The Facebook - Amazon comparison

Henry Blodget gives some healthy perspective on Facebook's stock price in Dear Facebook Employees Here's the Truth About Your Stock Price. Don't I wish that Business Insider had a social reader on Facebook so I could see how many Facebook employees had read the article.

The part of the article that interested me most was his last bullet point, which says Facebook should study Amazon's long term stock price for a best case scenario. If you like your analogies precise, this one requires more examination. I worked at Amazon from 1997 through 2004, and the Facebook to Amazon comparison isn't a clean one, except at the surface level in which the shape of Amazon's lifetime stock chart maps to that of any company with early success that sees its stock price tread water for a long while before shooting back upwards.

First of all, how the prices ended up with an early spike are different. Amazon never traded privately. Its stock only ever traded while it was a public company. Facebook's stock didn't trade publicly until after some period of trading privately. During that period of private trading, Facebook didn't have to adhere to public market disclosure rules, so much of its finances and metrics were matters of speculation. What investors heard was just what Facebook chose to share and what could be seen on third party tracking sites like ComScore. Those were usually two things: user growth and engagement (time spent on the site).

Those were almost always up and to the right, and the user numbers, in particular, were of a scale almost never seen before for any company, and dreaming on those led to some insane whisper valuations. Living in the Bay Area and working in technology for much of that period, I'd hear astronomical valuations bandied about by those looking to get in on the IPO. Revenue, profit, all of those were numbers available to a select few.

Of course, Facebook's IPO price was also pushed up artificially, for reasons which have been widely documented elsewhere.

Amazon's stock could be based of financials from the beginning. Revenue, gross margins, users, and our guidance was all public. We were confident in our long-term business model and never betrayed any fear on quarterly earnings calls or in meetings with analysts, but we were notably conservative in our forward guidance. Still, the confidence of analysts who studied our model closely, including influentials like Bill Gurley and Mary Meeker, led them to issue confident opinions on our future. Ironically, some of the sharpest growth in Amazon's share price occurred after Blodget himself predicted our stock price would hit $400 (pre-split) in late 1998.

If Facebook's stock hadn't been boosted artificially at the last minute before its IPO, we might not be looking at its current price of $19 to $20 and thinking that it was a bit stagnant but fair. Versus companies like Zynga and Groupon, people might be pointing to Facebook's stock price as a rock of stability in the tech sector. Granted, Facebook ended up building up a much healthier treasure chest than it would have otherwise, not that anyone outside of Facebook was shedding many tears for them.

I was at Amazon from 1997 through 2004, and during that time, I never heard Jeff Bezos display a single moment of concern about what the stock price was to the company troops. We'd have quarterly all-hands meetings, and he never even talked about the stock price or showed it on a chart or showed a single moment of concern. How people see Jeff publicly, as a somewhat lovable, happy geek with a boisterous laugh, is how he came off at every all-hands meeting, quarter after quarter.

The only times I remember Jeff addressing the Amazon stock price were when people asked questions about it, at the end of All-Hands meetings. Jeff wanted people to able to submit questions anonymously so they'd be more inclined to ask difficult questions, and they'd be written on note cards that would be handed to Jeff at the start of Q&A. In between questions from the audience, he'd flip through the notecards in search of the most interesting questions of relevance to the company at large, and usually those would be the most difficult ones.

When Amazon's share price was surging in late 1998 and early 1999, one question asked Jeff whether we should hang on to our Amazon shares or sell. Given that it had surged already, what did Jeff recommend?

I'll never forget what Jeff said. Of course, he said, it's a personal decision, dependent on your own unique financial circumstances. But as a matter of course, the safe move when considering one's personal finances was to diversify rather than having all your eggs in one basket. It's the advice he'd give his grandmother, and it was the same advice he'd give anyone, including all of us. This was regardless of how you felt about the company's future, which of course he had absolute confidence in. It was such a sensible answer, and it's more remarkable in hindsight.

Later, of course, our stock came tumbling down into the single digits. Again, a question about the stock price came up during an All-Hands meeting (Jeff did not bring it up during the presentation portion). This time, Jeff quoted Warren Buffett quoting Ben Graham: "In the short run, the market is a voting machine but in the long run it is a weighing machine."

In other words, don't mind the markets, once they see the long-term value we're building, our stock price will come around. He noted that we were almost never as good or bad as our stock price might indicate. Since the only metrics he focused on presenting to the company were those about our underlying fundamentals, he taught so many young people a first and important lesson about focusing on what mattered, what we could control, which was the customer experience.

I have no idea how Zuckerberg is reacting internally to Facebook's stock dive. All I've read is the same single word in quotation marks that many press outlets have cited: "painful". Supposedly, "Zuckerberg said the stock's performance may be 'painful' for investors to watch." I have no idea if he brought it up proactively, if someone asked about it, how he seemed when he said it.

Facebook's stock looks to trade more on financial fundamentals like revenue and profit growth in the near term rather than just user growth or engagement, and that's actually not a terrible outcome. Feeling like you can control your own destiny is as much as any company should wish for. If Facebook is looking at advertising as its primary revenue stream, it still only has captured a tiny sliver of that market. At Amazon, in 2000, when we looked at our share of retail revenue domestically and internationally and at retail segments we hadn't even entered yet, the future seemed full of opportunity.

The key to how anxious Facebook feels may be how much they feel in control of their revenue and profit growth. At Amazon in 2000, our retail fundamentals were strong, and more importantly, they were largely predictable. Our customer experience was great, so our user base kept growing on word of mouth. Meanwhile, retail revenues, at least for a lot of the markets we were in (like media), follow a highly predictable, recurring pattern. For years, our revenue model at Amazon could predict our next quarter's revenue within 2 to 3%. 

2 TO 3%! It was a beautiful thing. I never worried going into a quarterly earning call whether we'd beat analyst expectations. I knew we would. The only variable was how analysts would receive some of our longer term strategies, like intentionally cutting our margins in the name of growth, which we did a number of times with an eye to becoming the most attractive retail option for consumers, period.

I don't have much public data to go off of on Facebook's ad revenue trends because it has only been public for such a short period, but it still feels as if they're trying to find ad units that will allow them to yoke revenue to numbers like total users, time on the site, etc. In addition, they're likely seeing their traffic shift to mobile, where monetization is more difficult because of the constraints of the screen size. Since the answers to those challenges feel less deterministic than the challenges we faced at Amazon, the stress at Facebook may be higher.

A difficulty which Facebook may have to deal with which Amazon didn't is employee defection. Amazon was located in Seattle, and I can't think of any local hot internet companies that seemed like attractive alternatives to working at Amazon. Microsoft was the biggest tech company in Seattle, but versus Amazon it was a dinosaur. Most of Amazon's largest competitors were either former brick and mortar companies or were in the Bay Area. Meanwhile, the current Bay Area tech scene in which Facebook operates is one of the most mercenary I've seen in my life, and the supply and demand curve for good people tips far in favor of employees and not employers. Facebook's has a number of huge competitors, cash rich, all of whom have campuses nearby. Employee switching costs are much lower than they were at Amazon.

The competition for employees, of course, is just a subset of competition, period. It's always tough to compare across eras, but Facebook's current competition feels stiffer than Amazon's in 2000 in two ways. One is that there are just more of them. In all my years at Amazon, only 2 massive, well-capitalized competitors stick in my memory as feeling truly threatening. One was eBay, and the other, which came later, was Google. They didn't feel threatening at the same time, either.

The second difference is that the moat around Amazon's business model in 2000 felt deeper than Facebook's feels now, though both are formidable. Facebook is more of a network effect business. While that can be formidable, and they have the largest network ever built in the history of man, we've seen that the lock-in effect of large social networks can be overturned, and has been the case many times before.

At Amazon, we only had light network effects (the more users we had, the better our customer reviews and recommendations engine), but we had huge economies of scale advantages. If at gunpoint you forced a tech startup today to try to compete with Amazon in 2000 or Facebook today, I still think you'd choose Facebook. Amazon's extensive logistics network, its ability to get volume discounts from shippers like the USPS, UPS, and FedEx and from suppliers like book publishers, its willingness to match or beat competitors on price over long period of time, mean that to beat Amazon requires not just tech expertise but logistics expertise. And an enormous, enormous treasure chest, enough to build a distribution network across the entire U.S. and some international markets (by 2000, Amazon had entered some European markets, and by the end the year, they'd launched in Japan).

Not that I would fund a Facebook competitor (for example, if someone launched an app.net to compete with Facebook), either. But I think a straight comparison of Amazon in 2000 and Facebook today is not a simple one, from my limited perspective. Incidentally, another difference between 2000 and now is the existence of sites like Quora where employees, whether anonymously or not, report on internal mood at companies. Today, companies may have to live with more of their kimono open to the public. It can be chilly.

[Full disclosure: I still own some Amazon stock today, though I think you could forgive me for implying that you should buy some Amazon stock in the year 2000 if you have a time machine. I am not making any recommendations about Amazon or Facebook stock moving forward. I have lots of friends who work at both companies today, most of them are really smart, and I wish them the best.]