Some companies are just loved. For example, my story yesterday on Costco Wholesale Corporation (NASDAQ:COST) aroused a storm of protest from readers who, like me, obviously love the place. Such loyalty is valuable. Costco shares carry a price-to-earnings multiple of nearly 30, and a price-to-sales ratio of almost 0.6, very high for a retailer, despite a growth rate of 4% and the fact that profits have barely budged over the last year. Amazon.com, Inc. (NASDAQ:AMZN) is yet another example of a company that engenders fierce loyalty from its investors.
In the case of COST, I’m thrilled to say that I have 100 shares on which I hold a fat profit. Likewise, my loyalty to AMZN helped me get in at about $330 per share in 2014, and it helped me hang in when it fell to a low of $284. Amazon stock is now at almost $790. Loyalty, what accountants frequently mark as goodwill, can be very valuable.
It can also be misleading.
AMZN: Loyalty Pays
So, what did I see in Amazon stock, while others saw only profitless growth and some called it a scheme?
I saw two things in AMZN: I saw audacity and a unique business model.
As I have written elsewhere, Amazon creates e-commerce infrastructure, which it uses not only to run its own operations, but it also uses to rent to others. AMZN CEO Jeff Bezos believed in the model, while others did not. He poured $1 billion per quarter into his cloud, Amazon Web Services, while others did not. He stayed the course while others would not have.
Eventually, Amazon was able to be paid by its own competitors for providing essential services to them. Netflix, Inc. (NASDAQ:NFLX) is one of AMZN’s customers. Some of the online stores for which it does fulfillment have sales of over $1 billion per year. A business-to-business version of this from Amazon reached $1 billion in sales within one year.
However, Amazon stock is still expensive. Its price-to-earnings ratio is near 200, although it has profits. Its price-to-sales ratio is over 3, although it had over $100 billion in sales last year. I, for one, am staying in on AMZN.
Loyalty does not always work that way, of course. Unlike Amazon stock, there are companies that customers are intensely loyal that can lose you money fast.
KMI: Loyalty Is Not Everything
Take Kinder Morgan Inc (NYSE:KMI), which I also own.
Richard Kinder’s pipeline company may be the best-loved outfit in the oil patch. Pipelines are essential infrastructure, and KMI moves more natural gas than anyone. So-called “midstream” operations pre-process crude oil and make it safe to transport, extracting valuable gas and gas liquids along the way.
Kinder also seems to make all the right moves. With oil at its peak in 2014, KMI consolidated all its units under one umbrella. It looked like a very safe place to hang out while oil prices adjusted to a new reality
It wasn’t. KMI fell off a cliff. A $40 stock in 2014 became a $15 stock by late 2014. It held up longer than its peers, because of loyalty, because of audacity and because investors believed in Richard Kinder. But it’s still trading at a little over half its peak. For investors, loyalty was a loser.
KMI has cut its dividend to the bone, but its 12-cent-per-share payout still represents a yield of 2.23%. It may be headed higher, and has already recovered about one-quarter of its 2015 losses. But my loyalty to Richard Kinder did not pay off. Buying loyalty is not always a winning strategy.
So 20-20 hindsight is always perfect. Where is loyalty that you can buy now?
TSLA: Today’s Loyalty Play
If you buy Tesla Motors Inc (NASDAQ:TSLA) today, you are buying loyalty to Elon Musk and his peculiar vision.
There is no fundamental reason to do it. TLSA has no profits. Tesla stock sells for almost 7 times sales. That’s close to the level of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), the artists formerly known as Google. You can get Ford Motor Company (NYSE:F) for less than seven times its earnings.
So why does anyone hold it? Because of loyalty to an audacious business model. Tesla cars sell before they are made. Tesla cars are cool. Tesla cars are electric, and high-performance. Musk’s purchase of SolarCity Corp (NASDAQ:SCTY), which analysts are condemning, completes a circle of TSLA cars powered by Tesla batteries drawing power from TLSA, or SolarCity, roofs.
What remains unknown is whether Tesla can execute. Musk promises to quadruple production to 500,000 cars in 2018. Will he? Or will he push too hard, as he did with SpaceX, his other company, which recently saw one of its rockets blow up on the launchpad?
No one knows. If you wish to profit from Elon Musk’s audacity and unique business model, you are taking a risk. You are showing loyalty to Tesla stock despite the numbers … you are ignoring the math.
Just as, perhaps, you did with AMZN and Costco. But just as I did with KMI.
Dana Blankenhorn (http://www.danablankenhorn) is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time (https://www.amazon.com/Reluctant-Detective-Travels-Time-ebook/dp/B01FECREKW/ref=nosimacluecom ) Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. At the time of writing, he owned shares in COST, KMI, AMZN and GOOGL.
