Good optimistic article - for AMZN bulls!
Thursday July 13, 12:45 pm Eastern Time
Individual Investor
Internet: Amazon Is No Dot Com Pipsqueak
: Greg Bartalos (07/13/00)
On February 3rd, four major Wall Street firms upgraded shares of Amazon.com (NASDAQ: AMZN - news) to 'buy' or 'strong buy.'
Fast forward to today.
Shares of Amazon.com were recently at $35, just above the 52-week low of $32.44 and 58% below where the four investment banks upgraded the stock.
What went wrong?
In large part Amazon.com's weak stock price reflects a heavily damaged Internet sector. Lousy Net companies and great Net companies alike have seen their stocks get hammered. But Amazon.com, which sells CDs, books, videos, computer software and more, is also the recipient of some negative Wall Street sentiment.
On June 23, Ravi Suria, a convertible bond analyst for Lehman Brothers, said Amazon.com's credit was ``extremely weak and deteriorating.'' He warned about Amazon.com's $2 billion in convertible debt and said the company risked running out of cash in 2001. The stock promptly dropped almost 20%, to its lowest level since 1998.
At no point in Amazon.com's short history has its future been so heavily debated as it is now (one wonders if Gore and Bush should let voters know what their opinions are on the company). As the headline to this story indicates, I am firmly in the bull camp. As I wrote in January (when Amazon.com shares were at $69.75), ``Amazon.com is executing an intelligent long-term strategy that is tailored specifically for the Internet. Amazon.com knows exactly what it is doing.'' I still stand by that assertion but will first address Suria's concerns.
Suria took Amazon.com's first quarter numbers and extrapolated them going forward. The problem is that this skews the numbers downward because the first quarter is the company's weakest part of its fiscal year for generating cash.
The convertible debt situation is a concern, to be sure, but a company of Amazon.com's caliber should be able to strike a partnership or find new lenders if needed.
Running out of money? Amazon.com had over $1 billion in cash at the end of March. And last month, CEO Jeffrey Bezos said the company expects to fund operations from cash flow by the end of the year.
Although there appears to be considerable envy directed toward Amazon.com (as evidenced by the gleeful way in which some critics bash the company), keep in mind that it is in many people's best interest to keep it around.
For example, the Industry Standard recently wrote, ``If Amazon.com can't make a go of it, most of the companies that have sprung up in hopes of becoming the 'Amazon of something' jewelry, furniture, cookware - have little chance of making it.'' You see, if Amazon.com goes down, all those pesky e-tailers funded by Idealab and others could go poof!
The problem is that puerile, shortsighted and impatient voices are crying that they want Amazon.com to make profits - NOW! How rich.
The pundits used to criticize companies for being fixated on maximizing short-term profits at the expense of long-term growth. Here we have a company doing just that -- and getting blasted for it. Is there a law against enacting a long-term growth strategy for profitability?
Building a loyal army of 20 million customers and garnering a reputation for remarkable customer service is an achievement. You don't simply hand a truckload of money to a squad of inebriated baboons and watch happy customers multiply before your eyes. You need vision and a capable team that can execute, which is what Amazon.com has.
And don't forget, Amazon.com's rapid early growth deterred a great many would-be competitors from ever existing. In addition, by making such a big splash early on, Amazon.com occupied a large portion of the world's ``mindshare,'' a valuable thing in a crowded field.
Lehman's Suria wrote that Amazon.com, this winter, would face ``arguably the most challenging holiday season.'' I don't think so. Last year was Amazon.com's most trying season when all those semi-anonymous e-tailers flooded the airwaves with annoying ads. Now that many of those companies have thankfully gone out of business or merged, Amazon.com stands to inherit their customers. Amazon.com's competitive position has never been better.
Amazon.com doesn't offer the lowest prices on the Net, because it doesn't have to. Customer satisfaction is the key ingredient for Internet retailing success.
If Amazon.com stops delivering a satisfying customer experience people will shop elsewhere. Competition is a click away (or at least it used to be - hee hee). But once you have a customer's loyalty that person can give you business for years to come.
In fact, in Amazon.com's fourth quarter last year, repeat customers accounted for 73% of all sales. How do you value an intangible like loyalty?
Not Just an E-Tailer
Amazon.com holds equity stakes (whose value has dropped significantly this year) in a number of Internet companies. Amazon.com owns portions of Nextcard (NASDAQ: NXCD - news), Pets.com (NASDAQ: IPET - news) and Kozmo.com, among other companies.
Amazon.com also has a 22% investment in HomeGrocer.com (NASDAQ: HOMG - news), which was recently bought by Webvan (NASDAQ: WBVN - news) . Amazon.com's interest will be converted into a 6% to 7% stake after the merger is completed. The HomeGrocer.com acquisition is great for Amazon.com.
One of the company's vulnerabilities is the few days that most customers have to wait to get items. Don't be surprised if Webvan soon starts offering same-day delivery of products ordered from Amazon.com.
Amazon.com also makes money by providing small links on its web site to companies that pay for the placement. This is a shrewd way for Amazon.com to leverage its massive audience into hard dollars. Plus, the margins on such deals are obscenely high, considering that the only work Amazon.com has to do is simply create a wee link.
Still not bullish on Amazon.com? Consider these facts:
Biggest physical distribution system on the Internet.
Core business of U.S. books, music and videos is profitable.
Competitive prices and unparalleled customer service. Amazon.com said that more than 99% of its holiday orders were shipped on time last year. ToysRUs (NYSE: TOY - news) couldn't handle the volume of orders it received and sent $100 coupons to frustrated shoppers who got their gifts late.
Invaluable product reviews. You can't go to a bookstore or CD shop and get 50 different opinions about an item. Amazon.com's user reviews represent a savvy way of using the Internet to do something that can't be done off-line.
Biggest e-commerce player in the world.
Bill Miller, the only manager in history to beat the Standard & Poor's 500 index for nine consecutive years, said late last month that Amazon.com shares are worth in the mid-70s to mid-80s.
Bottom Line:
Amazon.com is like America Online (NYSE: AOL - news) in 1996. The time to buy is when the hour is darkest.
For more in-house professional stock analysis and commentary, visit us at Individual Investor Online. |
