Post of the Day
April 27, 1998

From our
Amazon.com Board


Subject: Re: Associates / Earnings / Financial Projection
Author: stocksareme

Stocksareme wrote:

How many money-making e-commerce sites can you name? I only know one profitable e-commerce site, and I'm not even sure if they have broken even yet on a cumulative basis.

To Which Tom C. inquired:

Does this mean that you don't think any e-commerce sites will make money in the future, or is it just an observation about the present? If it's a statement about the future, then I'm afraid we'll have to disagree one more time.

First of all, what I meant is that of the thousands of e-commerce sites that exist, some of which have been around for 3 years, and many for nearly two years, I know of only one that is currently (in the present) operating profitably. But, on a cumulative basis (total expenses minus total profits since start up), I doubt that even that one site has reached breakeven yet. In an industry that has been around for about three years, the statistics on earnings look real bad, i.e, there aren't any earnings! To me, the real irony is that many "bricks and mortar" retailers have been setting earnings records, while the e-commerce retailers, who are supposed to derive huge benefits through the efficiency of the Internet, are making nothing but huge losses.

Regarding the future, a lot depends upon the time horizon. Will Amazon earn any profit in 1998 - NO; 1999 - NOPE. After that, the projections really depend upon the various assumptions one makes. I have little confidence in projecting what will happen beyond 1999. Again, I invite anyone to post their earnings projections on this board. Someone please show us when and how much Amazon will earn in future profits to justify a price of $80 - $90/share. I'd love to see the numbers. (Personally, my guess is that Amazon will be out of business or a very marginal player at best by 2000.)

  Will people still want the same kind of printed books that Mr. Gutenberg invented something like 600 years ago? Amazon sends a 600 year-old product (printed books) via a two thousand year-old method (mail). Am I supposed to be enamored by this "high tech" and pay absurd amounts for this stock? Not me, thanks.

On the other hand, if your only point is that they are not currently making money, then you get to figure out who will turn the corner, when, and how. And toward that end, I am very interested in growth numbers, even when they don't make for black ink on the bottom line yet.

I guess I'm not as venturesome and I'm certainly not as smart as you. I cannot even begin to fathom what will happen to change the competitive environment, the technological landscape, and the regulatory environment in the next few years. Will Internet usage be taxed/regulated? Will Internet sales be taxed? Will every bricks and mortar retailer have an Internet division? (This is pretty certain already.) Will book and music publishers do more horizontal integration through M&A, and then bypass traditional distribution channels and Internet booksellers to sell their products directly to consumers?

And, think about this: Will people still want the same kind of printed books that Mr. Gutenberg invented something like 600 years ago? Amazon sends a 600 year-old product (printed books) via a two thousand year-old method (mail). Am I supposed to be enamored by this "high tech" and pay absurd amounts for this stock? Not me, thanks.

Why not sell "books" on DVD disks with neat effects that take advantage of all the MMX and AGP capabilities we now have on our desks? For that matter, won't compression technologies improve and bandwidth problems be somewhat mitigated within the next few years? If so, no one will need to ship us a disk: We will just be able to download a super-compressed file of the "book" we want, complete with sound effects, narration, and visuals.

Look, the scenario I wrote above may be total crap. I admit, I am not a technology futurist. I am only trying to make this point: Take all of the technological changes and changes in business models there have been the past three years, and multiply it many times over to even try to envision what things will be like three or four years from now. In this incredible, wonderful, mind-boggling era of change - which will accelerate, not decelerate - it is comical to me that anyone can project earnings for Amazon five years out with any degree of confidence. However, we almost all agree that Amazon will lose money for at least the next two years.

EPS, gross margins, net earnings, sales - these concepts have been around forever, and will be around forever. This is what investors care about. My guess is that in two or three years, no one will even remember the term "number of associates".


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