ebook essays pieces of the puzzle
Friday, December 23rd, 2011
under the tree

Given the crowds at Apple stores (although there are a lot of employees mixed in), you can expect to get an iSomething this year.  Perhaps it was bought online, perhaps in person.

Two other companies have come to represent the bookends of the evolving market for electronics:  Amazon (AMZN) and Best Buy (BBY).  For many shoppers, Best Buy has become Amazon’s showroom, although it’s too late for that now if you want something under the tree Christmas morning.

Above you can see the online phenom in green and the bricks-and-mortar superstore in red.  The top panel shows that Best Buy has actually been producing more in the way of net income, although the market capitalization of Amazon is about ten times as much.

The middle panel illustrates that the stocks did about the same over time (the chart starts with AMZN’s IPO in May, 1997) until a few years ago.  Since then a huge gap has opened up, creating the immense valuation difference that you see at the bottom.

There has been some commentary lately that Amazon’s stock, which has been under pressure since it released earnings in late October, is suffering because investors infatuated with short-term profits have punished it for its long-term strategy.  I agree with Aswath Damodaran:  If anything, the firm has gotten the benefit of the doubt.  Its approach is such that it will be more subject to the whims of investors and will continue to exhibit significant rallies and freefalls.  It comes with the territory.

Best Buy is harder to figure.  It has a dominant position and a cheap valuation, but the business is a tough one, which is sure to be hit hard if a recession comes any time soon.  (And the company will also have to try to live down the latest fiasco.)

In any case, whatever is under your tree and wherever it came from, have a great holiday season.