Whether you want to own a stock has as much to do with its price as its intrinsic quality. Amazon.com (AMZN $15.68) has been among the more successful punts covered here in the last couple of years. But is it as good a candidate for shorting now, at $15.68, as it was when first suggested in October ’99 at $93?
I’ve said several times that Amazon is a cinch for bankruptcy, certainly Chapter 11 (a reorganization) and maybe even Chapter 7 (a liquidation), although I consider the latter a bit of a long shot. Let’s look at the numbers, something you should do before buying any stock, if only as a matter of academic interest.
Amazon currently has 358 million shares out, giving it a market cap of about $5.6 billion at $15.68 a share. Revenues, as of 2000 (the fiscal year conveniently ends Dec. 31, as does the calendar year) were $2.762 billion.
By way of comparison, America’s biggest bookseller, Barnes and Noble (BKS $30.36) is selling at 40 percent of sales. But it has a history of earnings, limited long-term debt, and equity of $530 million. And a market cap of only $1.9 billion, even though it also has greater revenues than Amazon. Interestingly, BKS has been steady to strong in this ugly market environment. I conjecture it may be because many see it as a huge beneficiary of Amazon’s impending demise.
Of course Amazon cheerleaders think that’s a ridiculous exaggeration, pointing to the company’s growth, and believing it’s about to turn the corner. OK, that’s worth a look. In 1996 it had $16 million in revenues; in ’97 $149 million (830 percent growth); in ’98 $610 million (309 percent growth); in ’99 $1.64 billion (168 percent growth); and in ’00 $2.76 billion (68 percent growth). Nice numbers, even though the rate of top-line growth is slowing rapidly.
The rate of total reported losses, however, is growing even faster than revenues. In 1996 they lost $6 million; in ’97 $31 million (416 percent growth); in ’98 $125 million (303 percent growth); in ’99 $720 million (476 percent growth); and in ’00 $1.411 billion (96 percent growth).
So Amazon’s income statement is in an apparent death spiral. But the balance sheet is even worse. The company reports current assets of $1.361 billion, and total assets of $2.135 billion. Some of those assets, like the $366 million for plant and equipment, $92 million in “investments” (i.e., crapshoots on other e-businesses, some certainly on their way to zero) and $60 million in “other long term assets” (who knows what this may be without a forensic audit) are questionable. It has apparently already written off scores of millions invested in deals like drugstore.com, pets.com, and homegrocer.com.
Amazon’s total current liabilities are $975 million. Added to $2.127 of long-term debt and some miscellaneous items, we have total liabilities of $3.102 billion. Which means Amazon has negative equity of $967 million dollars — as an optimistic case. And that’s not counting the first quarter’s losses.
So, what is the business worth? Let’s see. It has rapidly growing losses (which should be between $1-2 billion this year), and over a billion of negative equity. I’d say, on paper, it’s worth less than zero. Of course Bezos may convert the bondholders to stock, which would buy time, but won’t solve the problem of the losses. Nor will it solve the problem of a slowing economy, where people are going to be buying less — a lot less, in my view — not more.
So, in light of this, what should you do? I’m continuing to sell nearby, at-the-money calls on Amazon, for premiums running 10-15 percent per month. It’s a risky maneuver. Or you can just short the stock on strength.
Why there’s still debate about Amazon’s fate is a mystery to me. Or maybe it shouldn’t be, because it shows the public is still in denial about the severity of this bear market. Soon, they’ll find that denial is not just a river in Egypt. Just as they find that Amazon could be nicknamed “the river of no returns.”
But the market is full of short candidates. I’m also selling naked calls on IBM, but for reasons quite different than Amazon.
