Famous Internet Analyst CIBC Oppenheimer's Mr. Blodget Gives Positive
Comments on AMZN's Latest 1.25b Bond Offering. Enjoy.
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09:41am EST 29-Jan-99 CIBC Oppenheimer (H. Blodget 212 667-4509) AMZN
AMZN: Raising Some Petty Cash
CIBC Oppenheimer
January 29, 1999
Internet/Electronic Commerce Amazon.com
Henry M. Blodget (212) 667-4509 Raising Some Petty Cash
Elizabeth Anning (212) 667-8321
Investment Conclusion
UNEDITED: In the interest of timeliness, Rating: BUY
this report has been made available to our AMZN-OTC(1/28/99) $122
customers before editing has been completed. 52-week $199 1/8-9 1/4
It will be replaced with an edited version Shares Out 154 Million
shortly. Float 58 Million Shares
Amazon.com sold a convertible bond offering Market Cap $18.8 Billion
yesterday, raising a paltry $1.25 billion Div/Yield Nil/Nil
(on very good terms). The offering was Fiscal Year December
increased from $500 million at the last Book Value $0.90 per Share
minute, apparently because of enormous 1999E ROE 0.0%
demand. Investors concerned that LT Debt $348 Million
Amazon.com's spending habits might cause it Preferred Nil
to burn through too much of its existing Com Equity $45 Million
$400 million war chest (an unwarranted fear,
given that the company's cash flows are
basically break-even), now need not be so
concerned. The company now has nearly $2 Earnings per Share
billion in cash. 1997 ($0.24)
1998 ($0.50)
Amazon.com has always been focused on the 1999E ($0.90)
long term, and this offering is all about
the long term. Amazon.com believes (and we P/E Ratio
agree) that the leading e-commerce company 1997 NM
will one day be able to serve tens of 1998 NM
millions of customers and generate tens of 1999E NM
billions of dollars in annual revenue.
Amazon.com believes that in order to have
the best shot at being that company, it must
invest heavily now. With $1.25 billion of
new cash in the bank, it can now invest as Additional Information
heavily as it wants. Total Customers 6.2 million
New Customers in Q 1.7 million
The biggest concern among investors is that Cust. Acquisition Cost $11
online retailing will be a zero margin Inventory Turns 27X
business, in which companies sell products
at cost and Amazon.com goes from being a Company Description:
high-profile customer service company to a Amazon.com sells books, music,
fulfillment shop (we don't think this will and more from a web site,
happen, but it is a possibility). The good amazon.com.
news for Amazon.com investors, then, is that
the company can now implement whatever
strategies and/or investments it thinks
makes sense, whenever they make
sense--including, for example, attempting to
price almost any competitor out of business
(with $1.5 billion in the bank, you can lose
hundreds of millions a year for many, many
years--most start-ups can't). It could also
buy companies with cash or pay bonuses in
cash or do a host of other things with cash.
The bonds have a 4.75% coupon and a 27% conversion premium ($156). If
Amazon.com's stock increases 50% in the next few years, it can call the bonds,
converting them immediately to stock. What this means is that the company has
effectively just issued $1.25 billion of new equity at $156 a share (why do
you issue a convertible bond instead of equity? Because, in part, you think
that your stock is undervalued.). If and when the bonds convert, they will
increase shares outstanding by about 7 million shares (4% dilution). That's
cheap money.
The risk, of course, is in the fact that this is a bond--Amazon.com actually
owes people money. If the business falls apart and the market cap tanks,
Amazon.com might have to issue equity at far below the current price to pay
off the debt, thus significantly diluting shareholders. We believe in
Amazon.com's long-term story, and we don't think this will happen--but we
admit that it, too, is a possibility. As always, we recommend that investors
who believe in Amazon.com's long-term story buy the stock, and investors who
don't, don't.
In our opinion, thanks to this offering, Amazon.com (and its shareholders) are
now in a much better position to win long term.
Our quarterly EPS estimates are shown below.
1 Qtr. 2 Qtr. 3 Qtr. 4 Qtr. Year
1997 Actual ($0.03) ($0.06) ($0.07) ($0.08) ($0.24)
1998 Actual ($0.07) ($0.12) ($0.16) ($0.14) ($0.50)
1999E Current ($0.29)E ($0.26)E ($0.21)E ($0.13)E ($0.90)E |
