Barrons vs. AMZN, round 4
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Friday seemed like old times. Right up front of the pounding pack was Amazon.com, racing ahead by more than seven points.
The stock benefited, of course, from the sudden resurgence of interest in virtually all Internet issues. But it also got a special lift from a recommendation by Merrill Lynch. Citing the company's transition from a "momentum story to a growth story," analyst Henry Blodget said he was maintaining his Buy/Buy rating (until last week, a lot of investors mistook that for a bye/bye rating and acted accordingly) and sees the stock ultimately hitting $100.
Even if he uses phrases like "momentum story" and "growth story," Henry's a very bright fellow. But, and it grieves us to say so, we somehow can't share his enthusiasm for Amazon.
The stock was really creamed in the recent unpleasantness, falling from a peak of 113 in early December to a hair over 40 a couple of weeks ago. So, even after Friday's smashing run, at 57-and-change it was barely half its high and a fair piece from Henry's 100 target.
Ironically, a day before the stock's dazzling eruption, it had been hit by a warning from another analyst, laboring for Lehman Brothers, that Amazon would be forced to adjust its liberal accounting ways. More specifically, it and other online retailers will have to change how they book the costs of handling and shipping goods. Such expenses, which Amazon had been carrying in its income statement as sales and marketing costs, will instead be included under cost of goods sold.
Before your eyes glaze over (if they already have, please blink twice), this bookkeeping switch will exert a sizable impact on Amazon's gross profit margin, the ratio between revenues and the cost of goods sold. Thus, by the reckoning of Holly Becker, Lehman's analyst, the company's first-quarter gross profit margin would be cut more than in half, to 10%, from 22.3%.
The accounting change, slated to be mandated by the Financial Accounting Standards Board, will not affect Amazon's bottom line. But then, Amazon doesn't have a bottom line; it has a bottom hole.
In the first three months of the year, for example, on sales of $574 million, it had a net loss of $308 million and an operating loss of $198 million. So, on a not-quite doubling of sales in this year's first quarter compared with last year's comparable span, Amazon's operating loss came close to quadrupling. We can understand why that disqualifies the company as a "momentum story," but we're a little puzzled how it qualifies it as a "growth story." Oh, well.
Riffling through the 10-Q, we found some other engrossing items. Like the fact that the company used up $320 million worth of cash in the opening three months of this year, rather a big leap up from last year's $17 million. The explanation was that it had stocked up heavily on stuff in the fourth quarter of last year, when the bulk of retail sales are done, and had to pay for them in the first quarter of this year.
Amazon also cheerfully expects to enjoy positive cash over the rest of the year. We'll see. But it's important that it does. For the company's balance sheet is not a thing of beauty.
It has $1 billion in cash and marketable securities. But it also has $2 billion in debt, an accumulated deficit of over $1 billion and stockholders' equity of a mere $25.6 million. In fact, the company forecasts that net worth will disappear by the end of this quarter.
Amazon also has a bundle of equity interests in this dot.com and that dot.com. Some of these strike our jaded eye as long-term investments only if one is willing to employ the most generous definition of longevity.
The market is valuing the company at $19 billion. That's roughly seven times this year's likely sales and an infinite multiple of both earnings and book value, since the company never has had any of the former and the latter is about to disappear.
Of course, that brings us back to Henry and $100 a share. So far as we can tell, he doesn't anticipate Amazon violating solemn tradition by scraping together even a modicum of earnings. But then, Henry follows the sacred injunction: If you give a date, don't give a price, and if you give a price, don't give a date. And while he's predicting $100 for the stock, he won't say when.
We said he was a bright fellow.
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