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Highlights

  • Amazon’s stock rallied 1,480% during the ‘90s then fell 95%!
  • The stock has never been a “good value” based on traditional valuation measures
  • The magnitude and frequency of the ups and downs have been unprecedented

Amazon's stock price has reached well above $1,000 making the company one of the most valuable in the world and its founder, Jeff Bezos, one of the richest in the world. Since its debut more than 20 years ago as a public company, Amazon's stock has gained more than 66,000% making it nearly the best performing stock during that time.

Amazon's Annual Revenue

1996 - 2016

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Source: S&P Compustat

During the past 20 years Amazon has grown into a giant company with revenue well above $100 billion today. As the accompanying graph shows, their growth in revenue has been both substantial and consistent year after year. But as consistent as this growth has been, the stock’s performance, although off-the-charts long-term, has been anything but consistent!

Early Years

It was the mid-‘90s and still very early in what would later be known as the dot-com bubble. Amazon was founded in 1994 as were some of today’s other leading internet companies including Yahoo, eBay, and MSN. Amazon waited three years to go public when its stock was offered for $18 on May 15, 1997. This initial public offering (“IPO”) was a success with the stock trading as high as $30 and closing at $23.50.

The company was valued at $560 million at the close of its first day of trading. In the most recent full year prior to going public, Amazon reported total sales of $16 million and a net loss of $3 million. Therefore, investors were paying $35 in market value for every $1 of revenue. To put this in perspective, investors in Microsoft were paying just $11 in market valuefor every $1 of revenue and even less for nearly all other companies.

Stock Price / Company Sales

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Source: S&P Compustat

Simply put, investors were paying a huge premium for Amazon’s stock when it went public in 1997 as compared to the vast majority of other stocks. A rational investor considering the company’s sales and earnings could not possibly justify buying the stock. At the time though there were investors buying anything with “.com” in the name. Investors with the vision to see that Amazon could rule the retail world in a couple of decades have been extremely well rewarded but the path to get there has been a wild one.

The Dot.Com Bubble and Burst

Investors’ nerves were tested from day one. After the first day of trading the stock fell for 5 consecutive days falling below its offering price for a total loss of -29%. This would be just a small glimpse of the volatility investors would endure over the next 20 years.

The volatility and gains and losses stocks experienced during the late ‘90s and early 2000’s is hard to comprehend! As the accompanying graph shows, Amazon’s stock peaked just above $350. Just three months earlier the stock was below $100! Following its peak at $352, just 5 days later it was back to $125! I can go on and on with one example after another of this incredible volatility. I doubt there were many investors sticking around long owning this stock.

Amazon's Dot.com Bubble and Burst

1997 - 2001

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Source: www.yahoo.com/finance

If only…you bought Amazon stock at its all-time low in 2001, $1 would be worth approximately $160.00. The same $1 invested in the stock market (S&P 500) would be worth approximately $3.25.

When it was all said and done, the technology bubble had burst, and all of the air was out of this stock and many more, Amazon’s stock hit a low of $5.97 on September 28, 2001. Not only was the stock down -98.3% from its high but was also -74.6% below its closing price on the first day of trading 4 years earlier. Interesting to note is that while the stock fell over this 4-year period, company revenue grew from $16 million to $2.76 BILLION in 2000. So much for a stock always following the fundamentals of the company.

The Wild Ride Continues…

Although the insane volatility from 1997 – 2001 did not persist, it remained a very volatile ride for investors. From its low in 2001, Amazon’s stock went up 10-fold in just three years. The stock then entered a very difficult stretch for the next three years, as illustrated in the accompanying graph, when it lost half its value while the rest of the market did very well. Such stretches are incredibly difficult for investor.

Amazon versus Stock Market

October 2003 - August 2006

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Source: www.yahoo.com/finance

During the last decade Amazon’s stock has continued to be volatile. During the Financial Crisis of 2008 the stock fell -65% to $35, a price that was less than double its initial offering price in 1997!. Since that 2009 low, the stock has rocketed higher topping above $1,000 in mid-2017. This is a gain of 28 TIMES! During this incredible run, the stock has fallen more than -20% on five separate occasions with the most recently being in 2016.

The moral of the story

Successful investing is hard! As great as a company may be, such as Amazon, or as great as an investment strategy may be, such as our Super-Diversification, investment performance will test your nerves.

Super-Diversification should never test your nerves like Amazon’s stock has. Although there have been and will again be times when lesser strategies will have shorter term performance that tops that of Super-Diversification. Think of being up 10% one year when other investors are up 15%. You will have to decide if you still believe in the long-term disciplines of Super-Diversification recognizing that periods like this are to be expected.

One other takeaway is that a stock’s performance often will not track the performance of the company. Look at the first graph showing Amazon’s annual revenue, the incredible growth and consistency, and then consider the volatility of its stock price. Long-term, over 2 decades, the stock has reflected the company’s growth but there have been many periods of time, sometimes multiple years, of total disconnect. This illustrates the impact of human behavior in the market.

Contact Mark A. Patton :