WSJ Article: Analysts Question Amazon's valuation
Sept 9
Analysts Question Amazon's
Highflying Stock Valuation
By LESLIE SCISM and LINDA SANDLER
Staff Reporters of THE WALL STREET JOURNAL
They say you can't judge a book by its cover. But are investors doing just that
when it comes to Amazon.com?
For months, the highflying on-line bookseller has been among the sexiest
Internet companies around, with a vast market opportunity, a strong brand
name, a solid management team, and, seemingly, ever-growing sales that one
day will turn into huge profits.
But a growing number of rival booksellers, equity analysts and investment
managers are questioning all this. Some even suggest that the bookselling
darling may be little more than a glorified order taker -- and a money-losing
one at that -- in a tough industry with thin profit margins.
"Amazon is not a technology company, it is not a software company, and it
should not enjoy a valuation that is even remotely related" to such
high-profit-margin companies, says Jonathan Cohen, a Merrill Lynch
Internet analyst who initiated coverage on Amazon last week with a
recommendation seldom seen on Wall Street: "reduce" holdings.
Mr. Cohen isn't the first to marvel at Amazon's $4.64 billion market value,
which is about equal to its two biggest bricks-and-mortar rivals, Barnes &
Noble and Borders Group, combined. That value, Mr. Cohen contends, "is
completely disconnected" from the company's operating prospects.
The report is titled: "The world's leading Internet commerce company is too
expensive." But it was released Sept. 1, amid market paroxysms that, starting
in August, knocked more than 30% off Amazon's market value, after the stock
had more than tripled in June and July. So the report didn't get much attention.
Amazon's stock currently trades at about 10 times this year's estimated
revenue. In the absence of profit, a company's sales become the benchmark
by which many investors value shares, never mind the losses. This has helped
to push many Internet stocks into nosebleed territory. In the Merrill analyst's
view, many on Wall Street aren't asking enough questions about the future
profitability of such sales.
Selling books on-line "is a low-margin retailing business," Borders Chief
Executive Robert DiRomualdo recently told investors at a Merrill Lynch
retailing conference.
Unlike a Microsoft, for whom each extra 100,000 copies of the latest Windows
it sells virtually drops to the bottom line because the so-called cost of goods is
small, Mr. DiRomualdo noted that booksellers can't get away from the fact that
each book they sell costs them a hefty chunk of the sales price, with only
pennies dropping to the bottom line.
Indeed, today's high cost for space on Internet portals, combined with
discounting by on-line booksellers, may make Internet bookselling, at least for
now, a costlier business than traditional bookselling, executives say.
Some analysts don't see Amazon showing any profit until after the millennium.
Meanwhile, both Barnes & Noble and Borders are seriously turning their
attention to the on-line space, and both arguably have brand names stronger
than even Amazon.
Says Michael Mahoney, money manager for the AIM mutual funds: "Books
are absolutely, totally, a commodity," no matter where they are sold.
Amazon takes pride in the fact that its customers keep coming back. Amazon
Chief Financial Officer Joy Covey acknowledges that the company's profit
margins are "clearly lower" than those of software concerns. But Amazon's
model is computer maker Dell Computer. That company "created a better
distribution mousetrap," she says.
But Amazon has a lot of work to do refining its model. Ron Ploof, of IceGroup,
a Wakefield, Mass., firm that advises companies on electronic commerce,
concluded in a recent report that Amazon is losing $7.15 for each
Amazon.com order processed as it spends to establish its brand identity and
work out logistical kinks in shipping, handling, returns, payment processing,
credit-card fraud and inventory management.
Mr. Ploof says he recently experienced some of the kinks first hand. After
ordering a book from Amazon and receiving it promptly, he also received a
book destined for a customer in Kansas. He says the company sent him a
postage-paid mailing envelope to return the book. |
