Rats leaving a sinking ship.
Sunday NYTimes
Piling On Amazon's Stock, After the Fact
By GRETCHEN MORGENSON
Rats leaving a sinking ship.
That unfortunate metaphor sprang to mind
last Thursday when a pack of formerly
bullish stock analysts suddenly cooled on
the shares of Amazon.com.
After the close of trading on Wednesday,
Amazon reported its second-quarter results.
With remarkable synchronicity, 6 of the 35
analysts who follow Amazon cut their
ratings on the stock the next morning. Even
Henry Blodget, Amazon's big believer at
Merrill Lynch, allowed that the company
was going through "an awkward transition."
Mr. Blodget opined that intermediate-term
investors should no longer "buy" the stock;
they should "accumulate" it.
Why the turnabout among Wall Street's
finest analytical minds? In Mr. Blodget's
case, the company's revenues in the quarter
missed his estimate by $7 million.
Even in this weird investment age, it is hard
to believe that one equity analyst, forget the
throng, would turn tail on a stock because
its revenues came in at $578 million rather
than $585 million -- a difference of 1
percent. What scared the analysts -- just a
guess -- was Amazon's falling stock.
That is not surprising. Academic research
shows that equity analysts generally react to
changes in stock prices rather than cause
them. Luckily for investors, the same cannot
be said for debt analysts.
It has been about a month since Ravi Suria,
a convertible bond analyst at Lehman
Brothers, penned his blistering report on
Amazon's prospects using words -- like
distressed, deteriorating and woeful -- that
are rarely seen in equity reports. The stock
fell 19 percent in the wake of the report, but
most equity analysts stayed positive on the
company. Until last week.
Of course, not all equity analysts are down on Amazon's shares. Mary
Meeker, the Internet analyst at Morgan Stanley Dean Witter remains
bullish. Her 12-page report on Amazon's second-quarter results included
such calculus as "Notable Quotables From Jeff," three paragraphs of bon
mots from Mr. Bezos. Example: "We have a great team. We have a
common set of objectives. We have a plan to reach those objectives."
Research? Stenography might be a better word.
Morgan Stanley may feel that bullish is the only way to be on Amazon,
because it is the company's investment banker and likely holds a barrel of
the company's convertible bonds, which are trading in the cellar. The firm
is the major market maker in the debt.
Ms. Meeker did not return a phone call seeking comment.
Amazingly, Wall Street's remaining optimists could still be trying to attract
investment banking business. Sure, a new stock or bond issue may not
fly, but Amazon might want to retire its $1.9 billion in convertible debt.
And it would need a banker's help.
To be sure, such deals are usually done by companies in dire straits, not
a place Amazon finds itself now. And Amazon says it does not discuss its
financing plans.
But a company whose convertible debt is trading at depressed levels can
retire it by paying holders of the debt a fat premium to the price the
bonds fetch. The company pays bondholders in common stock.
Many convertible holders are eager to sell at a slight gain. They wouldn't
be taking on additional risk by getting more shares in the company,
because convertible holders are usually short the underlying stock to
hedge the equity position their bonds represent.
The only losers, of course, are the shareholders, whose stakes are diluted
by the issuance of shares to retire the debt. But maybe they won't mind.
After all, to many investors, Amazon has never been just a stock. It's a
religion. |
