Does Lisa Rapuano know something about Amazon.com Inc. that the rest of us don't?
Rapuano is the research director for Baltimore-based Legg Mason Inc. Funds, which manages about US$23 billion in assets. About $12 billion of that is held by Legg Mason Value, which just might be the best-run mutual fund around: Year after year for the past decade, it has produced a higher return than the S&P 500 stock index - a feat no other fund can claim. Legg Mason Value made its mark by placing huge, contrarian and winning bets on tech stocks such as America Online Inc., Dell Computer Corp. and Gateway Inc.
Now Legg Mason is the second-largest investor in Amazon.com; its 14.7 percent stake is exceeded only by the slice owned by founder Jeff Bezos. For good measure, Legg Mason also owns a quarter of Amazon's convertible bonds.
What makes the stake so intriguing is the stunning success of Legg Mason's previous wagers on fallen tech stocks. In 1997, for instance, it gambled big on AOL when Wall Street was repelled by the stock. At the time, AOL was under siege on several fronts: It faced network glitches, a U.S. Securities and Exchange Commission probe into its accounting practices and potential competition from Microsoft Corp. But Rapuano saw a business that continued to attract loyal customers. Ultimately, her firm made hundreds of millions of dollars on the stock.
This time, Legg Mason is betting on Amazon. The firm began building a significant stake in 1999, when the stock was around $50. The lower it went, the more Rapuano bought. "When the stock fell into the 30s, I started to believe it was getting a little bit ridiculous," she says, and she's kept buying as the stock has slipped further.
Why so bullish? "Amazon is one of the few with a potentially gigantic market, a global natural monopoly with a potentially extraordinary economic model," she says. "It doesn't require lots of capital." It's a lot like AOL, she adds. "The customers love it; the customers aren't leaving."
Rapuano concedes that things haven't unfolded as Amazon had planned. "But if e-commerce is a business, then Amazon has a gigantic lead on everyone else," she says.
But can Amazon make money? "I believe it can, absolutely," Rapuano says. Amazon had 8 percent operating margins in U.S. books, music and videos in the latest quarter, and Rapuano believes that Amazon can reach 10 percent margins overall.
So what's the stock worth? At 10 percent operating margins and a 20 percent growth rate, Rapuano sees Amazon.com worth at least $30 a share. If she's right, her bet will go a long way toward extending Legg Mason Value's winning streak.