Amazon.com ? 2 June 2000
2
Mid-Quarter Update. We remain comfortable with our
Q2 revenue estimate of $585mm, up 2% sequentially and
85% year-over-year. We do not expect to see much upside
to this estimate. Based on Media Metrix data for April
?00, traffic (# of users) to Amazon was down M/M from
14.7mm users in March to 14.2mm users in April (a 4%
sequential decrease). This is similar to last year?s 3%
sequential decrease from March to April. This trend
suggests that sequential growth this year will likely be
slightly less than last year?s 7%. Thus, we are not looking
for much revenue upside. We also remain comfortable
with our operating EPS estimate of a loss of ($0.33), and
we expect to see minor improvement in gross and
operating margins.
Potential Reclassification of Fulfillment Costs. As
Amazon reported on its Q4 conference call, the SEC is
considering issuing guidelines about whether retailing
companies should classify certain fulfillment expenses as
cost of goods sold or S,G&A. Amazon?s current
classification is standard for most companies in the
industry: most direct fulfillment costs are placed in SG&A
(this is the way many offline retailers account for
fulfillment and distribution expenses, including Wal-Mart).
The SEC is considering asking companies to classify such
expenses as COGS. This would obviously increase COGS
as a percent of revenue and decrease SG&A as a percent of
of revenue. Gross margin would decline, but there would
be no impact on operating margin.
Some observers have argued that a reclassification would
be negative for Amazon?s stock because the decreased
gross margin would come as a surprise to some investors.
Any such impact, in our opinion, would be a short term
perception issue and would quickly be offset by the
observation that the change in no way impacts the bottom
line. Unlike many etailers, moreover, Amazon would still
have decidedly positive gross margins.
Importantly, the current classification is in no way unusual
in the etailing or retailing industry. There is no universal
standard for how to handle distribution and fulfillment cost
allocation when looking at the land based retailers?and
all the etailers that we follow, with the exception of
buy.com, account for these costs in SG&A.
The Stock. The AMZN story continues to transition from
a momentum story (strong sequential revenue growth) to a
long-term growth story (solid Y/Y growth and earnings) --
a transition that will likely require another quarter or two
of investor patience. We are maintaining our $100 price
objective (7X 2001E revs. of $4.7B), but expect
appreciation to occur in the second half of the year.
We maintain our positive outlook for the balance of 2000
including steadily improving gross and operating margins.
The major concerns remain: 1) slowing revenue growth,
and 2) high fulfillment costs as % of revs. (16%).
[AMZN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
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