Why AMZN sold out..
Investors Boo Amazon Deal
staff writer: Judith Graham 11/9/99 on individual investor highlights the reasons..
Big deal!
That how investors reacted to Amazon.com?s (NASDAQ: AMZN - Quotes, News, Boards) announcement this morning that it will launch four new ?stores? and acquire Tool Crib of the North, a catalog and online retailer of power tools. Starting Wednesday, Amazon will sell software, video games, home-improvement supplies and offer a gifts ideas service, adding to its already jam-packed product line-up of toys, books, music, electronics and auctions.
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Remember, in September it announced that it would add zShops, which lets other merchants rent space on the Amazon site.
Its shares, which surged 20% to $78 on Monday after the online retailer promised a 'significant announcement' on Tuesday that it would add to its product pipeline, were down $6, or 7.7% to $72 in early Tuesday afternoon trading.
A case of buy on the rumor, sell on the news?
Partly.
Also chalk up some of this selling to profit taking, especially among day traders.
However, other investors were clearly disappointed with the scope of the announcement.
A number of Wall Streeters were speculating yesterday that Amazon would buy Beyond.com (NASDAQ: BYND - Quotes, News, Boards), which sells software online. And that boosted Beyond.com shares by nearly 28% yesterday alone, to a closing price of $11.06.
Investors had also speculated that Amazon would partner with Home Depot (NYSE: HD - Quotes, News, Boards) to deliver home improvement supplies. Instead, it bought Tool Crib.
Was it worthwhile?
?The point is, why not [expand]?? says Steven Frenkel, chief market strategist at Ladenburg Thalmann. ?[Amazon] is using its customer base wisely to make Amazon all things to all people. It will have to do that to turn profitable.?
However, analyst Tom Courtney of Banc of America Securities cut his rating on Amazon from ?buy? to ?market perform,? citing concerns that the extension into other categories in front of the holiday season could exacerbate the company?s losses.
Keep in mind that just two weeks ago Courtney had downgraded Amazon to ?buy? from ?strong buy.?
In a recent report, Courtney says the move into software and video games is a natural extension from Amazon?s current product offerings and expects a further extension into the PC hardware category in the next several quarters.
However, he argues that the company?s move into the home improvement segment didn?t merit yesterday?s 20% stock run-up. ?Expanding into additional categories is, in our opinion, reflected in our valuation of the stock,? Courtney notes in the report.
But Courtney?s main reason for today?s downgrade was less about the product expansion than Amazon?s current valuation. Which is a growing topic of concern among many analysts and investors.
CEO Jeff Bezos has been vocal about Amazon?s plans for continued expansion, but such spending will only aggravate its notoriously widening losses.
?While we continue to believe this is the premier company in the Internet retail segment, the stock sits more than $10 above our 12-month target price of $65,? Courtney notes. ?At the current level, we find it impossible to justify, based on our fundamental outlook, an adequate return on the stock over the next 12 to 18 months.?
Sure, some analysts have expressed confidence in Amazon?s ability to add sales and stem the losses, and anticipate the stock will run-up anew. Frenkel for one says he thinks it would be wise to buy now as he sees the stock going back up to $110.
?As long as the equity market keeps injecting cash into Amazon, I have no concerns whatsoever,? he says.
But as Amazon continues to stray from its core book-selling business, it only further distances itself from turning a profit. And despite whatever impressive sales gains Amazon can tout for the next year or two, eventually investors are going to want a glimpse of the black.
For some, that time is nigh. Amazon shares fell 20% during the two weeks leading up to yesterday, after the company warned of plans to spend more on promotions and new products, which will tack on even more losses. It projected marketing spending for the fourth quarter to triple from the third quarter, raising concerns among some analysts, who downgraded the stock last month.
Losses for the year already total more than $550 million.
And with profitability projected for a distant 2002, it?s difficult to imagine that both analysts and investors will remain patient.
Bottom Line:
Tuesday?s product extension could boost Amazon?s holiday sales, but in the long-run it represents just another thorn in its bottom line.
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