Many characteristics of Celera (NYSE: CRA) remind me of Amazon (Nasdaq: AMZN) when we invested in that company in September 1997. At the time, Amazon only sold books. Period. Amazon didn't sell music or hardware, it didn't have auctions or zShops, it didn't invest in several e-commerce companies, and it certainly did not collect millions of dollars from other online retailers for onsite promotion. Amazon had been public for only five months when we entered our buy order and clicked our mouse.
Celera had been public for only about seven months when we purchased it, but that isn't the similarity that is worth noting in relation to Amazon. What is similar between the two investments is that we didn't know exactly where either business would turn next, we didn't know how exactly each business would make money, nor did we know where these young businesses would ultimately focus. I don't believe that any of us imagined 30 months ago, when Amazon only sold books, that the company would soon have as many business lines, investments, and partners as it now does. Plus, we certainly didn't think that Amazon would near $3 billion in sales in 2000.
The point is, we didn't know what business initiatives Amazon would undertake, but we invested in the "idea" of its business. More accurately, we invested in the possibilities. And we invested early. Buying Amazon in '97 was a leap of faith (holding the stock now relates to "faith," too), just like buying Celera is a leap of faith today. However, Celera is an even larger leap now than Amazon was three years ago. In 1997, at least we knew that Amazon was the leading online book seller. We understood how it made revenue and how it could grow sales.
Celera, on the other hand, doesn't have much revenue -- at all -- and we're not sure where most of its revenue will one day be derived. We're truly Breaking the Rules here. We're buying a company that doesn't have significant revenue, and that is probably several years away from positive earnings, if it is to achieve profitability at all. We are investing like first-round venture capitalists, meaning that we're largely investing in management's potential to eventually create something valuable, rather than investing on past results. (There are no past results!) Investing in this way, we believe that eventually we'll achieve a crushingly great return on our risky investment, or we'll likely lose most of our money.
So, I don't know how Celera will make large amounts of revenue. I can only speculate, as we did with Amazon, that Celera will offer more and more "products" to its customers as years go by, and it will grow sales with every new product offered. Products offered (in the form of information and analysis) could be based on the genetic material of all animals, human beings, and plant and crop material.
Obviously, the going speculation is: can Celera patent or charge money for its discoveries? Well, of course Celera should be able to charge for its information however it wishes. Celera is a private company and it is spending private dollars to create valuable, private databases. Therefore, the more relevant question may be: will companies be willing to pay for this information?
Our answer is: we certainly think so (as we've said since our buy report). If Celera can provide pharmaceutical companies with an advantage in the creation of new drugs, or crop-producing companies with information to improve crop yields, however slight the advantages offered are, they should be valuable enough to merit paying a fee. As CEO Craig Venter recently said, the company plans to make the human genome data available to the public this year, after it finishes mapping the genome. Celera expects to profit by analyzing and packaging the data for subscribers to the company's database. So, Celera is selling specialized expertise, not just information.
We purchased Celera when the enterprise was valued at approximately $1.9 billion. It now has a market capitalization of about $5.3 billion. (We won't subtract from the market cap the nearly $1 billion in cash raised in the recent offering at $225 per share -- by the way, nice move for the company -- because that cash will presumably be burned quickly.) The risks were high at $1.9 billion. The risks are higher now at $5.3 billion.
Recognizing the risks, we're investing with the hope that in 10 years the valuation that we paid for Celera will seem almost amusing. We're investing on the hope that in 10 years Celera's talented management can create a $20 billion (for example) biotechnology company, one that sells value-added information that no one else can provide, and one that collects royalties on some products created from the information.
When we bought Amazon, it was valued at $880 million. Most people said "You're crazy, Fools!" Today, Amazon is valued at $24 billion. This isn't to say "we told ya so," because after all, we're only Fools -- not morons who claim to be sages. Instead, this is simply to remind you in a roundabout way that, in the end, value creation stems from great management with strong vision. Amazon's management created a fast-growing business out of a single web URL. That business attracted more and more investors, which in turn increased the company's valuation.
Nobody could have predicted the magnitude of growth at Amazon. Not us, and obviously not the Wise (so many of whom advised shorting Amazon at $880 million). Only Amazon's management had any inclination as to what they were aiming to create back in 1997. We only had "hopes" that they would become much more than a book seller. Now we hope that Celera has the same type of visionary management as Amazon -- management that can create shareholder value, in the long term, by (in Celera's case) creating new markets and new ways of selling and leveraging its valuable, new information (new information that it should harvest perpetually) to an ever-growing customer base. This is our hope. We'll be proven right or wrong in due time.
Celera's recent news demonstrates just one possible "business line" for the company. With a partner, Celera is working to discover gene information related to breast cancer patients. Celera will retain the "rights" to the information that is found. Also, yesterday Celera announced that it would buy a company called Paracel for $283 million in stock. Paracel is a leading producer of advanced genomic and text analysis technologies. Read the press release for the interesting details. (Also, in Fool News, Brian Graney wrote about biotechs today and offered Foolish advice.)
Finally, during these whiplash times of volatility, it pays to return to the basics: Why did you invest in each company that you own? Why do you continue to believe in each company that you own? Why are you watching the stock prices hourly -- if you are doing so, and if you're not enjoying it? Be a Fool. Invest long term. And then enjoy.
Fool on!
--Jeff Fischer, TMF Jeff on the boards.
