Tuesday, November 18, 2014

"If you build it (revenues), they (profits) will come": Amazon's Field of Dreams! (AMZN)

The author, Stern School finance prof Aswath Damodaran famously pegged the value of Tesla at $67.12 just prior to the stock's run to $265 (the first time). To his credit the Professor posted a hemi-demi-semi mea culpa.*
In addition, gentle reader should note the title of our first link to him:
Sure, He Called the Top In Apple and He Called the Bottom in Facebook But Tesla Fair Market Value at $67.12? (TSLA)
From Musing on Markets, Oct. 29:
I have a long standing fascination with Amazon from its inception as a dot-com poster child in the late 1990s to its current standing as online retailer to the world. I have always liked the company's willingness to challenge established rules on how business should be done and admired Jeff Bezos for being to willing to leap into places where others only tip toe. As an investor, though, I have found the company to be cheap at times in the last 15 years and expensive at others, and the most recent earnings report led me to revisit it, partly to examine whether the market's negative reaction to the most recent earnings report was appropriate and partly because I may learn something.

A short history of Amazon
For those are twenty five or younger, it is hard to imagine a world without online retailing, in general, and Amazon, in specific, but it was just over 20 years ago (in July 1994), that Amazon was founded by Jeff Bezos in his garage, continuing the long tradition of garage-founded companies in the United States. The company caught the dot-com wave of the late 1990s and was listed on the NASDAQ in 1997. Initially focused on book retailing, the company remained small in operating numbers, relative to other retail giants, and generated only $1.6 billion in revenues in 1999, while reporting an operating loss of almost $600 million. Its market capitalization, though, rocketed up (with the rest of the dot-com sector), hitting $ 35 billion in early 2000. In fact, it was one of the companies that I used as a prop for a book I had on valuing young, technology companies. At the risk of gravely embarrassing myself, this was my valuation of Amazon in January 2000, close to its peak:
My valuation of Amazon in January 2000 (The Dark Side of Valuation)

It is never flattering to the ego to compare actual to forecasted numbers, especially for young growth companies but it is a process that has never bothered me, because it comes with the territory. I compare my forecasted revenues & operating income for Amazon (from my January 2000 valuation) to the actual revenues & operating income for the company (from 2000 to 2013) in the table below.
Comparison of my forecasts in 2000 to actual numbers

I will cheerfully confess that I did not have the foresight to predict the behemoth that Amazon would become in retailing and the tentacles that it put into other businesses (including media and cloud data) but my forecasted revenues were higher than the actual numbers every year through 2010. Since 2010, though, the company has blown the lid of my revenue forecasts but that outperformance has come at a price. I may have been pessimistic in my assessments of Amazon's capacity to scale up its revenues, but I was also overly optimistic in assuming that it would find a pathway to strong profitability. After mounting a steady improvement in margins in the first half of the last decade, the company seems to have relapsed in the last few years. 

A Field of Dreams company
A couple of years ago, James Stewart wrote an article in the New York Times, using Amazon to draw a contrast between short-term markets and long-term managers. The discussion about whether markets are short term and if so, why, is one well worth having, but I took issue with Mr. Stewart on his use of Amazon as an example of short term markets. In fact, I would argue that markets have been extraordinarily forgiving of Amazon's long loss-making history and have given Mr. Bezos breaks that very few companies have received through time. If anything, they have been too "long term" in their thinking, not too "short term"....

Yesterday AMZN closed at $323.05.

*Here's his March 25, 2014 post "The firing line: Revisiting Tesla".

And our follow-up to "Sure he called the top...":
Tesla: More on the $67.12 Valuation (TSLA)