June 27, 2000
Personalized E-Mail
------------------------------------------------------------------------
Amazon Stock Performance
Put Focus on Web's Value
By SUSAN PULLIAM and MYLENE MANGALINDAN
Staff Reporters of THE WALL STREET JOURNAL
Many that are first shall be last.
Or so Wall Street analysts now are preaching. Stalwart Internet stocks such as Amazon.com and Yahoo! recently have lost large swaths of market value after Wall Street analysts raised questions about the business models of each.
Wait a second. Weren't these Internet giants -- the ones at the vanguard of the Web craze -- supposed to be havens? Yes, and that is why the development marks another signpost in the unraveling of last year's dot-com craze. Even after March's big sell-off in Internet stocks, investors clung to shares of these and other online icons. Wall Street ignored questions about their business models, and, at Amazon, about when it would become profitable, considering it was burning through cash.
Now, even the biggest dot-com stocks don't look very safe. And that has got investors wondering what will be the next shoe to drop. Will Web "infrastructure" stocks -- which have depended partly on demand from the steady parade of new dot-coms -- be next on the chopping block?
So far, that hasn't happened. But all around the speculative-technology area, there are more examples of companies that escaped the first round of pain which are vulnerable to the dot-com slump. At 4 p.m. Monday, for instance, Scient was down $9.625, or 20%, at $37.4375 on the Nasdaq Stock Market after it said two of its dot-com clients had filed for bankruptcy. And PlanetRx, which has had cash-flow problems for months, was at $1.50, down 9.375 cents on Nasdaq, a new low.
"Before, you could close your eyes and buy a concept," says Seth Tobias, a hedge-fund manager who has made a bearish bet on Amazon shares. "Now you have to look at these as real companies."
The recent market action appears to play a lot like other corrections. Drew Cupps, manager of Strong Enterprise Fund, says, "The weakest or most controversial are taken down first and then slowly the mighty fall."
Ironically, it wasn't one of Wall Street's star analysts that started the recent stampede. In Amazon's case, it was a little-known convertible-bond analyst at Lehman Brothers who called into question Amazon's credit quality on Friday, sending the shares sliding 19% that day. In Yahoo's case, it was another Lehman analyst, Holly Becker, who helped draw attention to a potential slowdown in revenue growth, causing a 15% drop in Yahoo shares last week and a sell-off that continued Monday. At 4 p.m. on Nasdaq, the stock stood at $119.3125, down $6.
The sell-off among Internet giants shows how quickly Internet investors will flee when a piece of the puzzle pops out of place. In Amazon's case, what is missing is a robust capital market. For eons (at least in Internet time), the beauty of Amazon shares was the belief among investors that they deserved a big multiple because of its "first-mover" advantage and dominance in its "space."
As a first, and favored, child of the Internet age, Amazon increasingly put on more girth and was even able to tap the bond markets, an option unavailable to most Web rivals.
In a twist, however, that advantage has turned on its tail. In his report, Lehman's Ravi Suria says Amazon's credit is "weak and deteriorating. Our negative thesis stems from Amazon's massive negative operating cash flows, poor working-capital management and increasing debt." The report recommends investors avoid Amazon's two convertible debt issues, saying the risk inherent in Amazon's strategy isn't priced into its bonds.
The worries extend beyond profits and credit quality. In the case of Yahoo, which actually shows a profit, it is a question of revenue growth. At the core, investors are wondering about its business model as well, which is based in part on Internet advertising.
"It's not an appropriate time to own companies that are generating large losses or whose model is unproven," Strong's Mr. Cupps says. These days, he adds: "We are putting a higher priority on companies with earnings and lower multiples," eschewing the Yahoos and Amazons for bets on National Semiconductor and Compaq.
In her report, Lehman's Ms. Becker says Yahoo also is feeling the pinch of the slump among Internet companies, some of which are under pressure to cut spending on items such as advertising.
"Advertising accounts for over 80% of Yahoo's sales," she said in a report to clients on Friday. "Its growth has been fueled by heavy investments by dot-com companies, who are now running out of cash. While Yahoo remains a 'must buy' for advertisers, we still believe that the impact will be felt by late 2000."
Says Mr. Tobias, the hedge-fund manager: "You're seeing a fallout in the dot-com world and it's accelerating on a daily basis. Who is going to be there to advertise if there are more failures" among Web concerns? he asks. "People are buckling down on ad expenditures and if there are less dollars flowing around overall, how can you justify these multiples?" Revenue growth is a big bugaboo at Amazon, too, says analyst Greg Konezny of US Bancorp Piper Jaffray. Investors, he says, increasingly are concerned that Amazon's revenue growth for the second quarter won't exceed analysts' forecasts. "That change was what spooked investors," he asserts.
"Clearly this company is being valued on its size and long-term profitability prospects," Mr. Konezny says. "If the company doesn't exceed analysts' revenue forecasts at the rate that it's been doing so, Amazon will have a harder time justifying its valuation," he says.
Amazon is in limbo between being perceived as a "hypergrowth" company and a "cash-flow and earnings story," maintains Henry Blodget, Merrill Lynch Internet analyst. The hitch: Amazon now is burning through cash, and earnings are far out on the horizon.
"You are in transition between two groups of investors-momentum investors who are driven by top-line growth and growth investors who are more price and earnings sensitive," says Mr. Blodget, who has been bullish on Internet stocks.
Indeed, Amazon's high-octane growth is largely the result of its opportunistic debt strategy, analysts say. "I don't think Amazon intended to raise more than it did in the first quarter. They have always said they are flexible enough to take advantage of the market if it was there, but once it disappeared, they would begin emphasizing profitability," Mr. Blodget says.
Tim Stone, director of investor relations at Amazon, declines to comment directly on the Lehman report but says: "We left the March quarter with more than $1 billion in cash. We are absolutely not burning through hundreds of millions of cash. We expect to be generating cash for the next couple of quarters."
Mr. Stone added that the company's U.S. books, music and video businesses will be profitable for the full year 2000.
Amazon expects to spend in the $200 million to $300 million range for capital expenditures this year, Mr. Stone says. The company expects to use the cash it is generating from operations for its capital expenditures.
Amazon has scrambled to repair some of the market damage stemming from the Lehman report. Russ Grandinetti, Amazon's treasurer, sought to reassure analysts that the company is in no danger of running out of cash and reiterated that the company will end the year with about $1 billion in cash and equivalents.
He told analysts the company expects "strong year-over-year revenue growth in each quarter of 2000" and will reduce the company's operating loss as a percentage of sales each quarter of 2000. Amazon expects the company's operating loss -- 26% of the company's sales in the fourth quarter of 1999 -- to fall to the single digits by the fourth quarter.
Write to Susan Pulliam at susan.pulliam@wsj.com and Mylene Mangalindan at mylene.mangalindan@wsj.com
------------------------------------------------------------------------
interactive.wsj.com |
