Amazon's 7-year itch

(Fortune Magazine) -- In the wake of Amazon.com's rousing first quarter--profits of $111 million, up 115% from last year--it seems relevant to look back on an article this writer reported seven years ago (Fortune, May 1, 2000). We aimed then to forecast what this five-year-old, hugely innovative Seattle company might look like some years out, say, in 2007, which just happens to be right now.

Depending on your grading criteria, our predictions perhaps deserve a B or even a B+. We were good on profits and the stock, not so hot on revenues. Back in 2000, Amazon was a big money loser, and some analysts doubted it would ever make money. We forecast it would, and profits indeed materialized in 2003. Now 2007 profits look as if they could beat the 2004 record of $589 million.

Our revenue forecast, though, was too optimistic. We thought 1999 revenues of $1.6 billion might grow to $30 billion in 2007. But Amazon's whopping growth slowed, and the company is now estimating $14 billion in revenues this year.

And the stock? In spring 2000 it was a famous holding of Legg Mason's Bill Miller (who still owns it), a valuation quandary, and a stock that this writer, having voyaged up the Amazon.com, said she wouldn't be buying. The bubble had by then burst, and the stock had collapsed from $113 per share to around $50. It then sank all the way to $5.50 before recovering. And recently, with the first-quarter news, the stock leaped from $44 to above $60.

So suppose an investor bought at $50 in the spring of 2000 and held to a recent price of $62. That would be a compound annual growth rate of 3.1%--oops, far less than the 6½% coupon a ten-year Treasury bond bought in May 2000 would have carried.

But the key forecast in our article concerned what Amazon might make in operating margins (that is, before taxes) on our hypothetical $30 billion in 2007 revenues. For aid here, we turned to two unnamed buy-side analysts. The optimist in this pair, believing Amazon would solidify its first-mover advantage, predicted an operating margin of 10%. The pessimist, expecting e-tailing competition to stay fierce, said margins would be 4% at best.

Neither analyst precisely hit the mark (as noted, neither did we). But the pessimistic analyst clearly gets the nod: In the past three years, Amazon's operating margin has ranged from 3.5% to 5.1%. Even in this year's first quarter, it was only 4.8%. These results aren't even up to Wal-Mart's 5.5% or so. Amazon has therefore not produced--so far--the profits justifying the rich valuation it usually fetches.

We won't feel sorry for founder and CEO Jeff Bezos, 43: His one-quarter share of Amazon was recently worth about $6.3 billion. He's also a large Texas landowner and has just bought a spacious vacation home in California's Beverly Hills. The Spanish-style house was listed for $31 million and probably went for something less. For Bezos the price appears to have been a yawn. He hasn't reported selling a single Amazon share.