CHICAGO, IL (Jan. 28, 2000) -- I've been doing quite a bit of thinking about Amazon (Nasdaq: AMZN) lately. The company has a dominant position in this portfolio, and I also have a great interest in the overall e-commerce industry. More importantly, we here at the Fool will be unveiling a new company-specific research product in less than three weeks, and I'm the dude who has the challenging task of trying to analyze and keep tabs on the ever-dynamic Amazon. (Check back in the near future about our research offerings, which everyone here at the Fool is quite excited about.)

Just about everyone knows that Amazon is unprofitable. It hasn't had a profitable quarter in its history, and none are in sight for at least another year or two. When earnings are released next week, the company could report a quarterly operating loss that approaches $200 million before special charges. Amazon is awash in red ink, right?

Well, luckily for Amazon shareholders there is the mitigating factor of Amazon's investments. For those who may not know, Amazon has been an aggressive investor in upstart "dotcom" retailers, acting as a sort of venture capitalist. The thought is that being the world's largest consumer e-commerce company gives Amazon insight and experience needed to select the future e-commerce leaders. Having the largest customer base in the business doesn't hurt, either.

The benefits of these investments to Amazon and its investees are several-fold. First, the investees have the experience of Amazon's senior management to draw upon to better grow their businesses. Second, Amazon has the ability to funnel some of its 16 million (and growing) unique shoppers towards these investees, greatly improving the traffic to its affiliate sites at little cost. For its part, Amazon gets these investments at fairly good prices and can personally help its investments grow.

To see if Amazon's investments are profitable or not, let's first start by taking a look at the estimated value of Amazon's investment portfolio. All these numbers are as of yesterday's close of trading:

                          Equity            Approx.
Amazon.com Investments:    Stake             Value

Drugstore.com (DSCM)*      28.0%            $374**
Ashford.com (ASFD)*        16.6%             $76 
Sotheby's (BID)*     1.7% + 1.7% Warrant     $30 
NextCard (NXCD)*            9.9% Warrant     $25?
Pets.com (IPET)*(proposed) 30.0% (post-IPO)  $90?
Gear.com                   49.0%             $40??
HomeGrocer.com             35.0%             $40??
Greenlight.com      5.0% + 25.0% Warrant     $25??

Estimated Total Value                 $700 million

*Each of these tickers is listed on the Nasdaq.
**Dollars in millions

So how exactly did I arrive at $700 million? It wasn't easy, but stick with me. The values of the Drugstore.com (Nasdaq: DSCM) and Ashford (Nasdaq: ASFD) stakes are pretty straightforward since each is publicly traded and Amazon's exact percentage ownership is known. The simplicity ends there, though.

Amazon's ownership in Sotheby's (Nasdaq: BID) and NextCard (Nasdaq: NXCD) is clouded by the fact that a portion of the value is derived from warrants that are "out of the money." In the case of Sotheby's, Amazon owns a million shares outright and also owns a warrant to purchase another million at $100 a share. Since Sotheby's is trading below $25 today, the warrant obviously does not carry much current value. (But it is not totally worthless, either.) With NextCard, Amazon's stake comes solely from the fact that it owns a warrant to buy 4.4 million shares at $39.20 per share. Pull up a quote on NextCard and we see that this warrant is significantly closer to being in the money, and hence carries some value. Either way, the point is that the value of these warrants is imprecise and highly volatile.

Next up is Pets.com, which just last week filed to go public. Amazon's 30% interest assumes that Pets.com does indeed go public with the intended number of shares. (Right now, Amazon holds closer to 50% of the shares.) The pricing of the IPO is today expected to be near $11 per share, which is the price the $90 million figure above is derived from. But if Pets.com is like the typical Internet IPO, Amazon's stake here may increase in value greatly in the near future.

Valuing the next three investments of Gear.com, HomeGrocer.com, and Greenlight.com is little more than a shot in the dark. All three companies are private and do not publicly disclose their financials. It's difficult to even determine exactly how much money Amazon has invested in these three (more on that later). Either way, take the last three values with several grains of salt. The values could be way overstated or even understated. There's just no way for anyone to really tell.

Either way, adding up all the value of all these investments shows us that Amazon's stakes in these public and private companies is worth roughly $700 million. Now let's turn an eye to what Amazon paid for these investments.

In the company's last quarterly SEC filing, Amazon's 9/30/99 balance sheet showed $196.3 million worth of investments. We need to add the approximate cost of Amazon's investments since then to this figure. Just like before, we sometimes know the precise amount of money Amazon invested (Drugstore.com and NextCard), and other times we're left to guess the exact amount (Ashford.com and Greenlight.com). Either way, let's go through and crunch da numbers.

Investment Carrying Value at 9/30/99: $196 million

Investments since 9/30/99           Approx. Value
Drugstore.com                         $30 million
NextCard                              $23 million
Ashford                              $100 million?
Greenlight.com                        $25 million?
Total investments since 9/30/99:     $178 million

Estimated total cost-basis:          $374 million
Estimated value today:               $700 million
Estimated paper gain on investment:  $326 million

So there we have it. Using our best Foolish estimates, Amazon has somewhere between $300 and $350 million in paper gains on its investments, which means the company has come just short of doubling the money it has plunked down on other e-commerce companies. This is fairly impressive considering the vast majority of these investments were made in the last year. Heck, about half of them were made in the last three months alone!

Of course, there's a huge difference between a paper gain and a real gain. Until Amazon sells (which it is unlikely to do), the company will continue to see accounting losses from these investments. Plus, the value of these investments is largely being controlled by Wall Street, and a souring of the market towards consumer e-commerce companies could quickly destroy Amazon's paper gains. Just look at Drugstore.com, which a few months ago was worth double what it is today. On the other hand, these newly public stocks may just be starting significant rallies that could bring Amazon a windfall if they materialized. As always, time will tell.

When the books are closed for 1999, Amazon should have an accumulated deficit, which is the sum total of all of its accounting profits and losses since inception, somewhere near $800 million. That means that over a third of Amazon's highly scrutinized losses would be erased if Amazon realized its paper gains today. That's what I call food for thought.

The bottom line is that Amazon may be best known as the largest gorilla in the consumer e-commerce forest, but it is also a savvy investor in the e-commerce industry and may see large financial benefits from these investments down the road. And while the precise value of Amazon's investments is not known, undoubtedly the company has significant paper gains on its investments today.

Care to share your thoughts on Amazon's equity investments or the pending launch of Motley Fool research? Swing by the Amazon message board. And if you have any burning questions about Amazon, please do post.

Fool on!

P.S. Starbucks (Nasdaq: SBUX) founder and CEO, Howard Schultz, will be a guest on Fool Radio this weekend to discuss the company's future.