We’re the Next Amazon – This NEVER Ends Well:

  • We believe “Total Available Market” stories and obsession with stocks that grow fast are as overhyped today as in 1999
  • Investor mania in IT has multiples at 1999 peak levels which led to a crushing 80% collapse
  • As our papers comparing IT stocks and IPOs in 1999 with today explained This NEVER Ends Well

We love innovation but believe paying Dot.com multiples is a recipe for disaster: Not Everyone Can Be “The Next Amazon”

Target Market Mythology

Almost every hot stock today has a product or service that targets a specific customer base or market segment and explains why they are going to wipe out the legacy vendors. Carvana, for example, is a company that loses money hand over fist selling used cars online. The market cap of this firm is vastly larger than its much larger, more well-established and profitable competitors.

Acolytes of this stock, and others like it, focus almost exclusively on their marketing strategy. In the minds of investors in Caravan, Uber, Snowflake and other stocks like these, all that matters is the total addressable market “TAM.” Everyone one of these firms is priced as if they were going to become not just the market leader but effectively near-monopoly businesses.

Our view is that it is easy to convert potential customers to your service when you are effectively selling a $1 for $0.90 cents! As long as investors focus entirely on total sales growth rather than asking if these firms have actual, credible, business models, these stocks may rise.

Market Share Mythology

The ability of these stocks to continue to increase market share is entirely dependent on investors willing to fund losses in the interest of sales growth. The thinking seems to be that you merely calculate some overwhelming market share, get these companies to that number and then they will be able to sit back and reap huge profits having wiped out other companies. Left to only compete with small businesses lacking the scale of these new-found winners, the profits will come.

As we pointed out in our piece Are Clean Tech Stocks a Short, this type of thinking was pervasive in 1999 as it is today. Unfortunately, a business plan that contemplates profits only in the distant future based on assumptions like these tend to end very badly. We get it. Amazon has pulled this off. Sort of. Even there the company, by their own presentations, generates virtually no FCF all these years later.

And even then, the total market cannot just sit in one firm’s hands in a functioning capitalist economy. Let’s use Amazon – the actual winner that has, by pursuing sales without profits, decimated many retailers, as an example. Right now, the world assumes their one major profit engine, Amazon Web Services, will forever maintain their market dominance while enjoying fat profits.

Yet all it takes is a brief web craw to find firms like Wasabi. Led by legendary David Friend who founded and built Carbonite – a firm that understood the value of secure online storage long before Amazon got there, Wasabi is not to be underestimated. The company ran ads recently noting they were “10x faster than AWS and 80% cheaper” and then promised they “would never buy a grocery store.”

This is the very nature of capitalism. Eventually, computing and storage on the internet will succumb to commodification as new entrants find lower cost ways to deliver equal to better services. Indeed, some of KCR’s own research staff have nominal interests in Wasabi for this very reason.

Very simply: not everyone can be the next Amazon, as documented in our research, the odds of guessing who is going to be the next amazon are very low and eventually…. even Amazon faces brutal competition from faster and more nimble competitors.

Consider yourself warned! Wishing everyone safety and success in their investing endeavors!

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.


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