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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Jan Crawley who wrote (68850)	7/22/1999 11:18:00 AM
From: Paul Viapiano	Read Replies (1) \| Respond to of 164684

I think today's movement is more due to downgrades than to the actual report. Paul

To: Jan Crawley who wrote (68850)	7/22/1999 3:14:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Amazon.com – 22 July 1999 2 Summary. We continue to believe that Amazon.com is in the early stages of building what could become a dominant global e-commerce franchise, one that could ultimately have a market capitalization far in excess of today's. Until last quarter, Amazon.com's stock had been driven by the company's extraordinary sequential revenue growth, which had exceeded 30% sequentially in every quarter since inception. With last quarter's growth of 16% and this quarter's of 7%, the stock now has to be driven by 1) valuation (which is still difficult to argue a case for), or 2) catalysts. We continue to believe that the e-shopping hype in Q4 will provide many catalysts (the company has nearly 11 million customers and now offers not only books, music, and videos, but a broad selection of toys and consumer electronics), so we are maintaining our Accumulate rating. Revenue increased 7.0% sequentially and 171% year-over-year to $314.4 million, slightly exceeding our estimate of $309 million (but missing the higher Street estimates). This sequential growth was the slowest in the company's history by far and should send any remaining momentum investors rushing for the doors. The company added more customers than we expected, but the average customer bought less than we expected—leading to only modest upside over our estimate. Revenue increased sequentially in all product categories and Amazon.com sold product in 150 countries around the world. International product sales represented approximately 24% of revenue, up from 22% in Q1, and the European businesses are currently humming along at a $100 million run-rate. As a result of the addition of toys and consumer electronics to the site in early July, we believe sequential growth in Q3 will likely be stronger than that in this quarter. We are currently looking for 10% growth to $345 million. The best news in the quarter was the addition of 2.3 million new customers, which brought gross customer accounts to 10.7 million, exceeding our estimate of 10.3 million. The incremental 2.3 million accounts added in Q2 was slightly greater than the 2.2 million accounts added in Q1 and the greatest number of accounts added in a quarter in the company's history. The company reported that of the 10.7 million gross customer accounts, approximately 2.0 million came through different “front doors” than the bookstore. Gross margin fell slightly to 21.5% from 22.1% in Q1 and below our estimate of 22.3%. We are expecting gross margin to continue to decrease over the next few quarters due to the addition of low margin product items (Toys and Electronics). Management believes increasing competition in both these areas could lead to intense pricing pressure. Along with management, we continue to believe that absolute gross profit, rather than percentage gross margin, is most important. Operating loss margin pre-goodwill of 21.4% was better than our estimate of 24.5%. We are expecting total operating loss for the year to increase from our earlier estimate of $251 million to $270.6 million, due to increased costs associated with new product introductions and the addition and opening of new facilities. Cost per new customer increased from $13 in Q1 to $20 in Q2 — below our estimated $28 but still the highest in the company's history. A key metric for all online retailers is customer acquisition cost — the average number of marketing dollars spent to induce a new customer to buy something at the site. Amazon.com has been walloping the rest of the industry in this metric reaching a record low of $11 in Q4 1998 and $13 in Q1. However, as we have seen the percentage of existing web users to new web users shift more toward existing users and online competition has increased, Amazon.com's customer acquisition costs have begun to trend higher. We should point out that customer acquisition cost becomes increasingly difficult to estimate as the company diversifies. Operating EPS were a loss of $0.51 versus our estimate of $0.52 and consensus of a loss of $0.51. Amazon.com had a loss of $0.12 for the same period last year. Revenue from existing customers increased to 70%, continuing the increase from 66% in Q1 and 64% in Q4. Auctions appear to be gaining some momentum. If successful, the auction service will lead to a larger market opportunity, higher margins, and less seasonality. We are increasing our 1999 revenue estimate from $1.38 billion to $1.45 billion and our 2000 estimate from $2.1 billion to $2.3 billion. We are lowering our EPS estimates for 1999 slightly, from a loss of ($1.74) to ($2.00) to reflect increased costs associated with new product introductions and the addition of new facilities. We are also showing EPS in our model pro forma for the announced 2-for-1 stock split effective September 1, 1999. n Outlook and Recommendation Those who believe that investors enthusiastic about Amazon.com's future are experiencing a collective hallucination once again have something to cheer about. The company's revenue growth, though objectively impressive in the context of a seasonally weak second quarter, was not as strong as it might have been given the huge customer increase (seasonality was more pronounced than it was last year and than we expected). Over the next several quarters, furthermore, the outlook for almost every conceivable operating metric will deteriorate — except, of course, for two: customer growth and revenue growth. Fortunately for those who have their eye on the distant future, these two are more important for long-term shareholder value than all of the rest combined. Amazon.com is continuing to spend as much money as it physically can on building for the future. Although this strategy is exasperating for those who hold out hope that Amazon.com will someday gush cash (and thought it might be nice to see some proof of this concept sometime this century), we continue to believe that it is the right strategy for building long-term shareholder value. (Continued)