04:44pm EST 17-Nov-98 SG Cowen Securities Inc. (REAMER, SCOTT 617-946-3749) AMZ
AMZN/ALL ABOARD THE COMMERCE PORTAL...PART DEUX (AND TROIS!)/STRONG BUY
SG COWEN
Scott Reamer
212-495-7769
November 17, 1998
Amazon.com (AMZN - $144)
All Aboard The Commerce Portal.Part Deux (And Trois!)
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EPS (FY Dec) Quarterly EPS
EPS Revision P/E Q1 Q2 Q3 Q4
1997A ($0.71) NM ($0.08) ($0.17) ($0.21) ($0.23)
1998E ($1.57) NM ($0.22) ($0.31) ($0.49) ($0.53)E
1999E ($1.55) NM ($0.50)E ($0.42)E ($0.39)E ($0.24)E
2000E $0.30 NM
Market Cap: $6.6 billion
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Key Points:
1. Amazon.com opens their much-anticipated video store well ahead of
schedule
2. The really new news is that AMZN added a Holiday Gift store, populated
with toys, electronics, and more
3. These announcements reinforce our thesis that Amazon is fast becoming
the Internet commerce portal
4. No change to our already-aggressive estimates; we're at $192mm for
December sales with great visibility
5. Reiterating our Strong Buy (1) rating and $175 target price
Thesis:
Amazon.com is the Internet's leading retailer, the market's single purest
proxy for consumer online commerce, and the most compelling consumer
retailing experience on the Net. In our view, this stock has all the
elements of a great performer, including an enormous and fragmented market
opportunity, a superb management team, first mover advantage, a great brand
and product, and, of course, an Internet pedigree. Though there are plenty
of secular reasons why we view this company and this stock so favorably, we
gain most of our comfort from, in Bob Pittman's words, "having seen this
movie before" in the form of that other great Internet stock: America
Online. Though the analogy to AOL is sometimes loose fitting, we see many
of the same characteristics in this stock and this company that we saw in
AOL back in 1995; a great management team, a huge market opportunity, a
obsessive focus on customers, and dysfunctional competitors. Of course, the
valuation debate will continue, but we're of the mind that, if Amazon can
execute half as well against the myriad (and enormous) retailing
opportunities before them as they have to date, the space is theirs to own,
which suggests that Amazon will be a much bigger company tomorrow than it
is today. Our Strong Buy (1) rating and $175 price target reflect this
optimism.
Discussion:
Amazon Opens Not One, But Two, New Stores Well Ahead Of Schedule And Just
In Time For Xmas
This morning Amazon "opened" two new stores in anticipation of what should
be a strong online shopping holiday season; in addition to the much-
anticipated video store (which debuts a full three months ahead of our
optimistic expectation), Amazon also opened a Holiday Gift store, which
features consumer electronics, toys, games, and other gift items especially
for the holidays. We had already been expecting, of course, that Amazon
would increase the breadth of their offerings, particularly with videos.
The new news here, of course, is the timing, which, because it's before the
holiday season, suggest that they'll have exposure to holiday spending,
which could be huge. In sum, none of the potential revenue from either
videos or holiday gifts are in our model; if they execute half as well
against these categories as they have against music, well, you can
understand why we (and the stock) have reacted so positively.
Videos Alone Could Be Big Business, But So Too Could "Holiday Gifts"
Something around $20 billion per year are spent on video sales off line
throughout the world, which makes the market opportunity smaller than books
($84 billion worldwide) and music ($38 billion worldwide), but no less
impressive with respect to the sheer growth to be extracted from this
market's move online. Of course, the pace and timing of this market's move
toward on-line sales will determine the ultimate size of Amazon's video
opportunity, but we're hard pressed to see this as anything but a very
large market that is Amazon's to lose. As importantly (perhaps more
importantly), the Holiday Gift store on Amazon speaks directly to the
Amazon-as-commerce-portal thesis that we have been tracking for some time.
We put it this way in our initiating coverage piece:
"It is increasingly becoming clear that Amazon has very little intention of
merely being a bookseller online, but rather being a web retailer of much
bigger dimension and with much more presence in vertical product categories
that extend well beyond books. Amazon's entry into music and videos is but
the first step toward this commerce portal evolution."
There can be little doubt in skeptics' minds that Amazon is undertaking
this strategy in earnest; perhaps the only thing we can all debate anymore
is (1) how successful will they be at executing against this strategy and,
(2) how much should we pay for the entity. The too-simple answers to these
questions are (1) extremely, and buyers who transact with a similar
purchase frequency and are
demographically similar. This makes Amazon's marketing pitch a pretty
simple extension of current programs. Extend this to other categories
(making sure that Amazon's customers want these categories, as management
has made clear that they do), and you start to get the sense of why we
remain so optimistic about the story and the stock. Getting customers in
the door is the hard part, as any retailer will tell you; monetizing them
is not much easier off-line. Online, however, things like one-click
ordering, Gift-Click, and Gift Matcher give Amazon an enormous advantage
over their off-line counterparts. If you have any optimism for holiday
sales this year off-line, then there is every advance, we'd be all
over it looking to build a position for the long haul in this
Internet Blue Chip. AMZN should be a core Internet holding. |
