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The online retailer Amazon has just disappointed with its quarterly figures and its earnings outlook for the fourth quarter. The share price fell significantly, investments in the new tablet computer "Kindle Fire" weighed on the result. The attack on Apple will be expensive, the shareholders will have to bleed for it. On the other hand, the news reminded me of a text I wrote back in November 2002 at the time still as a correspondent in Silicon Valley. "I claim that in the second quarter of 2003 at the latest there will be speculation about the bankruptcy of Amazon," wrote a reader to us at the time. I tried to clarify whether the statement would be true.

The online retailer Amazon has just disappointed with its latest figures and its earnings outlook for the fourth quarter. The share price fell significantly, investments in the new tablet computer "Kindle Fire" weighed on the result. The attack on Apple will be costly; the shareholders have to bleed for it. The news reminded me of a text I wrote back in November 2002, when I was still a correspondent in Silicon Valley.

"I claim that by the second quarter of 2003 at the latest there will be speculation about the bankruptcy of Amazon," wrote a reader to us at the time. I tried to clarify whether the statement would be true. Here is the text from back then; I think it is also interesting in view of the recent discussions about business conduct from Amazon to this day:

Could the reader be right?

“Could the reader be right? How would that fit in with the rise in the share price of the largest online retailer in the world, whose shares have gained around 170 percent in value over the past twelve months and thus outperformed all stocks in Standard - & - Poor's -500 index are included? A bankruptcy of Amazon could suspect anyone who assumes that the company will collapse under its long-term liabilities of around 2.26 billion dollars. To pay the interest on these liabilities, Amazon has to send around $ 35 million to its creditors every quarter. Anyone who then still believes that Amazon is only doing comparatively well at the moment because the interest rates are so low could actually get the gloomy thought that an interest rate rise could break Amazon's neck very quickly.

The market value seemed too high years ago

But on the stock exchange, Amazon is valued at around $ 7.2 billion (November 2002, author's note). That is more than double the market capitalization that the two market-leading American bookstore chains Borders and Barnes & Noble have together. The Amazon share is quoted at 139 times the profit expected for the current year before extraordinary expenses. At Borders and Barnes & Noble, this price / earnings ratio is 12.

When compared with Amazon, even the very successful online auction house Ebay has a “cheaper” share with a price-earnings ratio of 78. In view of this situation, it is not surprising that there are a particularly large number of investors on the stock market who, if not on bankruptcy, then at least speculate on an imminent decline in the price of Amazon shares. Around 52 million shares of Amazon are currently “sold short”, that is, the papers have been put up for sale by investors at a fixed price on a future date. However, the sellers do not own the shares at all, they only hope to be able to collect the papers in the future at a lower price than they agreed as the selling price in their forward deal.

Short seller at work

So it is nothing more than a bet on a falling share price. On Amazon, almost 20 percent of the stocks traded on the stock exchange are sold short, while on Ebay this percentage is only around 10 percent. The pessimism of our reader is therefore shared by many investors. On the other hand, this also means that a further rise in the price of Amazon can hurt a lot of speculators, but in such a case their bet does not work. If these investors then have to act quickly before the price of the Amazon share rises even further, this leads to even more violent price fluctuations upwards. The Amazon share is obviously accompanied by a lot of emotions, which ultimately obscures the core question of whether the company can be successful in the long term, given its balance sheet structure. And there are certainly glimmers of hope.

Amazon's sales rose by a quarter in the first nine months of 2002, and losses fell by 73 percent. Two years ago, Amazon invested 10 cents of every dollar in sales in setting up distribution centers and programming its website. That number is now under a cent, a quarter of what Wal-Mart, the world's largest retailer, has to spend on its investments. In the first half of 2002 Amazon invested 4 percent of its sales in advertising, three years earlier this share had been 12 percent. Since the company's IPO, Amazon founder and CEO Jeff Bezos has emphasized that the most important number for assessing the long-term existence of his company is the inflow of funds (cash flow). "That is the only measure of what is really going on in our country," he says. In addition, the cash flow is easy to understand: "You simply take your bank balance at the end of the year and subtract it from your bank balance at the beginning of the year," says Bezos, explaining the essence of the actually somewhat more complicated key figure.

Strong belief in cash flow

Bezos believes that positive cash flow will help Amazon weather any pressures given its heavy debt burden. In fact, Amazon's cash flow was positive at around $ 57 million last quarter. The cash and cash equivalents of currently around 865 million dollars ensure short-term security. Amazon does not have to refinance the first large tranche of its long-term debt with an interest rate of 4.75 percent until 2008, so short-term interest rate fluctuations are not particularly interesting. It is therefore highly unlikely that there will be speculation about the bankruptcy of Amazon in the coming year. … ”

So far so good. The reader was mistaken to an extent that, in retrospect, almost stunned: Because today Amazon has a market value of a good 92 billion dollars and not 7.2 billion dollars as it was when the answer was written. So you can't even blame Bezos for long-term harm to its shareholders (only the short sellers weren't having fun). And now he always ensures healthy competition on the tablet market.

Tags: Amazon, Jeff Bezos, Kindle Fire, tablet computers
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How Amazon didn't go broke

By Carsten Knop

The online retailer Amazon has just disappointed with its quarterly figures and its earnings outlook for the fourth quarter. The share price fell significantly, investments in the new tablet computer "Kindle Fire" weighed on the result. The attack on Apple will be expensive, the shareholders will have to bleed for it. On the other hand, the news reminded me of a text I wrote back in November 2002 at the time still as a correspondent in Silicon Valley. "I claim that in the second quarter of 2003 at the latest there will be speculation about the bankruptcy of Amazon," wrote a reader to us at the time. I tried to clarify whether the statement would be true.

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