Stepping away from the numbers, it's time for some thoughts on Amazon. Almost without exception, thoughts come before numbers in my mind; and isn't it true that almost any invention or conclusion based on numbers was first conceived through thoughts? Thoughts before numbers?
My first thought regards the business. Amazon is much more a retailer, with a retailer's sort of numbers (oops, numbers again), than I thought it would be when we purchased it in 1997. I thought that Amazon would become more of an electronic business by now. I didn't foresee it selling lawn tractors and ladders, even if it can, as it argues, make money doing so.
I always thought that by now Amazon would have more of a virtual business based on its community and less of a retail storefront, in digital form, that more or less represents products stored in warehouses somewhere, making Amazon basically an interactive, dynamic mail-order catalog.
Arguably it's too soon to be selling electronic music, I grant you, let alone e-books. Eventually, Amazon will sell these things in bulk, and the profit margins and logistics should be considerably more favorable than with physical products. But, what about all these warehouses that it has built? It's already clear how Amazon views itself. Jeff Bezos said in the conference call yesterday that one of the company's largest goals is to be the first truly worldwide retailer. That word "retailer" echoed in my mind long into the night, like this: "retailer... retailer... retailer... wear a clean shirt tomorrow for a change... retailer... retailer," and so on, until I fell asleep.
Do I want to own a retailer? Does the Rule Breaker? Traditional "middle-person to consumer" retailing, even when conducted over the Internet, is a difficult, seasonal, and arguably non-Rule Breaking industry.
Three years ago, Amazon was a young cub prowling the promising plain deciding what to kill. It has aged enough to show its stripes, and now that I can see them, I'm beginning to think that it may be time to set this cub free.
I can already hear some of you saying, yelling, even screaming, "But the stock price is so low now!"
Well, the price is low relative to where it has been, but it is certainly not low relative to our expectations. When we bought Amazon in 1997 among a hell storm of flames from readers -- all of them loving! -- we had only hoped for Amazon's stock to double by 2000. We wanted it to double to about $1.8 billion in valuation. It's above $7 billion today, making it one of the most valuable retailers on the stock market. That is investment success. (Additionally, we sold a chunk o' Amazon in 1998 at about $34, or a 1,000% gain, leaving only additional profits in the stock.)
Investment success or not -- and we certainly failed in that we could have sold it at $40 billion if we'd thought to -- that doesn't matter. The only question today is: Do we want to keep owning Amazon?
My answer is: Why?
OK. That's another question, not an answer. That said, asking questions is often the best means to an answer. Why would we want to continue holding Amazon? We see how its numbers are shaping up. We see how its business is developing. It expects 20% to 30% sales growth this year and fourth-quarter operating profits on a pro forma basis. The net profit, mind you, will likely be slim to nothing this year, and probably slim next year, too. That's retail for you.
Cutting to the chase, here's why I'm thinking that we can do better than Amazon.
The retail industry is always challenging, and Amazon has officially jumped into it head-first. Retail is what Amazon wants to do, as it reiterated last night. Plus, its other operations, including auctions and zShops, remain menial. These additional businesses have not grown into significance. In hindsight, that Amazon opened these businesses at all -- especially auctions -- is questionable given its real mission. I say that even though I was excited when it opened these services. (I was wrong!)
Secondly, the financials of the business aren't becoming of a Rule Breaker. Even young Rule Breakers usually have strong balance sheets -- they must have them to survive and reach their lofty goals. Amazon's potential to expand is tempered by its $2.1 billion in debt and the likelihood of slim profit margins. When we bought Amazon, it didn't have debt.
Finally, we're beginning to see the company's limitations. I believe that its place has been decided by management and by its customers: It's a retailer of products over the Internet. I thought that it could be more -- more community-based, more large revenue streams. More. Somehow, much more.
I want Amazon to succeed, and I believe that it will with moderation. I respect what Amazon has accomplished so far -- which is a lot -- and I admire Jeff Bezos. However, I'm questioning whether we should own it any longer. With a little looking, can't we find something better? More dynamic? Financially stronger? With more potential? What do you think? Is Amazon still a Rule Breaker to own? Tell us your thoughts.
Disclosure: Jeff Fischer does not own stock in Amazon, nor does he own a cell phone or a lawn tractor. He does, however, own a cheese grater and shares of America Online. To see his stock holdings, view his profile. The Motley Fool is investors writing for investors.