Amazing Amazon Valuation Is For Real

Shareholders of seem to have the gift that keeps on giving. Riding the crest of Internet-mania, the stock of the online book and music seller has zoomed up 160 points or 83 percent since last month to settle at 351 15/16 on Dec. 28. Amazon was up 130 in its last 10 trading days.

For a stock that started 1998 at 30 1/8, that's a 1,128 percent gain. In other words, a $1,000 investment made at the start of the year would now be worth $11,286.

Leading Internet portal Yahoo — which is currently not included in the DM News Portfolio but based on its direct marketing acquisitions soon could be — has enjoyed a similar run up this year from 32 to 253 7/8 while America Online is up from 23 to 141. Strong holiday Internet sales sent all three soaring higher to start the week after Christmas, leaving investors to wonder: Are these valuations legitimate?

Tony Blenk, vice president of research for Everen Securities, says yes. Internet stocks may not be valued in a conventional way, yet since their share prices reflect investor expectations of future performance, Blenk said the high stock prices make sense.

“The valuation for a company such as Amazon is based on what they could achieve far in the future,” he said. “It does not make sense to value Amazon on the basis of 1999 numbers or even 2000 numbers because it's obvious that [online book buying] is a vast market that is just beginning to be exploited.

“There is an element of speculation in stock prices. There has to be in placing a value on sales and earnings going out four to five years.”

Blenk said the attempts of rival Barnes & Noble to eat into Amazon's lead in market share through the proposed acquisition of distributor Ingram Book Group will have no effect on Amazon's growth for two main reasons. Should Ingram's delivery become sloppy to favor Barnes & Noble, it could lose a leading client in Amazon and face other client defections. Second, the cost savings of having Ingram provide books to B&N at a low cost would be nullified by the requirement that it pay sales tax in states where Ingram maintains a physical presence.

The Internet has done wonders for the performance of other DM stocks as well. Based on percentage change in value for the year, cataloger Skymall was the second best performing stock in the DM News Portfolio with a 611.3 percent return, making a $1,000 investment now be worth $7,113. Spurred by a report of a 600 percent increase in Internet sales, Skymall jumped 23 on Dec. 28.

Catalog and auction site Multiple Zones was the third best performer, up 499.2 percent. Fourth was direct seller Creative Computers, up 391.1 percent, followed by e-commerce software provider Connect Inc. up 324.1 percent. Buoyed by soaring Internet sales, cataloger The Sharper Image was up 282.4 percent, Web auction site Onsale was up 213.9 percent, Web portal Netscape up 179.7 percent and direct computer seller Micro Warehouse up 151.1 percent. The online non-Internet related stock in the top 10 was Telespectrum Worldwide, which increased 172 percent for the year.

Blenk said soaring stock prices reflect the expectation of investors that the power of the Internet as a direct marketing medium is just starting to be harnessed. He added that the stocks perceived to be the leaders in each category carry the largest premiums.

Following its acquisition by US Web earlier this month, CKS Group now trades under the ticker symbol USWB. Its price reflects its last close on Dec. 16.

Portfolio Value: If $1,000 had been invested in each of these companies at the beginning of the year — for newly public companies when the stock first closed — the value would be $136,157, an increase of 36.1 percent.

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