Analyst Raising Target Price to $190 !!!
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12:42pm EST 27-Jan-99 DLJ Securities (Jamie Kiggen) AMZN
AMAZON.COM: Amazon Reports A Strong December Quarter Profitable In
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
January 27, 1999 Jamie Kiggen (212) 892-8985
Tim Albright (212) 892-6801
Hilary Frisch (212) 892-4374
Cathy Watters (212) 892-4357
AMAZON.COM (AMZN: $115) #
Amazon Reports A Strong December Quarter
Profitable In Core Book Business
Range: Earnings Per Share 1999 vs 1998 % Chg
9-199 Old New P/E Ratios F1Q $(0.29) vs (0.07) NM
(FY:Dec.) 1999E $(0.59) $(0.93) NA F2Q (0.26) vs (0.12) NM
1998A (0.55) (0.50) NA F3Q (0.21) vs (0.16) NM
1997A (0.24) NA F4Q (0.17) vs (0.14) NM
Yield: % Market Cap.: $17.8 Billion 5-Yr. Growth Rate: 80%
Dividend: $0 Avg. Trading Vol.(000): Book Value: $
RATING: Buy Change: None 12-Mo. Target: $190
IMPORTANT POINTS
1. Strong December quarter: $252.9 million in revenue (previously
announced on January 5) vs. our $185 million estimate; better-than-
consensus loss per share of ($0.14) vs. our ($0.19) estimate.
2. Core book business was profitable in the month of December.
3. Raising '99 revenue estimate from $905.6 million to $1.3 billion, and
loss per share from ($0.59) to ($0.93).
4. Raising our price target from $60 to $190.
DISCUSSION:
Amazon Delivers An Extremely Strong Quarter. Amazon officially delivered
yet another in a string of dramatic upside surprises, delivering $252.9
million in revenue, up 65% q/q, 283% y/y and 37% above our $185 million
projection. Loss per share came in at ($0.14), $0.04 above consensus of
($0.18). Importantly, the company stated that its core business (U.S.
books) achieved profitability in the month of December, and for the quarter
its North American "dot com" product sales business moved towards
breakeven, posting -4% operating margin. Expansion area categories
(everything but North American book sales) accounted for 25% of total
revenue. Amazon ended the quarter with 6.2 million customers, up from 4.5
million in September.
The Biggest Music Store In The World (And A Whole Lot More). Amazon
generated approximately $63.2 million in "expansion-category" revenue.
Amazon posted music sales of $33.1 million, well above our estimate of
$21.9 million, extending its status as the largest online music store. As a
point of reference, Amazon's total music sales rivals that of the next two
largest online music retailers. And all of this has occurred within two
quarters of launch. Music generated $47.5 million in revenue in '98. The
company launched its video retailing site and gift center on November 17,
well ahead of schedule. In the month and a half since its launch we believe
that Amazon generated between $5 million and $7 million in video sales. In
addition, Amazon launched its German and U.K. sites in October, quadrupling
combined sales q/q, and becoming the leading online bookseller in both
markets. We believe the combined total for these two operations was $23
million. Note that this total is 49% of Amazon's internationally generated
revenue, which we believe to be $48 million, or 19% of total revenue.
Operating Margin Moving In The Right Direction. Amazon improved its
operating margin by approximately 700 basis points in the quarter as it
reduced operating expenses as a percent of sales from 36% to 28%. Amazon's
gross margin fell from 22.7% to 21.1%. The 160 basis point fall-off in
gross margin was due to the surge in late December order activity. This
resulted in product sourcing from distributors rather than publishers which
led to lower product margins, and in an increase in temp workers added to
the fulfillment component in the cost-of-revenue line. In addition, the
higher contribution from lower margin video and music categories also had a
negative impact on gross margin. We are anticipating that gross margin will
improve over the course of 1999, although it may not reach 23% in any given
quarter during the course of the year. The real story is operating margin
improvement. Amazon is accelerating its sales and marketing efficiencies,
experiencing leverage on the G&A line and investing in product development
in a way that has a meaningful long-term impact on margins. We see
continued improvement in the core North American "dot com" product business
such that it may reach profitability as early as the second quarter in
1999.
Balance Sheet And Cash Cycle Are Better Than Ever. Amazon's balance sheet
and operating dynamics are stronger than ever. Amazon increased its cash
cycle to 36 days (from 29 days in Q3), indicating nearly $39 million in
positive cash from operations in Q4; Amazon ended the quarter with $373.4
million in cash (up from $337.3 million). Inventory on the balance sheet
rose 49% q/q to $29.5 million, while the company turned inventory at an
annualized rate of 14 times.
Enormous Customer Growth, Enormous Incremental Value. Amazon grew its
customer base to 6.2 million accounts, up 38% from 4.5 million at the end
of Q3. As a point of reference, Amazon added more customers in the December
quarter than it ended 1997 with. Amazon spent only $28.53 to acquire a new
customer, down from $31.56 in Q3. Amazon continues to acquire customers
more efficiently than ever. In spite of the massive number of new customers
(over 1 million customers ordered for the first time on Amazon between
November 17 and December 25), Amazon's revenue per customer (total revenue
/ average # customers) was $43.76 in the quarter, for a $174 annualized run-
rate. Clearly as Amazon adds new categories and captures increasing retail
share-of-wallet, efficient marketing spending coupled with expanding
revenue-per-customer increases customer value. Given this dynamic, it only
makes sense to accelerate the marketing program. Put another way, Amazon
will acquire every customer it can at $28.53 per customer.
The Premier e-Commerce Destination Site. Having demonstrated its ability
to launch several new commerce categories efficiently, Amazon has become
the first name in e-commerce. Recently DLJ, in concert with Excite's
MatchLogic unit, surveyed close to 5000 Internet users (77% of whom had
made an online purchase within the past three months), and found that 31%
of the users had made a purchase on Amazon, versus 23% on AOL. The recent
launch of its "Shop the Web" site leverages off of this finding. "Shop the
Web" aggregates vendors across multiple categories in the friendly and
customer service-intensive Amazon environment. Amazon receives a payment
for every transaction and lead it generates, thereby introducing a new,
potentially high-margin revenue stream, also increasing its return on
invested capital.
Raising Revenue And Loss Estimates Again. We're raising revenue estimates
from $905.6 million to $1.3 billion, and increasing our loss per share from
($0.59) to ($0.93) in 1999. March revenue estimate increases from $190
million to $264 million and the loss per share increases from ($0.18) to
($0.29). The increase in Amazon's loss per share is due to the huge
investments planned in capital expenditures (i.e., building a significant
distribution infrastructure, automating fulfillment processes, and
extending overall systems capacity), to meet the demands of geometric
growth.
Target Price Of $190 Could Be Attainable Sooner Rather Than Later. We are
raising our price target from $60 to $190. Our price target of $190 is
based on discounted cash flow analysis. We extend our DCF analysis through
the year 2005, growing revenue between 40%-45% year over year. We grow
gross margins to the high 20% range and operating margins into the mid-
teens. Our terminal growth rate is 11.6% and our cost of capital is 13.3%,
bearing in mind that Amazon's capital structure is weighted towards debt.
The result is a $29.6 billion valuation, or $190 per share. We also arrive
at this valuation using a discounted 2004 EPS of $3.65 to arrive at a
present value of $2.21, to which we apply a 86 times multiple to arrive at
our $190 target price.
Don't Miss The Forest For The Trees, Buy Amazon. We are reiterating our Buy
rating on Amazon. The big picture is what matters here. Amazon has created
a dominant position as the premiere commerce site on the web, not by
accident, but through unparalleled execution. Excelling at all aspects of
the game is not easy, but the rewards are gargantuan. We try not to miss
the forest for the trees on this one, and we keep in mind that as 20% of
the earth's oxygen gets generated by the Amazon rainforest, it may well be
that 20% of all online retail sales get generated by Amazon.com.
Marketshare begets profits in an increasing returns business like the
Internet. Don't cringe as we stretch for yet another analogy, look at the
big picture. Amazon keeps raising the bar, winning marketshare, and
rewarding investors who stick with it. |
