Why Barron’s thought Amazon stock was overvalued in 1999
Disclaimer: I own stock in Amazon. Also, many of the facts and figures I mention here are from Brad Stone’s book The Everything Store. It’s a great book, check it out on Audible.
The other day, I packed a couple of suitcases because I thought I would have to evacuate my house. Right now, there’s a fire not too far from where I live. It looks like I’m safe for now because the winds are pushing the fire in a different direction. Still, I haven’t left my house the past few days because there’s so much smoke that I get shortness of breath after being outside for a few minutes.
Anyway, I’ve decided to avoid my problems in the present by diving into the past. So let’s go back to twenty-one years ago when I was 2 years old and a young company called Amazon was getting trashed on the cover of Barron’s.
Amazon.bomb
In 1999, Barron’s published a cover story titled “ Amazon.bomb “. It argued that the company was overvalued and the stock price would eventually come crashing down. Now that Amazon is worth $1.6 trillion in market cap, I think we can all agree that Barron’s got this one wrong. In fact, my biggest fear in life is that I’ll write an article that looks this stupid in retrospect. Let’s take some time and examine why this prediction turned out to be such a bad one.
Amazon’s long-term strategy
The Barron’s article mentions over and over how Amazon wasn’t making any money. The author seemed to believe that people would eventually realize it made no sense to invest in a company that wasn’t profitable. But this was completely ignoring Amazon’s long-term strategy.
As we can all see from Amazon’s success, focusing on profitability isn’t always the best move. Jeff Bezos realized that the greatest opportunity Amazon had was focusing on long-term growth. The more customers the company had, the more categories of products it could offer, and the better its personalization engine that offers shopping recommendations to customers. The better Amazon was, the better its chances it could become the go-to site for online shopping while the Internet was still young and the opportunity was still there. If the company had focused on short-term profits, there’s no way it could have expanded away from just selling books the way that it did.
Why Amazon didn’t get crushed by competitors
The Barron’s article also speculated that a bigger retailer like Walmart or Barnes & Noble would start selling online and crush Amazon. This belief was actually pretty common back then. In 1997, Jeff Bezos made a presentation to a group of Harvard Business School students. Afterward, one of them straight up told Bezos that he should just sell the company to Barnes & Noble while he still could.
Back then, Barnes & Noble had significantly more resources. In 1997, the company had almost $2.8 billion in annual sales while Amazon had just $148 million. Since Barnes & Noble had more money and locations across the country, it could hypothetically offer faster delivery and better customer experience.
Of course, things didn’t end up working out that way. Barnes & Noble was more focused on the opportunity they had in the physical space, which at the time was more profitable. It didn’t make sense to spend so much money dominating the online book market when it was still so small. Plus, the company’s internal culture was totally built around the physical distribution of books. It’s not that easy to ask the leadership team and employees to adapt to fulfilling online orders, which is a completely different business.
The Barron’s article also asked why authors couldn’t just set up their own websites and sell books directly to customers. There’s an obvious answer here: it was a lot of work back then to set up a website that offered an easy payment system and then make sure that you had a delivery process that actually worked. I really doubt that Stephen King wanted to take time away from writing books so that he could watch some Tai Lopez course on using social media to get more website traffic (or whatever the 90s equivalent of that was). Selling on Amazon was a much easier option.
The excess of Silicon Valley
Even though the Barron’s article got a lot of things wrong, it might have close to looking like a spot-on prediction. The tech sector in general was hugely overvalued at the time. 1999 was the peak of the dot-com bubble. Since the Internet was still very new, people were excited because they understood its potential. Unfortunately, they got way too carried away. Businesses that had no realistic paths to ever being profitable got unreal levels of funding.
The most notable example is probably Pets.com. The company had received $300 million in investment, which included money from Amazon. Still, Pets.com was still never able to figure out things that seem pretty basic for an online pet supplies company, like how to shop large dog food bags. The company went public in February of 2000 and went bankrupt within 9 months.
When the dot-com bubble ended, even companies like Amazon looked like they were in trouble. At one point, Amazon lost 90% of its stock value from its peak. In fact, some argue that Amazon only made it through the crash because of a lucky break. The company took out more than $600 million in bonds in 2000 just a month before the bubble popped, which gave the company the runway it needed to make it through the crisis.
In conclusion
It’s easy to call this Barron’s article stupid in hindsight and it’s fun to fantasize about how rich you would be if you invested in Amazon back then, but it’s not like anyone could have predicted what it would become. The company had only just started selling products other books the year before and Amazon Prime was still 6 years away. The only person who might have had a clue that Amazon would one day achieve the size and scale that it’s at today was Jeff Bezos himself.
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Originally published at https://sundayspecial.substack.com.
