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Amazon
The Invisible Gardener

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By oxentiel
January 23, 2002

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In light of Amazon's positive Q4 results, it is certainly fair to say that bears, including myself, were quite inaccurate in our predictions. But it is peculiar to the nature of the debate on Amazon, that the terms of this debate have been set largely by bulls. That is, a proforma profit in the fourth quarter, no matter how small, is considered positive news. Real, GAAP profits, no matter how small, is considered fantastic news. It is also fair to say, I think, that Amazon's recent results would fail to be considered successful by most companies. The valuation of a company as Amazon's must then be based on other considerations, chief among these is it's potential for growth, as others have pointed out. Lacking this potential, even bulls would have to agree; Amazon becomes a rather pedestrian mid-size retailer.

In the debate on the (non) existence of God, an argument called the Invisible Gardener was used. In one version of this argument, when confronted with the loss of his carrots, the owner of the garden proclaimed that it was due to an invisible gardener who came and took them. When it was pointed out to him that there were no footprints in the garden, he then proclaimed that it was because the gardener could also fly. So on and so forth, ad absurdum. The point in the debate on God was that just like the belief in an invisible gardener, we should not accept unverifiable qualifications as compelling proof.

Taken in the context of Amazon, "invisible gardener" arguments will no doubt be proffered by bears to explain Amazon's results. These include: wait until Q1, the numbers will be revised, the results are due to fraud, the results are due to legal but questionable accounting tactics, etc. What bears, like myself, instead need to do is take a long hard look at Amazon's results and admit the possibility that their business model is not a priori incapable of producing real GAAP profit. Likewise, bulls need to ask themselves whether such a model, together with prospects for further growth, is enough to warrant a long-term investment in the company.

My two cents for what it's worth,

Paul

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