05:39am EST 30-Mar-99 BT Alex. Brown Incorporated (S. Andrikopoulos/J. Pat) AMZ
AMZN: Blasting Into On-Line Auctions With A Winning Strateg-Strong Buy-Part 2/2
Andrikopoulos, Shaun G. (415) 477-4234 03/30/1999
Patel, Jeetil J (415) 477-4223
Berger, Lance A (415) 732-3004
BT Alex. Brown Incorporated
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AMAZON.COM INC. (AMZN) "STRONG BUY"
Blasting Into On-Line Auctions With A Winning Strategy--Reiterate "Strong Buy"
(1) Investment Rating -Part 2/2
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Date: 03/29/1999 EPS: 1998A 2000E
Price: 149.63 1Q (0.07)R (0.29) NE
52-Wk Range: 199 - 13 2Q (0.12)R (0.28) NE
Ann Dividend:0.0 3Q (0.16) (0.24) NE
Ann Div Yld: 0.00% 4Q (0.14) (0.13) NE
Mkt Cap (mm):23,103 FY(Dec.) (0.50)A (0.93) (0.60)
3-Yr Growth: 75% FY P/EPS NM NM NM
CY EPS (0.50) (0.93) (0.60)
Est. Changed No CY P/EPS NM NM NM
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Company is seizing the opportunity to advertise on TV since none of the other
on-line auction sites have launched TV marketing campaigns to date.
COMPELLING REVENUE MODEL
We believe that the fee-based auction opportunity represents a compelling
revenue opportunity. Unlike Yahoo!'s and Excite's ad-supported services,
Amazon plans to implement a listing fee- and commission-based business model
similar to the way eBay does business. Given the minimal inventory carrying
costs and fixed-cost nature of the business model, we feel that Amazon could
potentially enjoy gross margins of 80-100% and operating margins of 30%-plus
longer term within the on-line auction market. Although the Company will be
aggressively ramping up the service, with respect to both products and traffic,
we are not changing our revenue or EPS loss assumptions at this time. If,
however, we assume that 25% of the Company's 8 million current customers were
to buy or sell products at $2.50 per listing or transaction fee, the Company
would generate $5 million in incremental revenues by year-end, or $4 million in
incremental gross profits (at 80% gross margins). We note that this would not
only boost corporate gross margins but also increase the gross profit per
average customer.
We feel that Amazon.com could potentially achieve operating margins higher than
our current 9% forecast longer-term, driven by these higher margin auction
revenues. This reinforces one of our core theses that the Company's long term
margins will be ultimately driven by higher margin service revenues rather than
product revenues.
MARCH QUARTER APPEARS STRONG AS EXPECTED
Amazon.com also indicated that its customer base is currently around 8 million,
versus our 1Q estimate of 8.08 million customers, with a couple of days left in
the March quarter. Based on our conservative repeat order rate of 64% and an
average order size of $45 (vs. $53 in 4Q), we feel that the Company should be
able to exceed our March quarter revenue forecast of $265.0 million. We
anticipate that Amazon.com will achieve upside to our 1Q operating loss per
share estimate of $0.29.
PETS.COM INVESTMENT REPRESENTS PLAY INTO ON-LINE PET RETAILING SPACE
Amazon.com also announced today that it plans to take a 50% stake in Pets.com,
the largest pet company on the Internet. We note that the pet market,
including both products and services, represented a $23 billion opportunity in
the U.S. in 1998. Similar to the Drugstore.com investment, Amazon's investment
in Pets.com represents a unique yet powerful play into another attractive
retailing segment with an off-balance sheet investment strategy for the
Company. This reinforces our thesis that Amazon will not only build its way
into new product categories but it will also buy its way through minority
partnerships. We feel that the investment could eventually be liquidated or
even fully consolidated once the service has been fully built out. This
minimizes the execution risk for Amazon as it extends its brand permission. The
transaction is expected to be completed in early April.
RISKS
Although we feel that Amazon's execution to-date has been near flawless, we
note that the complexity of its business increases geometrically as it adds new
business lines (such as auctions) and incremental product categories, expands
into new geographies, and expands its world-class product fulfillment
infrastructure. Overall, however we think that Amazon is one of the best-suited
companies to manage its hyper growth given its deep management team and
critical mass. The Company plans to build up a critical mass of product
listings based on tens of thousands of products expected at the launch. We
note that the largest c2c on-line auction service, eBay, currently offers
almost 1.8 million products on its site today, representing a sizable (scale)
advantage.
CONCLUSION AND RATING -- ANOTHER REASON TO OWN AMAZON
We feel that the auction launch establishes yet another reason to own
Amazon.com stock for the long term. We continue to believe that Amazon
represents a core holding for investors seeking exposure to the rapidly growing
Internet retail sector. We are firmly convinced that Amazon.com has the
potential to establish a true multi-national brand that will compare with the
likes of Coke, Sony, or The Gap. We reiterate our "Strong Buy" investment
rating on shares of Amazon.com.
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