Price: $76 1/16
Estimates (Dec) 1997A 1998E 1999E
EPS: d$0.64 d$1.64 d$1.68
P/E: NM NM NM
EPS Change (YoY): NM NM
Consensus EPS: d$1.68 d$1.69
(First Call: 09-Sep-1998)
Q3 EPS (Sep): d$0.19 d$0.55
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-4-3-9
Mkt. Value / Shares Outstanding (mn): $3,651 / 48
Book Value/Share (Jun-1998): $0.82
Price/Book Ratio: 92.8x
LT Liability % of Capital: 74.9%
Stock Data
52-Week Range: $147-$18 5/16
Symbol / Exchange: AMZN / OTC
Options: Phila
Institutional Ownership-Spectrum: 0.0%
Brokers Covering (First Call): 12
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: Overweight (28-May-1993)
Market Analysis; Technical Rating: Average (27-Jul-1998)
*Intermediate term opinion last changed on 01-Sep-1998.
**The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
ú Amazon.com?s current valuation lies
significantly above the regression that
describes the valuations of other Internet
companies.
ú Given both the concerns we have outlined
below and the magnitude of the company?s
valuation premium, we continue to
recommend that investors exercise significant
caution towards Amazon.com shares.
United States
Information Processing - Internet Software & Svc
15 September 1998
Jonathan Cohen
First Vice President
Tonia Pankopf
Assistant Vice President
Amazon.com Inc
Further Thoughts on Amazon.com?s
Operating Model REDUCE*
Long Term
NEUTRAL Reason for Report: Company Update
Merrill Lynch & Co.
Global Securities Research & Economics Group
Global Fundamental Equity Research Department
248910/248900/248897/248100/248000 RC#20125858
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Amazon.com Inc Rel to S&P Composite Index (500) (Right S
Amazon.com Inc ? 15 September 1998
2
Following ongoing conversations with companies in both
the physical book distribution and retailing markets, and
also with companies in the online commerce space, we
would add some further thoughts to our discussion of
Amazon.com?s operating model.
1) It seems that the model for online retailing is
becoming split into two parts, consisting of:
a) Those companies with sufficient operating scale
and/or brand equity in the physical world that can
leverage themselves into the online space with
significant competitive advantages. Companies in this
group include pure-play retailers (such as Barnes &
Noble) and also companies which have taken
advantage of physical assets while redefining the role
of IP networks and real-time information streams for
their business (such as Federal Express).
b) Those companies which have embraced a virtual
commerce model predicated on not owning physical
inventory or infrastructure. Companies in this group
will generally operate on an agency (as opposed to
principal) basis.
2) Our specific concern regarding Amazon.com
(independent of the valuation issues we have
discussed previously) is that it sits between those two
models. The company is not large enough (in terms of
order volumes and distribution infrastructure) to
generate the economies of scale necessary to compete
effectively with large physical-world retail chains. At
the same time, Amazon.com is far too large (in terms
of the cost structure associated with its proprietary
inventory and distribution systems) to compete
effectively with companies which forego that structure
and provide a linkage with existing distributors.
3) We believe that the notion that Amazon.com will be
able to profitably leverage its (diminishing) market
share in online book sales into other, largely unrelated
business lines may prove overly optimistic. As in the
physical world, we have begun to see online users
congregate either at mass-market locations (shopping
malls, AOL, Yahoo!), or at places which provide a
much more specific user experience (specialty stores,
special-interest Web sites, Usenet groups, etc.). Given
the company?s very large advertising budget and its
willingness to generate substantial operating losses,
we expect to see Amazon.com garner a meaningful
initial share of online music sales. We do not,
however, expect to see any near- to intermediate-term
profitability associated with those sales. More
critically, we do not believe that online commodity
product sales produce the sort of brand equity
generated by the distribution of proprietary
information or media products. The implication here
is that while it may make economic sense for Yahoo!
to lose money while building a user population, it
probably does not make sense for Amazon.com to
follow in the same path.
Amazon.com?s current valuation lies significantly above
the regression that describes the valuations of other
Internet companies (that regression correlates
price/revenue valuation multiples to expected long-term
corporate operating margins). Given both the concerns we
have outlined above and the magnitude of the company?s
valuation premium, we continue to recommend that
investors exercise significant caution towards
Amazon.com shares.
[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 1998 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.
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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
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