“You don’t get it. It’s all about eyeballs,” the CEO told me.
I was concerned he might be right. I uncomfortably twirled a pen in my hand as I pressed him further to explain how his business will survive and why investors should buy or own the stock.
His frustration grew as it became clear I didn’t understand his business model: Get as many people to his website as possible. Once he had enough “eyeballs,” advertisers would break down his door to get in front of all of those people and the money would roll in.
[ad#Google Adsense 336×280-IA]The weird thing is that I’d had at least five similar conversations with CEOs in the past three months.
This was 1999, during the dot-com boom.
I’d only been in the finance business for three years, so I thought it was possible I truly didn’t understand their businesses.
A lot has changed since then.
For the most part, we now expect the companies we invest in to be successful businesses.
Generally speaking, we want to see revenue, earnings and cash flow growth.
It’s hard to argue that Amazon.com (Nasdaq: AMZN) isn’t a successful business.
According to The Wall Street Journal, Amazon.com sells more than the next 12 online retailers combined.
I know I send Amazon plenty of my money. We shop for nearly everything on Amazon.com and I just renewed my Prime membership. Their prices are competitive, the process is easy and customer service has been good.
But I wouldn’t buy the stock.
Though the company just reported a 23% increase in first quarter revenue, to $19.7 billion, it doesn’t make much money. Amazon’s net income was $108 million. That’s a net profit margin of just 0.5%. In other words, it generates $1 in profit for every $200 in sales.
That’s not good.
Compare that to Overstock.com (Nasdaq: OSTK), which has a 1.2% profit margin, or eBay (Nasdaq: EBAY), which has a 17.7% profit margin. EBay, admittedly, has a different business model in that it doesn’t sell the products directly. But you can still see the huge difference in margins between Amazon and some of its competitors.
Amazon has unapologetically sought to capture as much sales and market share as possible and worry about profits later. That’s understandable for a new business. Maybe even for a new publicly traded one.
But for a company that has been public for 17 years, with a $134 billion market cap and a $290 stock price, I’d like to see more than $0.59 per share in earnings for 2013.
A company’s executives have the right to run the business any way they see fit. If shareholders don’t like the way management is handling the company, they can insist on changes or sell their shares.
If Amazon’s shareholders are satisfied with the company’s strategy, I won’t argue with them. It’s their money.
But I wouldn’t invest my money in a company that takes an “if you build it they will come” strategy. I’ve seen how that ended for too many companies in 2000 and 2001.
I’m not suggesting Amazon will go the way of Pets.com. It’s too large and successful at this point. But it’s not a good idea to invest in a company where profits are an afterthought.
This time, I’m sure that I get it. I just don’t like it.
Good investing,
Marc
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Source: Investment U