Friday, May 19, 2006
The 800 Pound Hamster
A distant acquaintance at my previous journalistic affiliation, TheStreet.com, has written extensively of late regarding his love affair with the shares of Overstock.com.
His basic thesis, as I understand it, is that the stock is unduly depressed by bearish sentiment generated largely by short-sellers, and that while profitability is currently non-existent, the price-to-sales ratio renders it attractive to patient, long-term investors.
Indeed, by assuming sales growth picks up and margins go from negative to positive over time, this sober, clear-eyed analyst published a $90 price target some weeks back that sent Overstock.com shares flying—just prior to the company reporting lower-than-expected first quarter sales, a larger-than-expected first quarter loss and a relapse in the share price.
Unlike the analyst in question, I have never expressed an opinion about the valuation of Overstock.com and am not about to publish a price target here. Opinions of value, being in the eye of the beholder, hold no interest to me.
What does hold my interest is the thought-process behind those opinions. And in this case, a cornerstone of the Street.com writer's thesis appears to be an analogy between the Overstock.com of today with the Amazon.com of 2000-2002, when the latter was losing money and likewise highly controversial.
In a recent follow-up post, he expanded on this analogy. After walking through the numbers, he catalogued a host of negative comments from various sources during the dark days when Amazon appeared to be in a barrel-roll a little to close to the ground. 'Look at Amazon now,' seems to be the analyst's Overstock rallying cry—'the nattering nabobs of negativism were proven wrong, and the shareholders who stuck it out were richly rewarded.'
Ergo, how can Overstock.com miss?
Having been one of those Amazon nabobs of negativity, I can recall the issue that made me bearish on Amazon shares back in the late stages of the Internet Bubble quite clearly: it was a slowdown in the company’s core book business, masked by new ventures into music, video and international sales, which got my attention.
As I pointed out in at least one piece for TheStreet.com at the time, Amazon’s core book business growth had actually slowed down to brick-and-mortar-type low single digit rates. I believe it even grew less than Sears’ at one point—although this fact was hard to see for all the other “get big fast” non-book projects which inflated Amazon's overall sales growth.
I recall fielding a Silicon Valley-based reporter’s incredulous questions about my analysis one afternoon in early 2000 while fighting off a stomach-clearing flu in bed. This reporter (I believe he was with Business Week) simply could not believe anybody could be negative about Amazon.com. In the patois of the day, he seemed to think I “just didn’t get it.”
Still, while Amazon was a controversial stock and had its share of short-sellers, to the credit of Jeff Bezos he never included me or any other nattering nabob of negativism in a conspiracy theory involving Israeli mobsters and Eliot Spitzer. In fact, Bezos did what great CEOs do when business gets tough: he ignored the shorts and focused on fixing his business.
Sometime after that Business Week conversation, the stock bottomed out in an avalanche of bad numbers and bad press. Momentum investors bailed out when the sales growth slowed, but beneath the sales line, book numbers began to improve and losses began to shrink. I covered my short at $12.50 a share, and wrote about it on TheStreet.com.
The funniest part was getting a call from the same Business Week reporter, who had by then joined the nabobs of negativism and could not believe I was no longer negative on the stock—since everybody by that time knew that the Internet Bubble had burst and Amazon wouldn't make it. Once again, he seemed to think I just "didn't get it."
Amazon did, of course, make it. My only regret about covering my short at $12.50 was, of course, not going long the stock at $12.50.
As for my former acquaintance at Street.com, he may well prove right about Overstock.com—and today’s nattering nabobs of negativism may well be proven wrong. But his survey of bearish commentary on Amazon.com from the dark days of that Internet pioneer left out one particularly negative nabob—not a stock analyst or a hedge fund manager, but the CEO of a company.
In 2004, a Fortune Magazine reporter quoted this CEO saying the following about Amazon.com:
"They don't have a wonderful business, and the stock is way overvalued."
She also reported he called Amazon an “800 pound hamster.”
This was no one-off dissing of Amazon.com: in 2005 this same CEO said he thought Amazon was “the Ottoman Empire of the Internet,” and repeated the "800 pound hamster" crack.
I’m not making that up. Here’s the full paragraph from the January 28, 2005 conference call:
I think that Amazon is the 800-pound hamster. I think that Amazon is the Ottoman Empire of the internet. And it may just drift along as the sick man of Europe for 200 years or one day you may wake up and it's gone. I don't think Blue Nile faces much of a threat from Amazon. I view us as competitive with Blue Nile. I view them much more as a competitor, but I'm not worried about Amazon.
This nattering nabob of negativism’s name?
Patrick M. Byrne, CEO of Overstock.com.
I Am Not Making This Up
© 2006 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 7:35 AM