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

To: Randy Ellingson who wrote (93219)	2/8/2000 8:00:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Amazon.com ? 8 February 2000 2 On the flip side of this analysis, it would be very easy to make the argument that the other parts of Amazon?s business are not operating nearly as efficiently. While the more mature businesses (i.e. books) appear to have superior operating efficiencies and margins, the newer product categories (toys and electronics) are in fact operating far less efficiently. For example, if reported consolidated Q4 fulfillment expenses were 16% of revenue and we are assuming that US books had fulfillment costs of only 10% in the quarter, then it would appear that fulfillment expenses related to Toys and Electronics might have been in excess of 20%. Line by line, we would assume that the new product categories are operating less efficiently but that over time Amazon will be able to show profitability in each category from increased volume and scale. We maintain our Buy/Buy rating on AMZN but think it is important to point out that we are not recommending the stock based on a small amount of profit in the book business. We feel profitability (no matter how big a profit) in the US book business is a positive and provides early proof that, in fact, Amazon can make money in online retailing with the right volume of business. In addition, we regard the profitability of US Books as important because it should provide management with a model for profitability in its other product categories. We recommend buying AMZN for a number of reasons, and perhaps most importantly is the positive outlook we received for 2000 with regard to the momentum of the business and margin improvement. We believe that Amazon.com has reached a turning point in the business. We believe the company has sufficiently built out its infrastructure in the US and has ample capacity to grow the business through 2000 (the company can handle an estimated $5 billion run-rate with its current US DC capacity and management stated on the call that it does not intend to add any additional distribution center facilities in 2000). We think management is very focused on making the operating model more efficient and reaching profitability in the overall US Retail business within the next 12-18 months. We view international as a large opportunity for Amazon and expect investment in international growth will increase significantly in the coming 12-18 months. AMZN ? Estimated Income Statement for US Book Business ? Q4 1999 ($ in Millions) AMZN % Revenue US Book % Book Rev. % of Consolidated Net Revenues 676 317 46.9% Cost of Revenues 588 87.0% 249 78.5% 42.3% Gross Profit 88 13.0% 68 21.5% 77.6% Fulfillment 108 16.0% 32 10.0% 29.3% Marketing and Related 71 10.5% 13 4.1% 18.2% Sales and Marketing 179 26.5% 45 14.1% 24.9% Product Development 58 8.5% 13 4.0% 22.0% G&A 26 3.9% 10 3.1% 37.7% Op. Income (Loss) ($175) -25.9% $1 0.3% NM Source: Company Data and Merrill Lynch Internet Research [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"). 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