In May 1999, Barron's wrote a famous cover story called "Amazon.bomb," mocking newly public Amazon (AMZN) for being highly overvalued and open to intense competition from much deeper-pocketed rivals.
The cover story, in hindsight, looks foolish.
Amazon's market capitalization at the time of the story was $19 billion. It's $365 billion today, a 19-fold increase over the last 17 years. (Amazon is part of TheStreet's Growth Seeker portfolio.)
However, this cover story captures the quintessential value investor's skepticism when assessing a growth stock. There were lots of growth stocks in 1999 with greater than $19 billion market caps that were out of business a year later. What was the difference between these shooting stars and Amazon, which endured?
Netflix (NFLX) has also been a growth stock many have scoffed at for 15 years as being a money loser. Yet, at some point a few years ago, just as happened with Amazon, that skepticism dropped. Both Netflix and Amazon have seen their losses finally tip over into big gains in recent years. More importantly, investors have started pricing in how difficult it will be for any start-up or legacy player to catch up to them in the near future.
If we better understood what the critics missed about Amazon in 1999, maybe we could better determine whether one of the most popular growth stocks of today -- Tesla (TSLA) -- will be a $300 billion company in 15 years or much smaller than its current $33 billion market cap.
Here are the main mistakes Barron's made in assessing Amazon then and how they relate to Tesla today:
- Barron's saw Amazon as only a book-selling e-commerce company. Its ambitions were to become the leading generalist e-commerce company. It did. A Tesla bull might point out that Tesla was never going to be a Roadster company. It's always had grand ambitions. It moved to an expensive sedan (the Model S) and plans to start selling the more affordable Model 3 next year. It's also announced its interest in selling a truck, a bus and it already has a crossover SUV. When Tesla announced it was buying SolarCity (SCTY) in June, it rebranded itself as an energy company instead of simply an automobile company.
- Timing matters. Amazon had a first-mover advantage to be the leading e-commerce company by starting at the earliest days of e-commerce when there was no clear leader. In the Barron's article, the author discounts the notion of needing to be a first mover compared to a "fast follower." Yet, no fast follower could ever catch up to Amazon's momentum. Tesla bulls could argue that Tesla similarly was the first to move in a big way toward the electric vehicle market. Tesla has forced the incumbent car companies to have to speed up their electric car development plans. Tesla hopes that either the electric car market (or alternatively the market for the best auto-pilot controlled cars) is just as big as e-commerce would become when Amazon started 20 years ago.
- Amazon was losing money and Barron's didn't think it was sustainable. However, Amazon was able to continue tapping the debt and equity markets for financing. The big concern for Amazon bears back in 1999 and until the bears finally died off a year or two ago was the string of net losses. Amazon always ran its business at a loss because it reinvested in the business. Nevertheless, Amazon has almost always had cash gains from their operations from the start. That's a big difference between Tesla and Amazon. More on that below.
- Amazon has tapped the debt markets for over $10 billion over the last 17 years and it helped. Back in 1999, Amazon did a $1.25 billion offering of convertible debt that many criticized at the time because the company was seen as a money loser. In fact, that debt helped Amazon get through the 2000-02 recession. Amazon steadily increased its cash flow from operations through the years. This put it in an easy position to manage the debt repayments and then eventually retire the debt. Tesla, by contrast, has $3.6 billion in debt. As I said in another article this week, the company might need over $10 billion in cash, equity or debt over the next four years. Tesla bulls might argue that debt doesn't matter (including the $6 billion in SolarCity liabilities it will assume if that deal closes in the fourth quarter). However, Amazon only raised $2 billion in the first 10 years of its life.
- Barron's assumed Amazon would have to be profitable immediately. But it didn't have to be. As long as Amazon stayed cash-flow positive from operations, it could continue to invest in the business. Tesla has neither been profitable nor cash-flow positive from operations. It doesn't appear as though that will change in the near term.
Just because there are lots of potential competitors doesn't mean those competitors will be successful. The Barron's article lists the many potential competitors that could have displaced Amazon. However, the list almost seems comical now. For example, the article touts how -- at the time -- Dell was making $14 million a day selling things online and could easily choose to start competing with Amazon. It didn't. There are always lots of possible competitors for successful companies. The big names have deep pockets but generally not the focus on some new niche. The start-ups have lots of focus but not always the momentum or resources to catch up with a successful first mover like Amazon. On this point, Tesla bulls can feel good that Tesla's 10-year head start gives it a big advantage over the established car companies like GM (GM) or BMW planning on coming out with Model 3 competitors next year as well as Apple (AAPL) , which appears to be four years away from shipping a car. (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
So while there are some similarities between Tesla and Amazon's early days in terms of being a first mover going after a large potential market, there are also some big differences.
The biggest difference seems to be that Amazon has almost always been able to generate operating cash flow from its operations, while Tesla rarely has been able to and just embarked on a series of ambitious plans that have burned and will burn an enormous amount of cash over the next 18 months.
I went back through the old Amazon 10-Ks and found the following progression of Amazon's operating cash flow from operations (the negative years are in bold):
Here is the operating cash flow for Tesla over the years reported in the public filings:
Amazon isn't the only "growth stock" that generates a lot of cash flow from operations. Here's Netflix's record of doing that:
Notice Netflix's cash flow from operations dropped when the company switched to streaming and away from DVDs. This will be a category to watch in the coming quarters to see if Netflix has the ability to remain a growth stock. But the point here is that both Netflix and Amazon built their growth businesses on the backs of positive and growing operating cash flow. They never racked up multiple years of operating losses.
Tesla has yet to show it can consistently generate positive operating cash flow. Therefore, it doesn't seem to support the same confidence of Wall Street bulls that Amazon bulls have had for the last 20 years.
If Tesla continues to rack up losses, it's not in control of its own destiny in the way that Amazon and Netflix were. It will continue to have to go to the debt or equity markets, cap in hand, to support its business. That's fine when those markets are open for business. It can be deadly when they're not. It also leaves you open to the possibility that your investors will lose confidence and that will be reflected in the stock price affecting the cost of the capital you need to raise.
Positive cash flow from operations is the biggest difference between the old battleground growth stocks of Amazon and Netflix from yesterday and Tesla from today.