A decade ago, Jeff Bezos in an interview with CNBC, said that there would be plenty of successful, long-lasting companies born of the internet with very large market cap. And while there are no guarantees, “if Amazon is not one of them, we only have ourselves to blame”.
If you give obsessive attention to the customer experience, by focusing on selection, ease of use, low prices, more information to make purchase decisions with; coupled with great customer service, then you have a good chance. In the long run, there is never any misalignment between customer interest and shareholder interest.
Brilliant words. But there is a reason I am mentioning this now.
Devina Mehra, Director and Chief Investment Strategist at First Global, tweeted this week, that within 24 months of that interview, they were certain that Amazon was going to make it and they invested even when the Street cried “sell”. The “they” being Shankar Sharma, Vice Chairman and Joint Managing Director at First Global and herself.
Let me tell you why this is so amazing.
Who’s going to buy Amazon?
When that media interaction took place, it was during the dotcom frenzy, and Amazon was the darling of this bubble. Everyone was buying it.
In April 1999, the company’s market cap crossed $30 billion for the very first time. In December that year, Bezos was named TIME magazine’s Person of the Year.
But First Global steered clear of that stock.
Then the bubble burst, as all bubbles eventually do. And the prophets of doom began to crawl out of the woodwork. Analysts began to state that Amazon, despite its ‘virtual pedigree’, was starting to look more and more like a plain-old retailer, and the company was seeing the effects of its growth-at-all costs strategy.
Ravi Suria, a convertible bond analyst with Lehman Brothers, went one step ahead and sounded the death knell on Amazon. In June 2000, he produced a scathing report where he pulled no punches.
In its current situation of high debt load, high interest costs, spiraling inventory and rising expansion costs, we believe that current cash balances will last the company through the first quarter of 2001 under the best-case scenario'
From a bond perspective, we find the credit extremely weak and deteriorating. The company's inability to make hard cash per unit sold, is clearly manifested in the weak balance sheet, poor working capital management and massive negative operating cash flow -- the financial characteristics that have driven innumerable retailers to disaster throughout history.
He not only questioned the retailer's long-term prospects for profitability but put forth the case where Amazon could run out of cash like its weaker competitors.
In The Everything Store: Jeff Bezos and the Age of Amazon, Brad Stone wrote:
For the next eight months. Ravi Suria continued to pummel Amazon with negative reports. His research became the litmus test for people’s view of the dawning new Internet age. … those who felt that the coming wave of changes threatened their businesses, their sense of the natural order, even their identities, were likely to embrace the sentiments of Suria and like-minded analysts and believe that Amzon.com was nothing more than a crazy precariously built on an irrationally exuberant stock market.
(In retrospect, the irony is delicious- Lehman Brothers on the demise of Amazon).
Around the same time, Morgan Stanley’s Mary Meeker also came out with the view that she saw no upside and possible modest downside to her quarterly revenue estimates. She saw no catalyst for the stock "until they make or break the December quarter" and predicted massive losses for the next two quarters (June and September). Meeker was no ordinary analyst. Called “Queen of the Net” by Barron’s, and a “market mover” by the Wall Street Journal, she was the diva of the internet age.
Let’s buy Amazon
To understand what made First Global pick up this stock, we need to look at their stock picking technique and how the Amazon stock held up against the various filters.
Negative momentum.
- The stock must be at multi-year lows. The negative momentum should be evident for a while, not just a few months. A few years is more apt.
- AMAZON: The stock price had hit rock bottom.
Losses.
- The stock should be preferably loss or near loss making. But to buy requires solid conviction, along with tremendous patience and courage.
- AMAZON: The company was incurring losses.
Weight in industry.
- Within its own industry, the weight that this stock occupies should be at the lowest-ever level. The index is a game of manipulation wherein over-hyped companies find their way into it simply because of high market cap. (For instance, in 1999-2000, four tech companies - Zee, Infosys, Wipro, and Satyam made their way into the Sensex). They look at it in the reverse.
- AMAZON: In retail, Amazon was its all-time low weight.
Watch for just one spark.
- It could be anything; a new launch like Apple’s iPod that changed its fortunes, or a management change like it happened in IndusInd Bank.
- AMAZON: The trigger was cash flow turnaround. Amazon turned the corner and was free cash positive.
Check sell-side views.
- If the Street is by and large pessimistic, it could pay to go against the herd. While this was not really a filter, it was used to solidify their approach on how their analysis stacked up against the negativity.
- AMAZON: There was plenty of bad news on this front, as elucidated earlier.
Shankar and Devina got onto a call with Amazon - Jeff Bezos and his CFO, with the sole intention of confirming the math. The company had made $139 million in free cash in one quarter. With $139 million of free cash staring you in the face as the prophets of doom predict its downfall was something that just did not make any sense.
Once they confirmed those figures, it was clear that the bankruptcy risk was off the table.
They began piling up on the stock in February 2001 at an average price of $15. (Do note, the Amazon stock has split thrice between 1998 and 1999, before Sharma purchased it.) They currently hold part of the stock but have also offloaded a percentage of their holding.
I have no idea at what price they offloaded and how much they currently own, but I do know that the current stock price is around $1,760.
Let's just say, they made a killing.
By the way, when they decided to go against the herd, Jeff Bezos sent them an email along the lines of “Thanks for the support guys”.
Got to admit, that was awfully nice of him.
Shankar Sharma presented these views initially at the Morningstar Investment Conference. Once again he will be presenting on his stock picking strategy at the 9th Morningstar Investment Conference to be held on September 17-18, at Hotel Sahara Star, Mumbai.
Registration
Speakers and Agenda
