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July 1, 2000
Even the Mighty are Falling
Poor Amazon. Investors are actually starting to care if and when the
company might start making money. The "new business model" for internet
companies, invented and executed dazzlingly by Amazon, is to expand like
mad and become the biggest player in your game, profits be damned. Amazon
barrelled along, becoming the 800-lb. gorilla of the bookshelf. But then
they kept going, and going, and going into other products lines. (CEO Jeff
Bezos is right up there with Microsoft in the hubris sweepstakes.) While
their book operation may be close to profitability at last, everything else
is awash in red ink, and now investors are getting impatient. Analysts are
all a-twitter calculating "cash burn rates" and talking about "P2P", path
to profitability, for the dot.coms. How impatient? AMZN's stock is
trading below $40, compared to a 52-week high of $112. Other big net
darlings such as Yahoo! and AOL have dropped precipitously, too, but not as
much as AMZN.
What does this prove? Cash flow is king. More has to flow in than out.
And inflows of new money from investors to finance Amazon-like expansion
are drying up. That leaves cash flow from operations. It's kind of like
maxing out all your credit cards. When you can't borrow any more, you have
to earn it.
Bless the Fed, they didn't raise rates. And bless us American consumers,
whose incomes actually went up more last month than spending. What a
concept!
FOR OTHER INSTALLMENTS OF ERICA'S COLUMN
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