Amazon.com ? 6 January 2000
2
Revenue. Revenue growth was strong but not spectacular-in
other words, very similar to the performance throughout
1999. Based on the strength we will likely be able to raise
our aggressive 2000 revenue estimate slightly, to just over
$3 billion. When the company reports results on Feb. 2, it
will be important to understand to what extent revenue
growth was ?bought? at the expense of gross margin
through the use of discounts and coupons (our sense is that
most of the shortfall on the gross margin line was the result
of higher-than-expected shipping and servicing costs, not
price discounts), as well as what percentage of revenue
came from high-ticket, low-margin items such as
consumer electronics, etc. (the pre-accouncement release
suggested that 50% of revenue was generated through
products other than books). The value-per-revenue dollar
of the lower margin products is obviously less than that for
higher-margin products, so if electronics contributed a
significant portion of the Q4 growth, this growth will
actually be less impressive than it looks.
A back of the envelope analysis suggests that Amazon?s
book business grew approximately 50%-60% year-over-year
and is now operating at a run-rate of about $1.2
billion. This business appears to have slowed significantly
in 1999, which may suggest that, at 5% of the domestic
book market ($25 billion), the company?s market share
growth-and, perhaps, the growth of online bookselling vs.
traditional bookselling-is slowing.
Expenses. We continue to believe that Amazon?s
expenses must be brought under control for the company is
to re-develop strong credibility with the Street and for the
stock to exhibit sustained appreciation over the next year
(the revenue growth has settled into a relatively predictable
pattern). The point here is not that the company must
control the magnitude of its losses-with a quarterly
operating loss already in excess of $150 million, another
$20-$30 million is not particularly relevant. The point is
that the company must improve its financial forecasting
ability and discipline and set a plan in place that, milestone
by milestone, eventually leads down a clear road toward
profitability. In our opinion, another year in which the
operating plan is revised quarter after quarter (read: loss
estimates are increased) will lead to a loss of confidence
and turnover in the core shareholder base.
Stock outlook. AMZN remains a core holding, as we
continue to believe the company will be the long-term
winner in electronic retailing. We continue to believe that
the stock is likely to trade off in the early part of the year.
If the company is able to set and stick to a firm operating
plan (still an ?if? at this point), we think the stock will then
likely have a good year overall. We are maintaining our
Accumulate/Buy rating.
[AMZN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 2000 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
regulated by SFA, and has been considered and issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was
obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments").
MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side
of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from
time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific
person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that
statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security?s price or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily a guide to future performance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced
by the currency of the underlying security, effectively assume currency risk. |
