Faith-Based Investing With Amazon
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Try this experiment. Buy 10 lottery tickets. Then tell your spouse you "invested" $10 in the lottery. They might say, smiling, (maybe), "that's gambling, not investing."
Despite reporting a loss three weeks ago, the stock of Amazon.com (NASDAQ: AMZN) has remained high. But Apple, (NASDAQ: AAPL) though profitable, has stumbed since reporting a tiny earnings miss. What gives? I think the explanation is counter-intuitive: Apple is being punished for their success and focus, and Amazon rewarded for their failure and lack of focus. Apple has been making gobs of money over the past few years with iPhones and iPads. Meanwhile, Amazon has seen deteriorating earnings, now negative. This deterioration is due, according to Amazon, to investments in their businesses, which are increasingly diverse, including online gaming, selling wine, and collecting taxes. Apple recently had nowhere to go but down, with investors fearing it is a two-product company, and someone (like Amazon) could build a better tablet, or phone. But investors seem used to Amazon not making money. And, since Amazon is so diversified, investors have many different ways to hope.
But the future is always guesswork; what is Amazon worth now, today? True, they have potential -- just like a lottery ticket. But how do you value it? How do you calculate the "value" of a company without earnings?
You try to calculate the future income stream. Imagine a water company in a new subdivision. They serve other subdivisions. So, since you "know" they will be serving x number of customers, at x monthly cost, with operating expenses of x, you can get a pretty good idea of what the water company's income will be in the future, and thereby what their value is now. But there are still unknowns. There could be a housing bust, with high property vacancies, or the EPA could mandate new costs.
A lottery ticket with a one in a million shot at a million dollars is worth one dollar. But suppose there was a "Mystery Game," in which you didn't know the possible range of winning numbers. Could it be six numbers between one and forty? One and ten thousand? The odds, and the expected value of the ticket, aren't calculable without known parameters. Since Amazon has neither earnings nor concrete prospects of earnings, there aren't any numbers to crunch. Instead, you must rely on what I call faith-based investing, such as:
AMAZON MAKES MONEY, OR WILL MAKE MONEY, SOMEDAY.
An example of this variant of Amazon faith is in this story written before Amazon's latest disastrous numbers:
"If Amazon’s results were as easy as looking at overall e-commerce spending, its performance would be a no-brainer. U.S. online sales in Q3 were up 15 percent year over year, according to comScore.
But it’s more complicated than that. Earlier this month, Bezos finally admitted that Amazon sells its hardware at cost, meaning that it will make more money after the new Kindle Paperwhite or the new Kindle Fire HD are in the hands of the customer. The strategy is hard for analysts to wrap their minds around . . . "
Indeed, the "strategy" does seem hard for some people to wrap their minds around: if Amazon sells hardware at cost, it does not mean that they will make any money later, much less "more money."
Another way to profess the faith:
TO STATE THE INTENTION TO TRY SOMETHING IS EQUIVALENT TO SUCCESSFULLY DOING IT.
A story humorously entitled Are Amazon Lockers Going To Crush Walmart? showcases this variant:
"Ordering goods online through services like Amazon is supposed to be convenient, but it can often be problematic as well. Purchased items might not fit, might be different than they appeared online, or there might be problems with shipping.
Amazon has found a solution for at least one of these problems."
They have? But it might not work out, so wouldn't prudence dictate that the preceding sentence ought to be edited to read "Amazon is going to try what they hope will be a solution to at least one of these problems"?
A third variant is this:
AMAZON CAN WALK ON WATER. THEY DON'T HAVE COSTS. BECAUSE. JUST BECAUSE.
A great example is found here:
"Not only does Amazon sell through its website but it is now able to ship at little to no cost. Packages get there within a day or two (and it's getting closer to same day delivery). There is no other company that comes remotely close to this network. The scary part for competitors is that Amazon's lead is only growing bigger thanks to huge reinvestment in warehouses, robots that automate the actual shipping, distribution centers close to big centers like New York, etc."
I am puzzled how Amazon can ship at "no cost." Do they have trucks they got for free, that fly, without using gasoline, for which they don't need insurance or garages, piloted by robots who don't get paid? Who knows? How can the "huge reinvestment" not be a cost, unless they won the money they are reinvesting? Maybe in the lottery?
Now consider an alternate, heretical opinion:
“Amazon is spending a lot to gain market share,” said Sucharita Mulpuru, an analyst at Forrester Research Inc. (FORR) “They’re obviously, as they call it, investing in the business -- everyone else would call it losing money.”
Indeed, everyone else would call it "losing money." As Amazon continues to plunge into new, profitless ventures, will their stock price eventually plunge as well?
boriskabinov is short Amazon.com via long-dated puts. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.