10:37am EST 24-Nov-99 Robinson-Humphrey (RUSS) AMZN AMZN.RV
AMZN: Strong E-Holiday Expected-Buy Now
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Please see the 11/29/99 issue of the Weekly Equity Focus
for charts and graphs.
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Strong E-Holiday Expected-Buy Now
Industry Overview
During this quarter last year we saw a phenomenal rise in Internet stocks
because of, among other things, strong e-holiday estimates for online
consumer sales. We believe that similar, if not greater, adoption and
growth metrics will return this year. In fact, we expect teasers about
these metrics to affect stocks over the next few weeks, and results in
January to fuel share prices into Q1'00.
The most obvious difference between 1999 and 1998 is the fact that the
FOMC has been massaging interest rates. This, and a glut of Internet
investment product, has made 1999 a volatile but still impressive time for
Internet companies. Through Q3, the Internet leaders posted strong
returns, (however, coming-up well short of last year's returns). AOL
shares are up 37%, YHOO shares up 42% and AMZN shares up 47%
year-to-date.
We believe, like last year, these issues are now entering their seasonally
strongest quarter, the holiday season. AOL has already matched and
exceeded its previous three quarters' return, while Yahoo! and Amazon.com
seem to have stalled a little. Last week estimates of consumer retail
sales online were released, and again they are above expectations at
$12-$13 billion. We believe AOL, Yahoo! and Amazon.com will be the leading
beneficiaries of this increased adoption. While there is ten times the
competition of last year, these companies have positioned themselves as
market leaders in terms of advertisers, merchants, page views and unique
visitors. Put simply, consumers follow the biggest and the best, and
these three are it.
This week we focus on Amazon.com. We believe that the heir apparent to an
increase in holiday spending can outperform during its strongest quarter.
We believe there is value in buying AMZN shares at this time and
level.
Recommendation: 1/1-S
NASDAQ - AMZN 11/22/99 $80.50
52-Week Range $110 - 25
DJIA: 11,089.52
Dividend - Yield: none-nil
Book Value per Share: $0.34
Shares Outstanding: 332.4 mil
Market Value: $26.7 billion
Average Trading Volume: 14,696,000
Industry Type: Commerce
Est. Five Year EPS Growth 50%
Founded: 1995
Headquarters: Seattle, WA
Risk High
6/12 Month Target $80.00/$107.50
Technical Rating 2/NR
Institutionally Held: 24%
Prepared for ImportANT Quarter Ahead
Expanded Product Offering
AMZN has added 14 product categories since last year's holiday season;
three were added just last month. The new categories are video games,
software, home improvement and, as a customer service category, gift
ideas. All the categories fit well into the companies existing
infrastructure and recently expanded distribution system. To add to their
existing expertise in tools and home improvement, the company bought Tool
Crib, a tool catalogue and mail order company. Amazon now has a leading
presence in sixteen distinct categories, more than any pure play e-tailer
online. Consumers have been clamoring for product ahead of the holiday
season and Amazon.com has answered.
Expanded Distribution
To manage this ongoing increase in product offerings and customer base,
Amazon.com has and continues to invest in its distribution centers. This
build out (estimated completion Q4 2000), should create the infrastructure
needed to capitalize on and grow with retail sales online. Distribution
center space will increase from 300K square feet today, to 5 million
square feet in Q3 2000. Along with the build out, the current DCs are
being overhauled with automated machinery to handle multiple products,
regardless of size. Amazon.com will have seven DCs, including five in the
U.S. and two in Europe. This build out is expected to improve capacity by
a factor of 15x, and knock 24 hours, in some cases more, off the delivery
process. Management has stressed that these Distribution Centers, as a
fixed cost, are far more valuable and easier to maintain than actual
storefronts. We believe this holiday season will prove this
point.
Going Profitable
No, Amazon.com is not going profitable yet, but its U.S. book business is.
Management has suggested that the book business will be profitable in
Q4'00 and throughout 2000. It took Amazon.com four years to mature this
revenue stream online, but much of this cost was brand and infrastructure
related. We believe that, with a world class brand and infrastructure in
place, other product revenue streams will reach profitability much faster.
In fact we were given the first suggestion of this last quarter. We
believe the company has bottomed out in terms of operating loss as a
percentage of revenue. Management has guided us to trend this operating
margin from -24% to the negative single digits by Q4 2000.
Conclusion
Amazon.com offers more products directly to the consumer than any of its
competitors online, they boast one of the most recognizable brands in the
world (on and offline) and have created on of the most versatile
distribution systems in the industry. We believe it would behoove an
investor to buy AMZN shares ahead of the efficiencies created by this
product, brand and infrastructure build out, before they are truly
recognized. |
