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Books, Boeing and Bumping Heads : Is Risky Play, but What of Plane Builder?


The Times today introduces Stock Exchange, a lively review of individual stocks by staff writers James Peltz and Michael Hiltzik, who between them have 30 years' experience analyzing the securities markets.

Jim: Mike, up first is Amid the hype over Internet stocks, it's soared to a ridiculously high price, about $100 from $12 a year ago, even though no one has a clue about the company's potential. And because there aren't a lot of shares floating around, it often moves $10 or $15 in a single day. I'd ignore the stock and sleep at night.

Mike: Right. Amazon of course is the world's biggest--well, let's give credit where credit is due--it's the galaxy's biggest online retailer of books. It's got a Web site instead of bricks and mortar. In this year's first quarter it sold $87.5 million of books and lost $9.3 million. In fact, Amazon doesn't plan to turn a profit until 2001 at the earliest. So, hey, why be surprised that the stock has gained 650% in the last year? And now it's got a market capitalization bigger than its two nearest profitable competitors combined--Barnes & Noble and Borders.

Jim: Which is the perfect time to bring up the "greater fool" theory of investing--namely that it doesn't matter what you think a stock is worth, as long as there's a greater fool out there . . . .

Mike: . . . to take it off your hands. And you know what happens when you run out of fools.

Jim: Exactly. And I'm sick of hearing Wall Street types argue that you can justify these stocks' high prices on the grounds that the Internet demands new ways of thinking about value.

Mike: That's a classic dodge. In fact, now that "Seinfeld" is off the air, the funniest spectacle around is watching Wall Street analysts twist themselves into knots trying to rationalize the valuations of companies like Amazon.

Jim: And to recommend the stocks when they know better.

Mike: I wouldn't get within 100 miles of this stock. Internet stocks are volatile because no one has any benchmark by which to judge the companies' business plans. So they can be $50 today and $90 tomorrow--and $20 the day after that. Exciting, yes, but nobody would mistake it for responsible investing.

Jim: I'm sure some day-traders have made a killing with this stock's gyrations. But most of us can't sit around our PCs buying Amazon and selling it an hour later. We have lives. And Amazon isn't the next Microsoft. So if you own Amazon and you've made a few bucks, don't be greedy. Get out.

Mike: I'm amused by even the common rationalizations we've heard for why Amazon makes investment sense, even though it's got a P/E multiple of infinity. For instance, you'll hear analysts say that in this fast-moving retail setting, Amazon's got the "first mover" advantage. It's the first bookseller online. It's got brand-name recognition. It's got an account base of a couple of million people who have already bought books, out of a potential market of 60 million Internet users.

Jim: Isn't that worth something? Especially if Amazon--which has already moved into music as well--starts selling other things online?

Mike: Not on the Internet, it isn't. That argument has everything upside-down. It's based on the assumption that technology is so expensive that Amazon has left its competitors permanently in the dust. In reality, technology is cheap--especially compared with the chores of finding store locations, getting leases, redecorating, maintaining inventory and hiring 100 part-time workers.

Jim: Not to mention maintaining their coffee bars.

Mike: Just for laughs, I pulled up some figures on Barnes & Noble, which is the nation's biggest bookseller and Amazon's archrival. It's taken Barnes & Noble eight years to build up its network of nearly 500 "superstores." But it had its Web site up and running in less than a year, and this year that online service will produce $100 million in sales.

Jim: I'm beginning to think Barnes & Noble and Borders are the stocks to buy.

Mike: The problem with Internet stocks is that the barriers to entry are very low, which means Amazon will have lots of competitors in no time. And since it's not making money now, it's going to be on a treadmill--cutting costs and spending more on advertising to fight off its rivals.

Jim: And isn't it true that the book market is basically flat?

Mike: Yes--and a commodity market to boot. Amazon is a fabulous company, and I've bought quite a few books from them and never had a bad experience. But now I can get the same service from Barnes & Noble, and soon enough there will be two or three others doing the same thing. And all I'll care about is who will sell me the book for the cheapest price.

Know what else? One of these days we're going to wake up to discover some survey showing that--whoops--consumer Internet growth has suddenly slacked off.

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