it in the Fool's News World this morning. That's right: News World. It's the Fool's shiny new daily news offering. It provides more in-depth articles on all of the day's large stories and on the most interesting companies and events. The columns don't just report. They analyze, explain, educate, and, when possible, find a resolve. That's Foolish.
Tomorrow in this space, eBay's competition.