I was all set to write up a little teaser from someone else, but then this latest pitch from the Motley Fool crossed my desk and, well, it’s exactly the kind of thing that Gumshoe readers are going to be asking about.
So look out below, here some some answers!
The tease is from Joe Magyer, who runs the Inside Value service at the Fool — but he’s not really touting his own newsletter, he’s teasing a David Gardner pick for the flagship Stock Advisor letter, and more specifically he’s teasing a pick that he says is revealed in the special report that they’re calling Secrets of Silicon Valley’s Hidden Empire EXPOSED: How to Play the 1 Stock That Refuses to Play by Wall Street’s Rules.
Which means we wanna find out who that is, right? The Fool has been cutting and cutting its newsletter subscription fees, so this time around they’re only charging $49 a year for the subscription to Stock Advisor, and they’re tossing in Inside Value for free. Inside Value has been very quiet lately, with not much hyped promotion, but Stock Advisor, of course, sends out a new teaser ad every couple weeks.
And this one starts out with a good, attention-getting pitch (and a picture of an early IBM cheese slicer to catch your eye), here’s a bit of it:
“Look, there’s no easy way to say this…
“Everything You Know about Investing Is WRONG
“But if you act NOW in response to the bombshell info revealed in the pages below… and if you can keep it a secret for a little while longer… I think you’ll be quite happy to discover you were wrong. I know I was! ….
“Would you buy stock in a company named IBM that makes cheese-slicers?
“What about a paper mill in Finland called Nokia? A record store in San Francisco named The Gap? Or a noodle factory in Korea called Samsung?
“I hope your answers were yes, yes, yes, and yes!
“But even if you had anticipated that these companies would successfully adapt their business models to a changing competitive landscape, you couldn’t have made money as an investor.
“Because they were all so small when they made these winning transformations, that their stocks weren’t even publicly traded.
“That’s why what we’re about to witness is such a rare event. And such a rare profit opportunity for investors like us.
“You can learn a lot about IBM’s culture of innovation by studying its earliest products. What you can’t learn about is the breakthrough that eventually sent its stock through the roof. But what if one of today’s technology leaders was about to radically transform its business model? And what if you could invest in it weeks in advance?”
Sounds good, right? And then we hear more about how analysts and investors have gotten this company wrong time after time, and how they’re about to radically change their business:
“.. the place to watch closest is named ‘Lab 126.’
“For most people, what happens at this highly secretive facility in Silicon Valley is nothing to worry about.
“But if you’re the CEO of a Fortune 500 company, you’re probably worried sick about it.
“And if you’re an aggressive investor, with a nose for value and a skin thick enough to ignore all the skeptics who are always so sure about what can ‘never’ happen…
“Then you’ll want to find out everything you can about Lab 126, and the one company that controls it. As soon as possible.
“Because even though the last innovation to emerge from Lab 126 was so disruptive that it caused Apple CEO Tim Cook to lose his cool in a public conference call with investors, when they accused him of adopting a copycat strategy —
“It’s their next bombshell that could finally reveal this company’s 18-year master plan.”
But wait, there’s more!
“New York Times technology reporter Quentin Hardy recently discovered another carefully-guarded laboratory this company operates, called simply “A9.” And wondered if this company’s entire history to date will soon be remembered as a series of “footnotes to its larger and more secretive goal.”
“It will… I’ll show you why I think so in a minute.
“AdWeek’s Tim Peterson took things one step further. He thinks this company may be hiding a ‘weapon of mass disruption,’ powered by an asset of almost unlimited value that this company has been stockpiling since 1995.
“It is… as I’ll argue below.
“Then Eliot Brown and Greg Bensinger at the Wall Street Journal revealed on February 28 that this company was shopping for 500,000 square feet of office space in downtown Manhattan.”
OK … so that’s enough, even without the Thinkolator on the case today. Shall we tell you now, or get some more of the details about this company from the teaser ad first?
Fine, we’ll give you the details … but first, for those who don’t want to wait around, a hint: the company’s name rhymes with “Shamazon.”
Some more from Magyer:
“… journalists aren’t even close to putting the pieces together.
“So they don’t understand how this company is quietly positioning itself to create a near-monopoly across dozens of industries, all at the same time. Which could ultimately allow it to charge lower prices than its competition but still make higher profits.”
And a few of the incredible and ridiculous accomplishments in this company’s young history:
- “No company could ever convince its largest direct competitor to pay them $$$ directly out of their own profits for 10 years, while slowly bleeding them into bankruptcy. But this company did.
- No company could keep beating the pants off its second largest competitor, even after that company accepted a $605 million technology bailout from mighty Microsoft. But this company did.
- No company could become “the most trusted in America,” according to the famous Harris Poll, and attain the highest rating EVER in the ForeSee Customer Satisfaction Survey, even though almost none of us have ever seen or spoken to one of their employees. But this company just did.
- No company could become half the size of Wal-Mart in less than a decade — by taking a huge bite right out of Wal-Mart’s hide. But this company did.”
And then we get a rundown of the many, many folks who said buying this stock was a mistake over the 15 or so years that David Gardner has been recommending it (Gardner’s original cost basis for this is reported as being around $3 a share, so that’s done well, and I think is somewhat more recent recommendation to subscribers in 2007 was closer to $15-20 a share, which is almost as spectacular):
“On April 30, 1999, Forbes called it ‘the market’s most overvalued stock.’ In subsequent years, its price more than tripled.
“On April 14, 2003, Barron’s said its valuation was ‘the most egregious’ of the top internet companies. Then its price shot up more than 10 times over.
“On October 22, 2010, Fortune called it an ‘amazing bubble’ and said there was ‘no reason why’ it should cost so much more than Apple or Google. Its price was up nearly 50% within less than a year.”
And we can add your friendly neighborhood Gumshoe to that list, too, because a few years ago I thought this stock, which is now pushing $300, was getting foolishly overpriced at around $50. It is, of course, Amazon.com (AMZN).
Magyer was apparently in the same boat as I a few years back, he makes a point of saying that he capitulated and accepted David Gardner’s argument and uttered what he said are the hardest words for an investor to speak: “I was wrong.”
So I’ll join him in that, too — I was certainly wrong to believe that Amazon was too expensive at $50 and $100. But does that mean I’ll jump on board and buy it now at $275 or so? Well, no. At least not at the moment — I see the argument, I understand the “Amazon takes over the world” story, I’m even a very happy Amazon customer. But I still can’t convince myself to buy the stock — I really just can’t stomach buying a company this big that doesn’t make money and doesn’t care about making money.
That’s quite possibly a weakness on my part. And maybe I’ll get over it someday — or maybe I’ll just miss out from time to time on massive “rule breaking” opportunities like Amazon over the last ten years (and maybe over the next ten), and I can live with that. But if you want to convince yourself to buy Amazon shares, for God’s sake don’t look at their income statement — they have poured all of their cash back into building their massive ecommerce and fulfillment infrastructure over the last 15 years, and they have sacrificed profitability for growth at every single step along the way, so they sometimes do make money … but their profit margins peaked back in 2009 at around 3.5% and are right around 0% now.
But Amazon certainly has done incredible things, and it is probably the most loved tech company by consumers — that’s because they’re really, really good at serving customers. It’s almost ludicrous how much better online shopping is now than it was ten years ago, with rapid delivery and wide availability of so many things, and a lot of that is because of Amazon pushing the envelope in faster and more efficient data centers, better tracking and delivery, cheaper delivery, and easier and easier and faster and faster ordering (and upselling, thanks to their recommendations engines that find things you might like). Amazon has also turned some of that infrastructure into an effective business, renting out their cloud servers and fulfilling sales for partners, but the lion’s share of their business is still about delivering a product quickly and cheaply, at a price that’s probably better than you can get in your town.
So to believe in the Amazon story and want to look at it as an investable retailer you have to make a little bit of a leap of faith — that they will, in fact, someday turn their customer-pleasing machine into a profit-making machine, either by raising prices or by simply growing revenues so much and so fast that a 0.5%-1.0% profit margin becomes enriching for shareholders.
But the new announcement that this teaser ad focuses on, their next stage of evolution as a company, is perhaps a way of changing that story. Maybe. By becoming more and more of a tech services company, levering their expertise and computing power in the cloud and their massive store of customer data into something even more valuable and, since it wouldn’t involve physical products or fulfillment, with a far larger profit margin.
So what is that new announcement that’s going to change things for Amazon?
Here’s how Magyer puts it:
“Let’s look inside Lab 126 and see why I’m convinced that this company’s newest innovation reveals the master plan it’s been formulating for the past 18 years. Positioning this stock for massive growth over the next 18 years.
“It’s called a ‘real-time bidding platform’ (RTB for short.) And this company actually snuck a pilot version of this RTB onto its website on March 4… without even issuing a press release!”
Lab 126 looks like it’s one of Amazon’s “incubator” companies, for lack of a better word, and it appears they’re the folks responsible for the Kindle hardware — the Kindle e-readers and the Kindle Fire tablets. The other “secret” project/lab that they tease as A9 is another division, one that briefly launched a new search engine to compete with Google and the like about ten years ago but has more recently been focused on improving search both within and without Amazon’s product offerings, and providing relevant product advertisements.
And it’s the new ad network that A9 is probably part of that has apparently garnered Amazon some attention now — Adweek called Amazon “Advertising’s sleeping giant” when the news started to break late last year. Makes sense — Amazon is also one of the world’s largest online advertisers, as well as being an owner of valuable advertising real estate and data, so even just revamping the way they buy and sell ads (and interface with the huge existing ad networks, like Google’s) in a real-time bidding network makes sense, and would make a big new system worthwhile. If they can leverage that to earn more from folks who want to advertise on their properties and target perhaps the most valuable people on the internet — those who are actively trying to shop — then I presume it will be quite successful.
Amazon Web Services in general is already quite successful, it seems — at least in building a big business, I have no idea whether or not it’s making money. That NY Times article cited in the ad is here from last Summer, about Amazon’s “secretive goal,” and it gives a good picture of how AWS is growing and helping other companies harness the cloud and search.
Will it be so successful that it changes the business materially, helping to either boost profits or meaningfully boost revenue? I have no idea. And analysts are already expecting 40% annual earnings growth for Amazon going out five years into the future, so they’re already expected to grow, continuously, far more quickly than almost any large company has ever grown for that length of time.
But there you have it — Amazon is one of the top ten most-analyzed stocks on Wall Street, I’m sure, and it’s true that any analyst with a calculator will say it’s overvalued … but it was also overvalued last year, and three years ago, and five years ago, and it has gone up more than 500% since the last time I (and Joe Magyer, as he notes) looked at it and derided it as too expensive.
Those analysts look at Amazon and project that they’ll more than double earnings in 2013, but that would still mean a forward PE ratio of 75 — so yes, as the ad says, anyone who uses the PE ratio as a rule of thumb will scoff at Amazon or just miss it entirely. And Amazon puts all of its very tiny pile of free cash flow into new capital spending, both because they keep pricing low to generate volume and because they’ve spent heavily to expand their capacity, so those who are looking for EBITDA margins or cash flow margins will also not find anything exciting at Amazon.
The Morningstar take, though, is also pretty interesting — they tend to be pretty fuddy-duddy about growth stocks, and they’ve slapped a $300 “fair value” on this stock and share this quick take on AMZN:
“A shakeout among traditional brick-and-mortar retailers is under way, particularly in commodified categories. With minimal customer switching costs and intense competition, we’ve already seen Circuit City, Linens ‘N Things, and Borders meet their demise in the past few years, while names like Best Buy, Barnes & Noble, Sears, Office Depot, and OfficeMax struggle to reverse deteriorating fundamentals. Mass merchants like Wal-Mart and Costco certainly have played a role in this trend, as has the rapid growth of key original-equipment manufacturers like Apple. However, we believe the most disruptive force in retail in recent years has been Amazon.com. Amazon’s low-cost operations, network effect, and laser focus on customer service provide the company with sustainable competitive advantages that traditional retailers cannot match; this should yield additional market share in coming years. Armed with one of the most capital-efficient models in e-commerce, Amazon generates economic returns well ahead of our cost of capital assumption, supporting our view that it has a wide economic moat.”
To buy the stock with a confident smile, I think you need to believe that someday the company will turn their massive customer base and broad scope of online and offline business into higher profits … and that until that day comes, that investors will continue to believe in management and will continue to be willing to pay a high price for the stock. It’s worked really, really well so for but, as I noted above, I still can’t convince myself to buy the stock. They’re certainly not hurting, of course, and they could raise prices on everything on Amazon.com by 1% across the board tomorrow and probably almost double their profit margins in the blink of an eye, given what I think is a pretty tight hold on existing customers — but that’s clearly not their goal.
Amazon doesn’t talk much to investors or give much in the way of guidance to temper expectations, so the shares can be quite volatile when news breaks or sentiment changes — they’ve rarely gone through a year without a 20-30% drop, so perhaps I’ll be more inclined to take a look the next time that happens. It may be that Amazon is turning Wall Street on its year by not making money, and by not playing by conventional rules or being valued by conventional metrics very well, but it’s still got a lofty enough price and enough embedded optimism about their future that any bad news or change in sentiment could certainly hit the shares very hard.
That’s just me, though, and I’ve apparently got hangups about Amazon’s valuation that go way back and can’t be shaken. All I can really tell you is that, yes, Joe Magyer says he’s finally a believer in Amazon, and David Gardner I don’t think has ever felt any qualms about buying it all the way up, and it’s the stock they’re teasing as “Silicon Valley’s Hidden Empire” today. So do you own it or like it, or want to buy it at today’s price? Let us know with a comment below.
P.S. The low price for Stock Advisor of late indicates to me that someone at the Fool is following the marketing strategy that Agora and others spearheaded in newsletterland years ago, that it’s worth it to slash prices and lose money acquiring new customers as long as they buy something. You need to bring in more and more people who’ve proven that they’ll pay a very small amount for a newsletter, because those people will then become hugely valuable prospects to whom you can market your much more expensive “upgrade” services in the future. Actually, maybe that’s the Amazon marketing strategy, too — get ’em buying and they’ll buy forever, more and more each time.
That’s why we’ve seen a proliferation of $29 and “$5 a month” and $49 newsletters in recent years — spending even a little bit gets you over the bar of sales resistance, and they know that, on average, it means you’re more likely to buy something more expensive next time. Of course, not to toot our own horn, but Stock Gumshoe doesn’t spend money marketing to any big lists of strangers and we’re quite happy that readers are buying our $49 Irregulars memberships, which don’t seem like such a “little bit” to us. We also have no need or plan to upgrade you to some better version of Stock Gumshoe after that. I already share my best thoughts, ideas and content with the Irregulars — and much of it with our free readers, too — I’m not holding something better in reserve for folks who pay ten times as much because, as I’m sure plenty of folks can tell you with a wry smile, I don’t have something better in reserve. Unfortunately.