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Amazon.com, Inc.
1516 Second Avenue, Fourth Floor
Seattle, Washington 98101
If you believe the market is efficient at least to some degree, you cannot simply throw up your hands with regard to Internet stocks by saying "the market has gone crazy." Amazon.com, Inc. is one of the much-touted publicly-traded Internet companies. Amazon.com, Inc. is an on-line book, CD and video retailer offering more than 4.7 million CDs, videos, DVDs, computer game books, and other titles. Amazon.com competes against the traditional book sellers such as Barnes & Noble. Its growth stems from two areas: increase of use and comfort level of the Internet as a retailing tool, and lower-priced products. Increased unit sales result from an increasing customer base and repeat customers.
In order to understand what drives the value of Amazon.com, Inc., we must examine some of the underlying dynamics which support these companies at such apparent lofty valuations. Amazon.com opened for business in July 1995, and went public May 1997 with a total market capitalization of $503 million. As of March 1999, the value of Amazon.com had reached $18.73 billion. In the same period, sales rose from $147.8 million to $610 million by year-end 1998. Current market value then is 30 times same-year sales. The company has posted no earnings to date, so its very high multiple fits with no current rational model of valuation.
However, there are some real-world factors driving these trends, and they are impacting more than just Amazon.com, Inc. Sales are projected to reach $1.5 billion in 1999, resulting in a price to year-ahead sales multiple of 12.4, which is substantially below Yahoo's 85 times year-ahead sales (there is some comfort there).
Comparing Amazon.com to other traditional retailers, the picture begins to come into focus. Amazon.com currently has 2,100 employees and three warehouses to produce sales in 1999 estimated at $1.5 billion, for a productivity per employee of $715,000. Border's Books, a bricks and mortar retailer, achieves its $3.0 billion in estimated 1999 sales with 14,100 employees and 1,150 retail stores, for a productivity of $212,000 per employee, and has a market price to year-ahead sales of 50%. Further, revenues for Amazon.com are growing at 230% annually, compared to Border's growing at 14.6%.
In fact, a majority of Amazon.com costs are associated exclusively with funding its sales growth, and once sales slow, the absence of retail store costs and employee's expenses show this retailer to be vastly superior to its fellow bricks and mortar retailers, making revenue per employee a key measure of not only productivity, but value. Sales growth is 10 to 20 times higher, productivity per employee is 3 to 5 times greater, there are no retail stores to support, and its price to sales is 24 times greater. There may be some rational supports to these companies which merit closer scrutiny after all.
