A couple of interesting tidbits here from herb on the street. Re: Amazon, and EarthShell
<<Herb on TheStreet: Oh, No, Not the Bear Story on Amazon Again!
By Herb Greenberg
Senior Columnist
3/25/98 9:33 AM ET
It's a jungle out there: Amazon.com (AMZN:Nasdaq) continues to confound the skeptics with valuations that one bewildered bear growls are simply "beyond comprehension." A $2 billion market cap compared with $2.6 billion for Barnes & Noble (BKS:NYSE). A price-to-sales ratio of 120 compared with a little more than 1 time sales for B&N. Oh, and Amazon still isn't making any money, but neither are most Internet companies, so we'll just take that as a given.
Why dredge up this tired old story, again? You can pretty much blame it on Bertelsmann's $1.4 billion bid for Random House, which comes just a few weeks after the German media giant announced plans to start an Amazon look-alike called BooksOnline. What's more, Cendant (CD:NYSE) is quietly putting the final touches on its Books.com site, which requires a membership but promises to automatically price every book below Amazon (or anybody else, for that matter). And B&N is committing more money to its online division.
Therein lies the reason the Amazon bears have come out of hibernation. With competition growing more intense, and Books.com claiming it'll always have the lowest prices, Amazon's business model suddenly looks more vulnerable than ever. Gross margins tend to fall when competition goes up and prices go down. Yet Morgan Stanley Dean Witter forecasts that Amazon will earn 10 cents per share next year, 73 cents in 2000 and $1.42 in 2001 based on gross margins of 23%, 24% and 25%, respectively, up from 19% today.
What about the competition? What about the pricing? Why should you think margins will rise? "If you had told people when we went public that we'd do $148 mil in revenues, which is nine times Barnes & Noble's online operation in the fourth quarter, they would have questioned what we were saying," an Amazon spokesman says. He adds that Amazon is hoping that its brand, its culture, its current customer base "and our understanding of purchasing patterns is a competitive advantage."
What about the possibility of pricing pressure? The spokesman says it isn't clear whether prices will drive demand in the online book world, or whether Books.com's membership strategy is something online book buyers want. And even if they do, "Cendant doesn't have a patent on the book membership model," he says.
Then there's the good ole bricks-and-mortar argument. Amazon doesn't have much in the way of traditional overhead, so despite its losses it's already cash flow-positive from operations. And it turns its inventory so quickly that it likes to think of itself as the Dell (DELL:Nasdaq) of the bookselling world, while everybody else is like Compaq (CPQ:NYSE).
Maybe so, but these are still the early days of the Internet, and with valuations like Amazon's, one disappointment with those margins and those bears could start to look a lot more like piranhas.
Cracking Earthshell
Looking for signs of a mania? How about that Earthshell (ERTH:Nasdaq) IPO? How about that Earthshell IPO! On its first day of trading yesterday the packaging company's stock zoomed 12% to 23 9/16 for an initial market value of more than $2 billion.
The sizzle: McDonald's (MCD:NYSE) plans to use Earthshell's patented biodegradable containers for its Big Macs. (Over the weekend I actually put one of the containers, sent by the company, in a sink full of water; it melted in about a half an hour.)
The substance -- or lack thereof: Well...Earthshell says its independent auditors have issued the company a "going concern" qualification, saying "there's no assurance the company's operations will be successful or result in a profit in the future." Seems appropriate, considering that since its founding in 1992, Earthshell has dug a cumulative hole of $74 million.
Furthermore, the company says it doesn't know when it will get significant revenues from the McDonald's biz, speaking of which: McDonald's has a nonbinding letter of agreement with Earthshell, which means it can buy similar products from anybody else if and when they're ever developed. (Oh, and Earthshell warns that competitors are working on products.) Then there's that other little, insignificant warning that Earthshell doesn't yet have any machines to mass produce its packages. (Hopes to build them from proceeds of the offering.) That means McDonald's won't even get them until the first quarter of 1999; earlier prospectuses say the fourth quarter of '98.
Finally, Earthshell touts its packages as being friendly to the environment. However, down in the fine print of the prospectus, the company says its products "also possess certain characteristics which may be perceived as negative for the environment...Whether, on balance, Earthshell products are better for the environment is a qualitative judgment based, in large part, on the importance given to various criteria, and is not determinable solely on objective bases." (What, you think I make this stuff up?)
In fact, "certain environmental groups initially opposed the introduction of the Earthshell sandwich container."
Oh, and don't go claiming you didn't have time to check out the prospectus. The original filing was in October 1996. It was then postponed, during which time NationsBanc Montgomery Securities exited as an underwriter. Seems, according to my sources, Earthshell had met only one of 10 preoffering milestones.
Not even Montgomery would stand for that. But Salomon Smith Barney and Credit Suisse First Boston did.
Iomega
Everything's going SO well that CEO Kim Edwards Quit. More to come.>> |
