Post of the Day
June 11, 1998

From our
Amazon.com Board


Subject: AMZN
Author: TomGardner

I think it's important for folks to understand the difference between large, established cash-cows and small, fast-growing companies. They are different creatures. Investors that can't recognize that should stay on the sidelines -- focusing on large-cap companies of either the Foolish Four or Cash-King ilk, if not just staying with the index fund.

A fine example is Coca-Cola. In their first year of business, they ran at heavy losses. Sales rang up to $50. Advertising costs alone ran to $76. Factor in manufacturing and distribution costs, and Coke wasn't your stalwart monster brand. Coke was losing money hand over fist.

  "He would say, and was saying back then: We're not losing money; we're making investments in a future that we believe in"

What about USA Today? They were entering an apparently mature industry and burning through cash, for years. Competing newspapers made fun of them. They couldn't turn a profit. Now Gannett is an $18.5 billion company. And if you ask Al Neuharth of Gannett, and if you'd asked him in the 80s, are you losing money? He would say, and was saying back then: We're not losing money; we're making investments in a future that we believe in. A few years back, Buffett threw some Berkshire weight behind GCI.

Further, if you dig through the speeches of Charlie Munger (Buffett's right hand man at Berkshire) what has he said about the development of Coca-Cola, what he refers to as the greatest business on the planet? He says that the last thing that a small company engaged in the creation of long-term shareholder value should be concerned with is PROFIT. Far more important is building the namebrand, honing the business model, positioning the company to expand gross margins and to dominate its category for the next twenty years. Profit isn't so important as the potential size of the market, the committment of management, the dedication to building a brandname, and the locking down on a category.

Am I saying that Amazon can do it? Sure. Am I saying they will do it? No, I'm not. That remains to be seen. But I think if you look at Amazon and relate it to Coca-Cola in its first year, USA Today as it lost (invested) $500 million over a handful of years, and America Online as the untrained financial media declared they were losing money hand over fist. . there might be something here.

"Profit isn't so important as the potential size of the market, the committment of management, the dedication to building a brandname, and the locking down on a category. "  

There is a model to this. Whether it will work here is open for debate. Can AMZN get gross margins up? Can they expand their brand while defending pricing? Is the future of eCommerce as big as the Commerce Dept. suggests? The business questions are fascinating -- much more so than the short-term valuation and earnings concerns.

That's my two cents on the situation. But I'd just cast a vote in here for treating developing, emerging market companies in a different fashion than we'd treat Microsoft, Coca-Cola or The Gap. The latter have been around a lot longer, have different concerns, and will provide less volatility in stock pricing. If that floats your boat, that's what the Cash-King Portfolio is all about. If not, I'd hunker down and learn as much as I can about how past consumer brands were built from the ground up. Rarely was it on early-stage earnings growth.

Fool on,

Tom Gardner
http://www.fool.com/cashking


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