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

To: Killswitch who wrote (106200)	7/16/2000 10:40:05 AM
From: Killswitch	Read Replies (1) \| Respond to of 164684

Hopefully on Monday I can get SSB to send me the actual formulas and model they used to come up with this. ------------------------------------------------------- Amazon.com (AMZN) AMZN: Cash Flow Projections, Amazon To End 1H (Buy, High Risk) March '01 With $666 Million... Mkt Cap: $13,026.9 mil. July 13, 2000 SUMMARY * Seeing much disinformation surrounding Amazon's future INTERNET - cash flows, we decided to publish our projections; we E-COMMERCE believe that Amazon will end the March Quarter '01 with Tim Albright $666 million, and March '02 with $757 million in cash. * We have stress-tested our model for for two scenarios , a 20% decrease in inventory turns coupled with 20% Bruce van Raalte increase in payables turns off of our base case scenario, and a 20% decrease in '01 sales off of our base case of $4.9 bn. * In the negative inventory turns / payables turns scenario Amazon ends Q1 '01 with $601 million in cash and March '02 with $553 million in cash. With the sales slowdown scenario, Amazon ends March '01 with $861 mm and March '02 with $620 million. * We will make available our cash flow projections, complete with formulas, to any Salomon Smith Barney client. Please contact your salesperson. * Reiterating our Buy (1H) rating. Q's 3 and 4 will be good for AMZN. FUNDAMENTALS P/E (12/00E) NA P/E (12/01E) NA TEV/EBITDA (12/00E) NA TEV/EBITDA (12/01E) NA Book Value/Share (12/00E) NA Price/Book Value NA Dividend/Yield (12/00E) NA/NA Revenue (12/00E) $2,996.0 mil. Proj. Long-Term EPS Growth 60% ROE (12/00E) NA Long-Term Debt to Capital(a) NA (a) Data as of most recent quarter SHARE DATA RECOMMENDATION Price (6/28/00) $37.88 Current Rating 1H 52-Week Range $106.69-$33.88 Prior Rating 1H Shares Outstanding(a) 343.9 mil. Current Target Price $130.00 Convertible No Previous Target Price $130.00 EARNINGS PER SHARE FY ends 1Q 2Q 3Q 4Q Full Year 12/99A Actual ($0.12)A ($0.26)A ($0.26)A ($0.55)A ($1.19)A 12/00E Current ($0.35)A ($0.32)E ($0.28)E ($0.22)E ($1.17)E Previous ($0.35)A ($0.32)E ($0.28)E ($0.22)E ($1.17)E 12/01E Current NA NA NA NA ($0.48)E Previous NA NA NA NA ($0.48)E 12/02E Current NA NA NA NA NA Previous NA NA NA NA NA First Call Consensus EPS: 12/00E ($1.28); 12/01E ($0.59); 12/02E NA OPINION Much has been made of Amazon's cash position in recent weeks. Although Amazon ended the March '00 quarter with more than $1 billion in cash some have speculated that the company will run out of money by the end of March '01. Certainly analysis of Amazon's last two quarters will not lead to pretty conclusions. However no one would dare come to an investment conclusion without looking at the range of outcomes from Amazon's operations and understanding the impact that they have on Amazon's cash balance. We've spent some time going over our cash flow projections and we believe that Amazon will end the March '01 quarter with $666 million in cash and $757 million in March '02, a far cry from running out of money. Even when we stress test the model with slower inventory turns and faster payables turns, or with significantly lighter revenue, we still come out with more than $500 million in cash at the end of the March Quarters in both '01 and '02. We are making available our cash flow model, complete with formulas, to all Salomon Smith Barney clients. Please contact your sales person. Cash Flow Projection Methodology In order to determine the sensitivity of cash flows to changes in working capital, we have constructed a simplified cash flow statement. We arrive at operating cash flows by adding depreciation and other non-cash items and the change in operating assets and liabilities to net income. The other non-cash items in our projections are primarily goodwill amortization. Changes in our inventory and accounts payable projections are reflected in the change in operating assets and liabilities. Deducting capital expenditures from operating cash flow we arrive at free cash flow. Assumptions We have projected that Amazon will have revenues of $2.98 billion in 2000, and $4.9 billion in 2001. We have projected capital expenditures of $200 million in 2000 and $225 million in 2001. For depreciation, our projections are $113 million and $183 million for 2000 and 2001 respectively. Our projection for other non-cash items, which incorporates approximately $440 million of annual goodwill amortization, are $847 million and $840 million in 2000 and 2001, up from $362 million in 1999. In our assumptions regarding changes in operating assets and liabilities, we held interest payable constant, since we do not expect the company to accumulate more debt. The current portion of LTD is based on the maturity schedule of capital leases. We expect the other operating assets and liabilities, outside of inventories and payables, to grow in proportion to sales. Inventory: We drive our inventory projections off of anticipated inventory turns that are built off of a combination of recent historical levels and the turns rate of bricks'n'mortar competitors. We are projecting Amazon's inventory turns to range between 3.2x in the December quarter and 2.7x in the March quarter, following the recent 4.0 in Dec. 99 and 2.9x in March '00. Leading Consumer Electronics' retailer Best Buy's inventory turns range between 2.6x in the December quarter and 2.2x in the March quarter. Leading Book retailer Barnes & Nobles' inventory turns range between 1.1x in the December quarter and 0.8x in the March quarter. We expect inventory turnover to decline in the September and December quarters and to increase in the March and June quarters. We projected inventory based on using sales-based turnover. Accounts Payable: We drive payables off of our payables turns data, using COGs as the turns-driving line. We expect payables to follow a similar pattern to inventory: building to a peak in December and reaching their lowest levels in the March quarter. We are projecting Amazon's payables turns to range between 1.6x in the December quarter and 1.3x in the March quarter, following the recent 1.7x in Dec. 99 and 1.2x in March '00. Leading Consumer Electronics' retailer Best Buy's inventory turns range between 2.6x in the December quarter and 2.5x in the March quarter. Leading Book retailer Barnes & Nobles' inventory turns range between 2.0x and 1.2x. Scenarios Base Case: In our projections, we have assumed a gradual improvements in inventory turnover as the company's fulfillment operations become more efficient. We have assumed that payables turnover will be consistent with historical levels. We have accounted for continued strong seasonality, despite the fact that Amazon is diversifying into counterseasonal merchandise. The result of our assumptions is that Amazon remains clearly adequately funded. We expect the company to finish Q1 2001 with approximately $667 million in cash and Q1 2002 with $757 million in cash, losing $342 million in the March to March time frame of 2000 - 2001, and generating a positive cash flow during the 2001- 2002 March to March time frame of $93 million. Bad Case 1 - Reduction in inventory turnover and increase in payables turnover: In order to test the robustness of the model, we reduced our inventory turnover by 20% and increased our payables turnover by 20% while keeping all else equal. In this case Amazon ends March 2001 with $602 million and March '02 with $554 million, losing $407 million and $48 million in respective years. Bad Case 2 - Reduction sales and increase in losses: We tested an alternate scenario, reducing projected revenues by 20%+ and increasing losses by $90 million, while keeping all else equal with the base case scenario including inventory and payables turns. In this scenario, AMZN finished 2000 with over $861 million of cash in March '01 and $620 million in March '02, generating cash flow losses of $148 million and $241 million respectively Conclusion Clearly we believe the concerns over Amazon's bankruptcy are overstated. Just like we cringed when we saw Jeff Bezos named as Time's "Man Of The Year" in January (one of the all-time great sell signals) we were relieved at BusinessWeek's recent cover page story on Amazon questioning its viability (buy signal). Amazon is not going to run out of money within the next year or the next ten years. Our sense is that we will look back and view these past several weeks as one of the great buying opportunities in the stock. The biggest risk in the story exists in Amazon's June quarter results. While we are not going to hazard a gun-slinger guesstimate on the quarter, we sense that our $610 million revenue estimate may be a stretch, but that the company should show an upside surprise on the spending lines (we are estimating an EPS loss of $0.32.). Should the company show sequential growth on the top line (against $574 last quarter) and upside against the EPS line we'd expect the stock to move back up into the high $40's to mid $50's by the end of Q3. We reiterate our Buy (1H) rating, comfortable with Amazon's cash position and thrilled with its competitive position.

To: Killswitch who wrote (106200)	7/16/2000 10:58:28 AM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Of course I cannot say for 100% sure :-) We both have our opinions. Mine happen to be backed up by the company (who states they will be cash flow positive by end of this year), and also major analysts who have spent more time on this than myself. For your opinion on the other hand, I don't see much backing it up. Brian, I also cannot say anything that is 100% certain. I have spent too much time debating Amazon now more out of interest than I should. I am going to stop debating the issues and just let time play out so we see how the firm does on a cash basis, earnings basis and stock price basis. I have been perfect in calling the the stock price of Amazon incorrectly. I do not know of anyone that could be as wrong as I have been and I doubt I would be any better at it in the future. On the other hand so far, if you look back to my past posts for the last two years, I have called Amazon's cash burn and earnings problems about as accuratly as it can be. I debated with William Harmond about Amzon needing to raise cash last spring and I was correct and he was wrong. That may be a first in that on stock price moves, William makes me look like I am just learning to walk;-) Amazon is the most controversial firm I have ever seen. These are the four possiblities that could play out over the next year or two. 1. The analysts in general do not understand Amazon well at all and basically go with what mangement says. 2. The analysts do understand the cash flow analysis and are calling it like they see it. 3. The analysts do understand the cash flow situation but for other reasons, they are not really telling what they believe. 4. I am incorrect and although it would be the first time rgearding the FA for Amazon, is is far from the first time nor the last time that will happen. I promise I will be incorrect again and will admit to being incorrect on Amazon if my call of needing funds by Q3 of 2001 is incorrect. I see you over on the New Economy thread which I frequent too. I very much enjoyed your reply and thoughts. I especially enjoyed the gentlemanly way you present yourself. Let's let it play out and keep in touch as each quarter unfolds. I do wish to reinterate or reply to this sentence: For your opinion on the other hand, I don't see much backing it up. Actually, I have posted more than I wish to admit with in depth explanations of my analysis for the Amazon cash flow, profit situation, etc. All of those posts are here but are very difficult to find with about 106,000 posts around and likely not worth trying to dig them up. I just want to say I have spent a great deal of time trying to dtermine the fate of Amazon and I did not make my opinion without a lot of research. On that note, let's post to each other brief thoughts at the end of each quaterly report and maybe when an analysts makes a change in their opinion in either direction. How does that sound to you? Glenn

To: Killswitch who wrote (106200)	7/16/2000 11:31:18 AM
From: Bob Kim	Respond to of 164684

Mine happen to be backed up by the company (who states they will be cash flow positive by end of this year), and also major analysts who have spent more time on this than myself. For your opinion on the other hand, I don't see much backing it up. Brian, So far, Glenn has backed up his opinions better than you. If the company is so confident then they should state in their SEC filings or even issue an 8-K saying that their statements of risk as they apply to the need for ever getting more funding no longer apply and they should volunteer to give up the safe harbor they use when they make forward looking statements outside of SEC filings.

To: Killswitch who wrote (106200)	7/16/2000 12:51:20 PM
From: Eric Wells	Read Replies (3) \| Respond to of 164684

Mine happen to be backed up by the company (who states they will be cash flow positive by end of this year), and also major analysts who have spent more time on this than myself. Brian - welcome to the AMZN thread - I have not seen you post here before (but I've only been posting sporadically here myself lately). You've wandered into a bit of a minefield in making some rather strong predictions that Amazon will not run out of cash. And while this is the AMZN thread, many who post here don't seem to have a very positive view of Amazon - the company or the stock. Amazon officials have made public statements that claims that the company will run out of cash are nothing but "hogwash" (the exact word spoken by Amazon spokesperson Bill Curry). But if you read Amazon's latest 10Q report, it is full of warnings that the company may run out of cash (http://www.freeedgar.com/Search/ViewFilings.asp?CIK=1018724&Directory=891020&Year=00&SECIndex=1049&Extension=.tst&PathFlag=0&TextFileSize=128632&SFType=&SDFiled=&DateFiled=5/15/2000&SourcePage=FilingsResults&UseFrame=1&OEMSource=&FormType=10-Q&CompanyName=AMAZON+COM+INC). Why aren't Amazon officials publicly stating what is in their own 10Q report - that there are risks of their running out of cash? In response to the recent Lehman bond analyst report, why didn't Jeff Bezos say something like "You know, that bond analyst has a good point - there is a risk that Amazon may have a cash problem in the future - we state this very clearly in our 10Q report - but, in truth, we believe in our business model and we're working hard in the interest of our shareholders to make sure that we don't have a cash problem in the future." However, Bezos didn't say this - instead, he and other Amazon officials opt to use inflammatory language, claiming the Lehman analyst's opinion is "hogwash". But in truth, the Lehman analyst was really only restating what was already in Amazon's 10Q report. Regarding major analysts (Henry Blodgett, Mary Meeker, et al) that have positive opinions on Amazon's outlook - well, I think that many on this thread view the opinions of such analysts with a bit of - what shall I say - a bit of suspiscion? Some of these analysts have pumped many an internet stock in the past - stocks that have lost 60%, 70%, 80% and even more in value this year (I have to be careful here, I don't want to open myself up to the possibility of being sued). And doesn't it seem a bit odd that many of these analysts are able to achieve and maintain respect for their opinions within the investment community - despite the fact that these analysts are employed by companies that hold large equity positions and have underwriting agreements with the companies for which the analysts are releasing opinions? I have no proof that any analyst has every purposely pumped a stocked for the benefit of his/her company or his/her company's investors. The investment banks will tell you there is a Chinese wall that separates the analysts from the rest of the firm. But on the surface, doesn't there seem that there is room here for a major conflict of interest? I would like to believe that the people who work for the investment banks are good, hardworking and honest people who are always thinking and acting in the best interest of their individual investor customers. But, I for one, would feel a lot more comfortable with the opinions of equity analysts if such analysts were a bit more independent. I realize that my writing at times reeks of idealism (and cynicism). But there are some analysts - employed by some very well-respected investment banks - well, some of these analysts I wouldn't trust to invest my pocket change (much less, my life savings). In short, no one knows whether Amazon will run out of cash. Even if the company does run into a cash crunch, Amazon may still be able to raise more money through the bond and equity markets (provided that such markets remain open to them). Looking at Amazon's income and cash flow statements from the company's recent 10Q and 10K reports, however, there's one thing that stands out: Amazon is not using that much cash in building out it's distribution centers these days - it appears that the cash required to outfit many of these centers (at least in the US) has already been spent. Where Amazon is loosing cash, however, is in operations. Looking at Amazon's sales and cost of sales, one would come to the conclusion that Amazon is operating in a very low margin business. The conclusion gains greater support when you consider that Amazon accounts for fulfillment costs (shipping) under "Marketing, Sales and Fulfillment". But of course, it is common knowledge that retail is a low margin business. Since Amazon is operating in a historically low margin environment, the only way Amazon will reduce it's operating losses is to drive more sales - which might require it to spend more money on marketing and advertising. I think Amazon has a chance of surviving. But I can see nothing in any of Amazon's reports nor in any of the opinions released by investment banking analysts that convince me that Amazon will be the next Wal*Mart. Amazon has benefited tremendously from very friendly bond and equity markets - the cash cushion that such markets has provided has allowed the company to survive and grow it's sales. But in my view, the company has yet to prove that it's model works. And it seems that there are a lot of people, especially a lot of analysts, who make very bold statements that "Amazon's model does work" and that the company will survive. But in truth, it's a big unknown. I would have much more faith in Mr. Bezos if he would publicly acknowledge the risks he is taking with investor's money, rather than downplaying the very real concerns expressed by a Lehman bond analyst (concerns which are echoed throughout Amazon's 10Q report) as "hogwash". Thanks, -Eric