ALEXANDRIA, VA (Oct. 27, 1999) -- The Rule Breaker Portfolio got sent to the showers early today, resembling in its own way the performance of Yankee pitcher Andy Pettitte last night:
NY YANKEES IP H R ER BB SO Pettitte 3 2/3 10 5 5 1 1
PORTFOLIO Today RBreaker -1.90%
Yeah, that's about right, give or take a base on balls or a percentage point or two.
eBay sold off about 9% following its earnings report yesterday. The report contained no warnings of slowdown in growth or any such thing, so we may ascertain that the market had been hoping for more than the $58 million in third-quarter sales and $1.4 million in profits (thanks to interest) -- and 7.7 million registered customers -- that the company reported. As ntoriusdan put it on our eBay board, "A runup before earnings usually indicates that there will be a selloff after the report. This shouldn't be surprising to anyone."
As I reflected yesterday, the quarter fits well in eBay's growth curve (a curve that goes pretty steeply up), so that while shares of EBAY may have been devalued 9% today, my belief in the long-term success of the company and reward for shareholders did not drop today. It remained unchanged. The total value of all items auctioned off on eBay was $741 million, up from $195 million in the same period last year. For a good overview on the quarter for interested eBay shareholders, read this post from Orangeblood. For a dissenting view reflecting some growing impatience for more profits sooner, here's ntoriusdan's take.
Hey, eBay could get thrown for another 9% trading loss tomorrow, but if it's merely a "trading loss," as opposed to a loss for some more apparent and rational and good reason, you won't find me clicking around the online trading sites.
Amazon.com reported earnings after the bell today. Sales came in just over $350 million for the September quarter, which is more than double last year's tally. Gordon66 lays out the quarterly numbers in a nice presentation in this post, which shows you at a quick glance Amazon's revenue growth since the first quarter of 1997. The point made in the post is that the actual growth percentage of quarterly sales is declining, but I scratch my head and wonder why it would be otherwise. You could show the same declining percentage growth for any one of a number of great businesses: AOL, Cisco, Dell.
Please note: It's not that sales are declining -- they're growing like crazy. It's that the actual percentage of growth declines over time. Both logic and experience show that in most situations, growing sales 100% in one year is easy when you start from a $10 million base, and much harder if you're looking at a $10 billion base. Similarly, Amazon.com now has 12-month trailing sales of $1.2 billion. That's up from $420 million, or about 180%, over the previous 12 months. Is Amazon going to maintain that 180% annual growth rate this year, putting trailing sales by this time next year at $3.4 billion? Almost certainly not.
Amazon.com is exceedingly difficult to analyze. All one sees is growing net losses off of dramatically growing sales. This is often made to sound, in a very straightforward manner, like a disaster. "Hey, thought you were going to make up your profits on volume," quips the wag. "Your sales are supposed to eventually scale, aren't they? Are you ever going to make a profit?"
On the other hand, Amazon has 13 million customers and one of the top 60 brand names in the world. The discount-the-cash-flows valuation guys often miss the critical asset of brand when evaluating an investment. Having one of the top 60 brands in the world means you have something that ain't measured on the balance sheet but is generally your biggest (multi-billion dollar) asset. Having one of the top 60 brands in the world when you've only been around for five years, and having that brand grow at the rate that it is over a global network, is extremely valuable.
Its brand gives Amazon the latitude to go many potential directions, as indeed the company has in just the past few years (from books, to music, to movies, to electronics, to software, to auctions, etc.). Expect more of such moves -- although no doubt some of them will be surprising in a way that neither you, nor I, nor the market can ever discount. Not all will be positive, of course. Also, expect profits. The market obviously does, hence the market cap. The market is pretty good in most situations at foretelling.
People on our message boards or across the traditional media who make it sound as if Amazon.com is an obvious winner or a bankrupt loser are generally evincing an extremely oversimple view of things. I won't. Because the situation isn't. Amazon.com is an extremely complex company in a dynamic industry whose business models and rules are changing every few months.
So why am I invested, here?
Same reasons as always. This is the top dog and first mover in the important, emerging industry of e-commerce (specifically, consumer information goods). It has a sustainable advantage -- it has blown out Barnes & Noble and Borders (which naysayers believed back in 1997 would crush Amazon). And I do not believe Wal-Mart will catch Amazon.com, once the offline behemoth finally opens its own online store. The company has strong past price appreciation, smart management and backing, and a global brand. And so much of the world still thinks it's dramatically overvalued to make me bullish.
In a word, the company is a Rule Breaker, and remains one. Anyone familiar with my work in this direction (starting with the Rule Breaker book), knows that Jeff and I believe you just can't value these companies using traditional methods. In this case, there is no E to even calculate a P/E ratio! Reminds me of America Online early on. And what was the discounted-cash-flow valuation method that got you excited about Microsoft back in 1986, Apple in 1980, Wal-Mart in 1970, or AOL in 1992?
Valuation work has its place, as it always will. It's just that traditional methods like the focus on P/E ratio or book value would have caused you to miss virtually every great Rule Breaker of the past 25 years. In this little nook of Fooldom -- which is just one of many places here, with just one of many diverse opinions -- we look to land such Rule Breakers. So it's no surprise that we eschew the use of irrelevant valuation methods as we continue to seek the public companies with the potentially biggest payoffs to shareholders over the next 25 years. As one of my Favorite Fools, Orangeblood, makes clear in this post:
"...we have to look for more meaningful ways to value these companies. Market share, market cap, value per registered user, auction growth, gross merchandise sales, subscriber growth, value of acquisitions, etc."