The investment community’s continuing love affair with the internet has now created one of the hardest to swallow stock valuations of all time, as on-line bookseller Amazon Com Inc’s shares climbed to over $95 this week. Still without a dollar of profit to its name, Amazon is now valued by investors at a total of $2.3bn, just a shade below the biggest high street retailer of books in the US, Barnes & Noble Inc, valued at $2.4bn. And the different business models adopted by the two rivals could serve as the definitive example of the way the internet is changing retail business practices. The history of Barnes & Noble goes back over 100 years, and from its 1,000 branches in prime, high street locations all over the US, the firm turns over $2.8bn a year. The freeholds and leaseholds on its premises are valued (on a historical cost basis) at $460m, while the firm’s massive stock of books is valued at over $900m. Amazon on the other hand operates from a warehouse in Seattle, with real estate valued at just $10m, and by buying in stock based upon receipt of customer orders, it carries just $12m of inventory. Amazon turned over just $87m in its last quarter, less than 10% of that achieved by Barnes & Noble’s, and Amazon isn’t even likely to break even for over two years. But investors are falling over themselves to buy into the company, forcing the share price up 60% in the last three months alone. The company’s business model means that in the long run, its overhead base will be vastly lower than that of a high street retailer. But with analysts predicting losses way into the future, this is still years rather than months away. And in the intervening period, every high street bookseller on the planet will be scrambling to catch up by investing in its own on- line service. Amazon still has a significant lead in terms of the quality of its on-line services, and the company is expanding its expertise and proprietary technology into other suitable markets like compact disks. But the expectations on which this stock is currently trading seem to defy all rational examination.
