Fake profits are causing the stock market to descend.

February 4, 2002 6:37 PM

Fake profits are causing the stock market to descend. Could someone explain to me the meaningful difference between Enron and Amazon.com? One company recently reported fake profits of $5 million, while having billions in debt. Enron, well...no profits either, and billions in debt. So why is Amazon.com considered "promising"? Enron had a revenue stream too.... Prediction: Amazon.com's stock will be "revalued" sharply lower as people get lucid about real profits and as the accounting/profit scandals spread.
posted by ParisParamus (19 comments total)

It seems to be that the problems with corporations (and I'm not meaning your local single industry business) come when they forsake a reasoned and ethical long-term and sustainable business strategy for pandering to the madness of 'the market' - where it appears that even if you're a prosperous and profitable company, if you don't progressively get larger and larger, making even higher profit margins each and every fiscal quarter to beat the analyst's earnings estimates, your corporation becomes virtual roadkill with a plummeting stock price as daytraders flitter on to the next get-rich-quick opportunity. Faced with this scenario, is it any surprise that corporations growing beyond a manageable size start looking anywhere to cut corners... environmental pollution, indifference to safety of employees and local communities and consumers, shady and/or illegal business deals and accounting tricks, corrupting the political process with campaign contributions and lobbying for special consideration...

I say it's about time that people bail on hyped yet hollow corporations and invest for the long term in secure and solid businesses and industries.
posted by SenshiNeko at 7:03 PM on February 4, 2002

As far as I know Amazon has not been accused of out and out fraud, Enron has (n.y. times). That's not to say that Amazon is a good investment.
posted by rdr at 7:06 PM on February 4, 2002

someone got the bright idea to introduce "operating earnings" in 1989 and it's been downhill ever since.
posted by kliuless at 7:08 PM on February 4, 2002

While Amazon does do some pretty crazy things with their pro-forma estimates, they really can't be compared to the scale of the Enron shell game. I think Amazon will do just fine. At the end of a rough day on the market, Amazon's market capitalization was barely over 5 billion.
posted by machaus at 7:10 PM on February 4, 2002

Additionally, Amazon wasn't set to receive a $254 million instant tax rebate from the House Ways and Means Stimulus tax cut bill.
posted by joemaller at 7:37 PM on February 4, 2002

I remember shorting Amazon on the way up. It's not if you're right. It's when you're right.
posted by Real9 at 7:47 PM on February 4, 2002

The two companies can't be compared.

Enron left its core business of energy to focus on financial products based on energy and even weather futures. They opened over 700 subsidiary companies in tax havens to hide losses and profit.. mainly losses. Meanwhile, companies in the same field may have tax haven subsidiaries, but together less than 100.

Enron can be compared to Barings, except on a company level instead of a single individual hiding losses it was a company policy.
posted by rich at 7:54 PM on February 4, 2002

There is this similarity, which is probably a more sensible place to concern ourselves than breathless accusations of fraud everywhere: stock prices are imaginary. That is to say, the value of anything is what people are willing to pay for it, and in the case of stocks especially, this value is extremely dependent on the market's aggregate perception of value.

Senshi, it's not a completely unfair characterization to say that all stocks are in some sense a shell game. The building of value at the market level, though, is little different from the kinds of distortions you see at the small-scale level of laying out a business plan and persuading friends, neighbors, and downtown bankers to invest in you -- or in selling the value of yourself in a job interview. In those cases you can't guarantee performance either, but you must persuade someone to enter into a contract where you both do expect a certain level of performance. This is the basis of the movement of capital. Oh, and Senshi, it isn't always about getting bigger quarter after quarter -- because analysts' estimates can be for no growth or negative growth. If they forecast a 10% drop in revenue (which may be simply due to anything from seasonal fluctuation to supply shortages), yet your revenues only fall 9%, you've "beat the estimates".
posted by dhartung at 8:38 PM on February 4, 2002

Amazon hasn't lied about it and then covered it up.
posted by jchotz at 8:40 PM on February 4, 2002

dh: stocks are a much more fundamental shell game than that. Stocks that pay no dividends are valuable; and stocks which pay dividends fluctuate in price far beyond their likely increase in profits/dividends. The truth is that fundamentally, there's no rational reason to buy the stock of a company which is forecast to do well--except that other people do the same.
posted by ParisParamus at 8:45 PM on February 4, 2002

Well, if you read amazons reports, you'll see exactly what they're doing. With enron, no one knew..
posted by delmoi at 8:53 PM on February 4, 2002

" ... stocks are a much more fundamental shell game than that. Stocks that pay no dividends are valuable; and stocks which pay dividends fluctuate in price far beyond their likely increase in profits/dividends. The truth is that fundamentally, there's no rational reason to buy the stock of a company which is forecast to do well--except that other people do the same..."

Buying stock is just that ... buying "stock", a share of a company. There's no more - or less- reason to own shares of a company than there is to own a company itself. Fortunately, there are at least a few people around that still want to start companies, and people that will invest in those companies.

While absurd amounts of attention are placed on one big company here, or another there, in fact there are hundreds of thousands of equities trading on 120+ exchanges around the world. And for every one investor that gets burned by a crooked business, there are thousands that very quietly invest intelligently, spread risk appropriately, and allocate assets dispassionately, who who have made not only far more than inflation over the last 20 or 30 years, but far more than they would have in any other instrument.

Stocks are not a shell game, they are a means for capital to find and fund ideas, to the mutual benefit of both. And they are a particularly successful means at that.
posted by MidasMulligan at 10:06 PM on February 4, 2002

Amazon's profit was net not pro forma. They initially predicted that they would make a pro forma profit but beat their estimates.

One slightly dodgy part of it was that some of the revenue was attributable to gains on the currency market, in respect to their international business. That was buried in their quarterly report.

Amazon is not a complicated company. They can't easily hide things to a large scale. Equally importantly the sector that Amazon is in is easily understood. Enron was doing a lot of nifty stuff including transferring cash between shell companies. No one really knew what it was doing, but trusted that the performace reported was accurate. It wasn't asnd everything fell apart. If Amazon starts claiming sales of $35 trillion, someone will notice.

For my money Amazon is basically a sound company now, albeit one with a lot of debt. Whether they are correctly valued is an entirely different proposition. Ebay is a great company, but I probably would not invest in them as their market capitalisation already reflects a high level of future predicted success.

I don't quite get the point of posting a sweeping statement that you don't justify, isn't based on anything and is obviously not researched even vaguely.

Everyone is entitled to an opinion but most attempt to assure that it is not formed in an environment of total ignorance.
posted by RobertLoch at 10:53 PM on February 4, 2002

As others pointed out: unlike Enron which was actively and knowingly indulging in illegal activities, Amazon has not been accused of any wrongdoing. Enron's collapse can be attributed to a large extent to their shady business dealings and accounting frauds. What Amazon appears to have done in terms of attribution of revenue in their balance sheets, isnt illegal. Corporations have been window dressing their balance sheets for ages.

On a different note, Amazon has been known to indulge in activities that many would construe as unethical. I have always felt a little uneasy about Amazon's inclination to cut corners on the software patent laws, online privacy issues etc. Three rather disturbing precedences:

-Amazon's patent of on-click e-commerce purchasing idea. I am amazed that it actually went thru. The 'Boycott amazon' document of Richard Stallman and Tim O'reilly's response in this respect are worth.

-Amazon's controversial alteration of their privacy policy. This was unfortunately eventually endorsed by FTC.

-The variable discount pricing (they said it was test) that they ran sometime back and for which they apologized later.


I always thought that because Amazon changed the way books are bought and because most of us buy books from Amazon, somehow the respect that many of us have for books rubbed off on Amazon. Our bullshot detectors get deactivated when it comes to Amazon. Three companies whose ownership consumer data and trackrecord in consumer privacy rights have always made me feel uncomfortable are Amazon, realnetworks and Doubleclick.

Having said that, let me admit that I too buy from Amazon
posted by justlooking at 1:33 AM on February 5, 2002

The real difference? Jeff Bezos is warm & cuddly with an infectious laugh, with a "pioneer" myth-like story about his drive out west, scribbled biz-plan, and start-up of Amazon.com. Ken Lay gives off a creepy vibe and is viewed by many as simply a "CEO, standard-issue, male, mid-50s."
posted by davidmsc at 4:05 AM on February 5, 2002

I don't quite get the point of posting a sweeping statement that you don't justify, isn't based on anything and is obviously not researched even vaguely.

The underlying premise is that each company has no real profits (especially since Amazon was likely accorded credit on highly favorable "Internet Bubble" terms: low interest rates; collateral in stock; whatever). That's enough for a discussion on Metafilter: this isn't an investment newsletter.

to the mutual benefit of both.

You've failed to demonstrate real, fundamental mutual benefit. The company gets capital; the shareholder gets nothing more than the virtual certainty that a share of stock will go up if the company makes more money. Even though dividends rarely increase (and sometimes there are none; and rarely go up as much as a stock fluctuates on the upside in price; and there are alternative interest-bearing investment vehicles, some of which are guaranteed), it's not like said shareholder's expectation is fundamentally rational. I invest too, but I do so on the premise that the whole thing is not rational. Which is why professional managers don't do any better on average than average Joes.
posted by ParisParamus at 4:34 AM on February 5, 2002

"...You've failed to demonstrate real, fundamental mutual benefit..."

Actually, it's probably up to you to demonstrate there isn't one, as millions of people around the world invest in equities. A company issues shares to raise money for the business. If they have a good idea, and execute it well, the return in the investment is greater than the investment. Portions of that return are paid to shareholders.

The company gets capital to engage in business it could not otherwise engage in. The investor gets dividends - the return on the investment - and/or capital gains (if the value of the stock rises). A "rational" investor will always have at least some portion of his/her portfolio in equities, as they are far more likely to keep pace with - and even beat - inflation. In saying ...

"The company gets capital; the shareholder gets nothing more than the virtual certainty that a share of stock will go up if the company makes more money."

... all you are pointing out is that there is a degree of risk in equities ... well of course there is - this is one reason why there is a greater potential return than there is in a government bond or a CD. But it is not "irrational" to take risks (in fact, "irrational" behavior would be investing in a "guaranteed" instrument who's return was less than inflation ... as by definition you'd be losing money every year you owned it).

If you are arguing that the value of a stock is not based on anything tangible, but is purely a matter of belief ... well, yes I suppose ... in much the same way as a dollar bill itself has not been based on anything tangible since we went off the gold standard - the only reason someone accepts it in exchange for a good or service is the collective belief that everyone will accept it (and as many countries have experienced, the collective belief in a currency can collapse). But I'm not certain that Econ 101 is particularly illuminating to anyone.
posted by MidasMulligan at 6:33 AM on February 5, 2002

Are you shorting Amazon or something, Paris? They aren't even mentioned in the linked article.
posted by sad_otter at 9:10 AM on February 5, 2002

I must have missed a major news item somewhere. Could someone give a cite for Amazon's "fake profits of $5 million"?
posted by DevilsAdvocate at 9:26 AM on February 5, 2002