Pro Forma Life
He don’ plant ‘taters
He don’ plant cotton
And dem folk dat plant ’em
Dey’s soon fogotten
That ol’ man river… he just keep rollin’ along.
“Once the Toast of the New Economy,” writes David Streitfeld in the Los Angeles Times, referring to one of our favorite stocks, Amazon.com, “May Be Toast.”
On January 4th 2000, I suggested to readers of the Daily Reckoning that shares of Amazon.com – then $69.75 – might be overpriced. Eighteen months later…at $14.85…Amazon is still overpriced.
I feel some obligation to continue our coverage of the Amazon.com story. Not that there have been any plot twists – there have not. Nor have there been any moments of high drama or suspense.
Instead, the big, muddy river just keeps rolling along. Bezos’ company continues to do just as we expected… rolling along towards ‘pro forma’ profitability… and GAAP bankruptcy.
What we find most interesting in the Amazon story is how the distance between ‘pro forma’ and GAAP numbers – like the space between opposing river banks – seems to widen as the big river nears the end of its course. On a pro forma basis, Amazon is expected to reach profitability by the end of this year. But when normal accounting rules are applied – the Amazon river may freeze over first.
“Amazon said that it expects an increase in revenue to between $625 million and $675 million in the third quarter, and that it will hold pro forma losses at current levels,” says the report on CBSMarketWatch. “The company maintains that it is on track to break even on a pro forma basis in the fourth quarter. Pro forma calculations are based on assumptions about the company’s business and exclude one-time charges.”
Amazon.com had $2.8 billion in revenues last year, on which it earned a minus $569.5 million. It has continued its losing ways during the first two quarters of this year – with a $168.4 million loss in the quarter just ended.
I do not claim to be the most learned or sophisticated financial analyst. But losing half a billion a year on less than $3 billion in sales does not seem to be the way to fortune, even in the New Economy. And yet Bezos has made a fortune from Amazon. He, like others who have made money on the company, has done so by selling the shares. That formula has been a moneymaker ever since Henry Blodget helped drive the stock up above $150 a share. Even at $14.85 a share, Amazon still looks like a better share to sell than to buy. Bezos seems to think so. A recent report on insider trading shows Bezos selling two blocks of 300,000 shares each.
“We went through a stage where online retailing was going to conquer the world,” said Eric Von der Porten of Leeward Investments. “No one was ever going to go to a mall again. But now it’s going to settle down. It’s going to be a lot less exciting.”
Especially unexciting is the growth in Amazon’s sales. Over $5 billion in sales were expected for this year. The actual total is now estimated to be closer to $3.4 billion. The company’s sales growth rate is little different from what you might hope for in a laundromat or landscaping business – about 17% per annum. Worse, most of Amazon’s growth is coming from selling electronic equipment, not books.
“And there is the Amazon dilemma,” explains Streitfeld. “Where it is profitable it is not growing, and where it is growing it is not profitable. Mark Rowen, analyst with Prudential Securities, thinks this is because electronics are still heavily discounted, while discounts have been curtailed on books.”
That is, however, only the beginning of Amazon’s troubles. After 17 consecutive unprofitable quarters, Amazon has accumulated $2.7 billion in debt. The great hope of the enterprise was that growth in sales would reduce, proportionally, the debt burden to a reasonable level. But now that growth rates have fallen, the company will have to achieve – in rough numbers – a profit margin of about 7% or so, just to service its debt.
In a pro forma world, debt is no problem. But in a pro forma world, nothing is a problem. Problems are dismissed and forgotten. In a pro forma world, absent earnings pose no more problem than missing Congressional interns.
But Amazon flows through the real world – a jungle, in fact, where it has attracted the interest of piranhas. Amazon raised $700 million by selling bonds last year, announcing a series of deals with Internet start ups to prepare the market for its bond sales.
“On Jan. 21, 2000,” Streitfeld recalls, Amazon said it would receive $82.5 million over five years from Greenlight.com, an online auto retailer, in exchange for helping to introduce Greenlight to Amazon’s customers. Three days later, Amazon announced a similar deal with Drugstore.com. Seven days after that, a deal with Audible Inc., a provider of spoken-word recordings, was announced.”
Amazon forgot to use the magic words. It failed to mention that these were not real deals, but pro forma deals. No cash changed hands…just shares in other often-worthless web companies. Now, it is being sued by one of the hedge funds that bought its bonds. Soon, it will be sued by other investors who believed ‘pro forma’ numbers were the same as real ones.
Pro forma life can be anything you want it to be. Pro forma, lawyers pose no clear and present danger to Amazon. Pro forma, Amazon will break even this year.
Pro forma, Bill Clinton did not have sex with that woman, and the weather is always perfect.
July 24, 2001
Writing to you, pro forma, of course.
*** I haven’t heard from Eric this morning. Maybe he’s depressed. Merrill settled an investor lawsuit for $400,000. The walls have been breached. Lawyers from all over the country are said to be arriving at New York’s Port Authority bus station, having approximately the same effect on Manhattan as the arrival of the Visigoths in Rome.
*** But, heck, I’ve got the Internet…I can find all the information I need about what’s happening on Wall Street. In fact, I can find more than I need.
*** The Detroit Free Press warned yesterday about a new syndrome:
“Now mental health experts have come up with yet another psychological disorder – ‘information fatigue syndrome’. Its symptoms include depression, anxiety, insomnia, inability to focus, headaches, high blood pressure and social withdrawal… Atlanta clinical psychologist Harold Steinberg says some of his patients have even answered their cell phones during therapy sessions. ‘I’m amazed at how many of them believe they have to take every call, read every memo and respond to every message,’ he says.”
*** Successful people are busy people. Everyone wants to appear to be successful…so they need to feel busy. So they pick up a cell phone…or get on the computer.
*** And….what’s this….here’s a news item….now people will be able to get on a computer terminal while they’re eating a Big Mac at McDonalds. The terminals are being placed in McDonalds by one of the nation’s leading debt pushers – Freddie Mac – in order to encourage low- income families to get a mortgage.
*** But “Homeowners Might be Borrowing Trouble,” warns the Seattle Times. Mortgage applications are up 54% this year over last. Nearly half of that is refinancing work.
*** “But some experts are spotting ominous signs in the refinancing boom,” says the Seattle paper. “Half of the homeowners who have refinanced recently did it to pay off credit cards, car loans and other consumer debts…”
*** In the refinancing booms of 1992-93 and 1998-99, only about one in five borrowers paid down debt. Many homeowners tapped so much of their equity that they now must pay private mortgage insurance premiums to protect the lender, a cost they did not have before refinancing. One risk of consolidating consumer loans: it turns unsecured debt into a bill that can cost you your house.
*** Get in debt…get a computer…get a cellphone …get a lawyer – get busy! Is life in America, in the 21st century, great…or what?
*** While Americans are dripping ketchup onto computer keyboards, the rest of the world is drooping its way to recession. The London stock exchange dipped near to a 3- year low yesterday. German confidence is at a 3-year low. Dow Jones’ world stock index hit a high of 19,256 in May of 2000; it now stands at only 12,892.
*** In Tokyo, stocks hit a 16-year low – erasing every penny of stock market gain since 1985! Industrial production in Japan is also falling – down 14% annualized in the first quarter of this year….and 7% in the second quarter.
*** Japan is, I remind you, the world’s second largest economy. I – and I alone – have opined that it might also be the world’s leading economy, in the sense that wheresoever it goest the world’s #1 economy – the U.S.- may follow.
*** The Dow fell 153 points yesterday. And the Nasdaq once again dropped below 2000 to end the day at 1988. Amazon fell 5% in after hours trading (about which…more below). GE ended off 3%.
*** The gold mining index – the HUI – gained 3% last week. And guess what group of stocks has done the best this year? Hard to believe, but it is the gold mining companies – up 27.7%. But the price of gold has barely budged. Go figure.
*** “SELL ENERGY??? Are you nuts?” writes John Myers of Outstanding Investments. “Some die-hard Pollyannas will argue about new technologies or giant discoveries just waiting to gush to the surface. But if you talk to oil insiders, a typically optimistic bunch, you see unanimous conviction in their eyes that oil reserves are rapidly dwindling. Meanwhile, our dependency on crude grows each day.”
*** What else? Well, Henry turns 11 today. The little entrepreneur has made more than $50 by picking blackberries and selling them at a local roadside market. For whatever reason – Henry wants to make money.
*** After church on Sunday, we strolled through the graveyard in West River, Maryland, where many of Henry’s ancestors are buried.
“There’s Doctor McCeney,” I pointed out. “He was your great, great, great grandfather.”
“What was so great about him?” Henry asked.
“Well, that just means he was…let’s see…the father of the father of the father of your grandfather…” I reply. “And there’s your great, great, great grandmother, who died in 1898.”
“Well, what did he die of?” asked Henry.
“I don’t know,” I reply. “Why do you ask?”
“Because I want to be a doctor when I grow up.”
“Why do you want to be a doctor?”
“Because doctors make a lot of money.”
“Oh…” we continue our stroll through family history.
“And there’s another great, great grandfather, Henry. He was a doctor too.”
“Did he make a lot of money?”
“I don’t think so, Henry. Doctors don’t always make a lot of money.”
“Then, I think I’ll be something else.”
“Henry, making money isn’t the most important thing in the world.”
“Oh, what’s more important?”
“Uh…doing the right thing.”
“Well, can’t you do the right thing and still make a lot of money?”
“I don’t know, Henry, I don’t know…”