thinking about Amazon (AMZN)–and concept stocks in general

I’ve watched AMZN since its inception, although I’ve never owned the stock.  What I find especially fascinating is that it has been a “concept” stock–one where the possibility of spectacular earnings growth is always there, but the reality seems to somehow always be just around the next bend–for close to two decades.

I think the stock has particular significance for investors in general–owners or not–at present, for two reasons:

–Yesterday afternoon I happened to be home and noticed a small crossover SUV I didn’t recognize parked outside our house.  After a while, an unmarked white panel truck drove up.  The driver came to our door, rang the bell and left.  It was a package from AMZN, containing–unusually for AMZN–a bunch of different stuff (gummi bears and two kinds of SD card, if you have to know) in one box.

The driver then opened up the back of the truck and began transferring packages to the crossover.  Welcome to  the newest wrinkle in AMZN’s logistics system.  No uniforms, no big trucks, no handheld package control computers.  Just guys with cars stitched together into a (low-cost) delivery network.  I’d been seeing the panel truck for months.  This is the first on-the-fly transfer I witnessed, though.

I read this as AMZN’s response to the successful campaign by bricks-and-mortar retailers to have states enforce the sales tax laws with AMZN.  I don’t think this has helped the b&m people at all.  I think it’s been a windfall for smaller online retailers, though, and for companies that use AMZN for distribution, two groups that are so far flying under the sales tax radar.

AMZN’s competitive response has been to reduce delivery costs, with (presumably negative, if it’s successful) implications for the post office, Fedex and UPS.

–More important for me, AMZN shares fall into the group of “story” stocks that have been sold off very heavily since February.  So I think we can draw conclusions about the whole group by examining AMZN (not a rock solid premise, but, I think, the best we’re going to be able to do).

Two features stand out to me.

First, nothing much has changed with the company, even though the stock has lost a quarter of its value in the selloff.

Second, the list of major holders consists of the most prominent institutional money managers in the country. So the selloff is not being induced by a small bunch of crazy, risk-prone hedge funds.  In addition, most of the big names (ex Fidelity) had already been lightening their positions late last year.

As far as trying to figure out how far the selloff might go, we can look at a fundamental component and an emotional one.  On the fundamental side, pre-Great Recession AMZN shares tended to trade at about 30x cash flow.  In recent years, that figure has been closer to 50x.  A return to 30x cash flow would imply a price of around $300, or about where we are now.  Personally, I don’t see why I should pay 30x cash flow for anything but a startup.  But arguably most of the air has already been taken out of the AMZN balloon.

The emotional side is where looking at price charts and volumes traded comes in.  In the case of AMZN, there has been a sharp pickup in volume over the past couple of days,  That’s usually an indicator of the panicky selling that marks a bottom.

From my own perspective, the selloff has gone on longer, and has been deeper, than I would have thought.  But that’s par for the course for me.  And I’m not feeling very uneasy about stocks in general–which is my go-to indicator that I should be starting to buy.  Of course, this may be because the overall market has been holding up very well. Selling has been confined to a relatively small subset of stocks.

For now, my strategy remains to ride out the storm, not buying in a big way but not selling either.  To my mind, it’s way too late for me to do the latter.  But I’d like more confirmation before becoming more aggressive.



One response

  1. I disagree with you on AMZN. First, institutional investors are in this in full force because Bezos was one of them (having worked on Wall Street, see and and has made the AMZN stock pleasant to own for those people. The underlying fundamentals have never been there.

    I do agree with your statement that it is valued as a startup – wow, really?

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