Wall Street Not in Amazon's Corner After Latest Profit Setback
By Joe Bousquin
Staff Reporter
1/5/00 3:09 PM ET
Maybe Time's Person of the Year cover makes for a solid contrarian play after all.
Flowing Red
Amazon.com's Press Release Saves Worst for Last Wednesday's action in Amazon.com (AMZN:Nasdaq - news), featuring a sharp drop in the stock and bearish comments from various analysts, offers further evidence that strategywise, Wall Street doesn't share the leading weekly newsmagazine's glowing endorsement of Amazon chief Jeff Bezos. Amazon's rough ride Wednesday points up some of the risks for the richly valued stocks of unprofitable companies -- and there are many, in wake of the Nasdaq's remarkable runup through 1999 -- as blue skies turn cloudy with the prospects of higher interest rates and, by extension, economic slowing.
Not Strong Enough
Amazon: TSC Message Boards.
The early morning saw Amazon post strong fourth-quarter sales growth but warn once again that profitability remains little more than a dream. Wall Street, tiring of narrowing margins and yawning losses, promptly knocked 13% off the stock as Robertson Stephens analyst Lauren Cooks Levitan downgraded shares of the e-commerce giant to buy from strong buy. Henry Blodget, the Merrill Lynch analyst who made his name with a bullish call on Amazon in December 1998, said of Internet names that "there is likely to be very little to prop these stocks up over the intermediate term." (Blodget rates Amazon a long-term buy and near-term accumulate, and Merrill hasn't underwritten for the company; Robbie Stephens also hasn't underwritten for Amazon.)
"The revenue numbers are certainly impressive," Levitan says, "but probably also below the kind of expectation levels that I think could continue driving the stock higher, especially as investors get focused on a clear path to profitability."
Bezos' grand plan for the bookseller involves expanding sales and market share at the expense of profit margins, further delaying Amazon's already stunted progress toward profitability. But Amazon, which enjoyed a long, profitless honeymoon in the stock market through 1998, last year saw its stock stall out after a strong January as analysts and investors started to wonder when they'd get to see black ink on the bottom line. Amazon's 42% gain last year was less than half the Nasdaq Composite Index's remarkable 86% return.
The question the equity market is facing are whether Amazon can generate profitability, and at what level of revenue the company can be profitable, says Jonathan Cohen, director of research at Wit Capital. You'll recall that in 1998 Cohen, as Internet analyst at Merrill, made the loudest bear call on Amazon, serving as yin to Blodget's yang. (Cohen has no rating on Amazon, and Wit hasn't underwritten for the Seattle-based Net giant.)
If Amazon has grown to have revenue of $2.6 billion but still can't cover its costs, Cohen says, investors must be wondering if it will ever be profitable. "The issue that I think the equity market is struggling with at the moment," he says, "is not where is the break-even point, but what is the break-even point."
Models Inc.
Amazon said it couldn't comment on profit issues beyond a press release in which it noted that "higher seasonal sales will not translate into lower net losses in the fourth quarter." That same release announced that inventories in new businesses such as toys and electronics would need to be written down, meaning that despite the heady sales gains on strong shipping performance, Amazon's holiday season wasn't a complete success.
"The economics of the model are weakening," says Mark Rowen, Internet retailing analyst at Prudential Securities. "From the way it looks to me, despite all their new categories, they weren't making much money.
"It seems like they were basically giving the stuff away," Rowen continues, countering Amazon's contention that its expanding offerings will make it Everything to Everyone on the Internet. (He's maintaining his hold rating on the stock, and Prudential hasn't underwritten for Amazon.)
The Bright Side of Life
Of course, not everyone was doing the Amazon smackdown. Even Levitan, who downgraded the stock, thinks Amazon remains a strong company despite Wall Street's increasing focus on profitability. "I don't think that Amazon as a business will be incredibly sensitive to those fears," she says. "The stock very well may be -- but not the company."
And Michelle Espelien, an analyst for Invesco Funds in Denver (which holds Amazon.com in its Blue Chip Growth fund), says Wednesday's reaction was overblown.
"I think 160% year-over-year growth is pretty good," Espelien says of the fourth-quarter sales report. "I think the whisper numbers got way out of hand."
But it looks like her colleagues are going to need to see the red ink dry up before they join her. |
