Wall Street waits for Amazon answers
msnbc.com
Amazon.com CEO Jeffrey Bezos, shown here speaking before a technology-business conference in Seattle last week, has been forced to respond to investors seeking a quick path to profitability.
Wall Street waits
for Amazon answers
E-tailer battles Wall Street’s
yearnings for earnings
ANALYSIS
By Elliot Zaret
MSNBC
Oct. 23 — Five years ago, Amazon.com packed its bags, loaded the kids from Wall Street into the back of the station wagon, and set off on a road it said would lead to a magical land called “Profitability.” When it turned off Book Boulevard onto Music and Video Highway, the kids cheered; there was so much more to see and do! But as it continued to wind through backroads that took it through such exotic places as Cookware, Hardware, Electronics and even New Cars, the kids in the back started to get cranky — worried that they would run out of gas or break down before they reached the destination.
AMAZON DADDY JEFF BEZOS has tried to reassure them, but since these kids have the credit cards, he has to listen when they scream: “Are we there yet?”
Amazon will be pulling over at a rest stop to show the road map to the Wall Street kids late Tuesday, when it releases its revenue numbers for the quarter that ended Sept. 30. Analysts expect a loss of 33 cents per share compared to 26 cents in the period last year.
Concerns over the road to profitability have sent Amazon stock on a free fall, plunging from a high of 113 in December to a low of 19 3/8 last week — a level it hasn’t seen since October 1998, back when it sold nothing but books and music. This summer stock analysts lined up to say they were “throwing in the towel” on Amazon because it continued to lose money, and they feared it would run out of cash before it ever achieved profit.
Amazon tried to ease those fears by saying it expected to end the year with nearly $1 billion in cash. Of course, that doesn’t include between $500 million and $700 million in accounts payable that is being deferred until next year. And it doesn’t include the approximately $1.5 billion in debt the company has accumulated. So the question of whether Amazon has enough capital to operate until it reaches profit is one that time will tell.
But it’s also one that Wall Street influences: With the stock price at a fraction of its former value, Amazon no longer can wheel and deal and snap up hot startups like it used to.
In perspective, however, the series of downgrades this summer seems like little more than a tantrum by the Wall Street kids who have grown increasingly testy as one dot-com company after another closed its doors or restructured. The thing about Amazon is it never planned to reach profitability until mid-2001 at the earliest. That’s what Daddy Bezos has been telling the kids since they got in the car, and his story has never changed.
“What’s really changed? Nothing. The stock’s gone down,” said Tom Courtney, an analyst at Banc of America Securities. “This is an example of the company’s doing one thing and the stock is doing another.”
Tale of the tape
Banc of America's Tom Courtney on Amazon:
• Aug. 11, 1999 - Initiated at Strong Buy - $45 7/16
• Oct. 28, 1999 - Downgrade to Buy - $71
• Feb 3, 2000 - Upgrade to Strong Buy - $84 3/16
• July 25, 2000 - Downgrade to Buy - $37 5/8
• July 28, 2000 - Downgrade to Market Perform - $30
CONSISTENT STORY
In fact, Amazon has had an incredibly consistent story since the beginning of the drive. From the time it first turned the engine on, Amazon wanted to revolutionize the shopping experience by using the Internet to both streamline traditional inventory problems and cost and to give the customer the best service possible.
Amazon.com
• Message Board
• Company Info
• Quarterly Earnings
• Earnings Estimates
• Analyst Ratings
Along the way, it has made only two significant changes to its story: 1) the decision to sell a wide variety of products, and 2) building a series of distribution centers that would carry an inventory of best-selling items.
Of course just because it’s been consistent doesn’t mean it will reach the Land of Profit. Which is why the world of Internet observers seems to be divided into two camps: the Amazon Believers and the Amazon Doubters.
The Believers argue that Amazon is building the single largest customer base in the history of commerce, and with its intense focus on customer service and satisfaction, will build and maintain long relationships with them. Those relationships will enable Amazon to sell the customer just about anything it wants, making it into the “Wal-Mart of the Internet.” Since e-commerce is at its infancy (goods bought online make up less than 1 percent of all U.S. consumer purchases), Amazon has nothing to do but grow, grow, grow.
The Doubters say that books, music and videos are very similar in a way that makes them perfectly tailored to online sales: You don’t need to try them on like clothing or compare one brand to another like electronics, and they are easy to stock and ship. The further Amazon strays from its core service, the harder it will become to make a profit.
The Doubters have a point: Books and music are already profitable, according to the company, so if Amazon had stuck to books, music and movies, it might have announced its first profitable quarter Tuesday afternoon.
But the Believers also have a point: If Amazon stuck to books and music, it would be shutting itself out of all sorts of potentially profitable markets. Electronics, for instance, have a much higher margin and were the fastest-growing segment of Amazon’s business in the second quarter.
Believers: Amazon has a captive and trusting audience to cross-sell products. Doubters: The distribution system Amazon spent all that money on last year was designed for its core business and won’t be compatible with the newer offerings, so the more it expands, the less it will be streamlined.
Those views are very different, but they aren’t necessarily directly at odds with each other.
TRICKY BALANCING ACT
Advertisement
Quick Gifts
Swimwear
Books
Music & Video
Computing
Electronics
Toys & Games
More . . .
Tony Tjan, executive vice president and managing partner of Zefer consultants, sees the difference between the two views as whether you look at Amazon from the demand side or the supply side. From the demand-side view, it is easy to be a Believer, because the demand is so clearly there and Amazon needs only leverage its customer base properly to make scads of money. The supply-side view creates the Doubters, who question whether the infrastructure Amazon has built can handle the variety of inventory systems, distribution models and procurement nuances the different kinds of items will entail.
“It’s a tricky balancing act between leveraging your customer base and leveraging your infrastructure,” said Tjan. “One has to ask if that infrastructure is truly leverageable across all the growth opportunities one is pursuing. Investing up front in infrastructure makes sense, but the nuances and specifics of the verticals will limit it. …What you have to be cautious about is if you just leverage the customer base you end up in the game of just-in-time infrastructure.”
The real question going into Amazon’s results is whether the company is being cautious to get the most out its infrastructure, but forward-thinking enough to grow in new markets.
Courtney, who has done some heavy data crunching on Amazon, said one of the key things to watch is the shipping margins, which indicate whether Amazon is successfully gathering up all the various items in your order in its distribution center and shipping them all at once — something that is far cheaper than the alternative of breaking up the shipments.
In the big picture, this measure may be more important than the gross revenues or the amount of money the company lost this quarter, because it signals whether Amazon is going to trim costs enough to make a profit in the near future.
Another thing to look for, Courtney said, is to “try to figure out whether the customer is really buying more stuff.”
If you look at the amount the average customer spends in a 12-month period, it looks like that’s growing rapidly. The average active customer spent $107 per year at the beginning of 1999, $116 per year last holiday shopping season and $128 last quarter, according to Courtney’s research. Courtney estimates that number will reach $130 this quarter.
But Courtney warns that Amazon may be benefiting from a short-term phenomenon that is universal in e-commerce: When people first shop on the Internet they buy one or two small items; the amount they buy and the frequency of their online shopping increase with their Internet experience. While that phenomenon is still contributing to Amazon’s revenue growth, it gets in the way of the ability to discern whether Amazon is really doing a better job of selling things to its customers and leveraging that user base.
To get around this effect, Courtney looked at the length of time the average Amazon customer has been shopping on the site, then used that number to normalize the sales figure.
What he found out is that when viewed through this lens, the average annual spending per customer has been pretty flat, and even trending a little bit down.
Courtney also sees Amazon as in a balancing act, but he sees it more from a Wall Street perspective.
There’s no doubt that Amazon is offering something valuable to its users.
“They are providing the best shopping platform for (business-to-consumer commerce),” Courtney said. “They provide the best customer service of any pure-play (e-commerce company.)”
But when looking at a publicly traded company, that’s only one-third of the battle.
“There’s a value proposition for the consumer, there’s a value proposition for the vendor and there’s a value proposition for the investor,” Courtney said. “If you put too much of a value on the customer and not enough on the investor, it doesn’t work.”
And that’s what the kids in the back of the station wagon — the Wall Street analysts — will be looking for in the quarterly report.
Amazon may believe it’s on the right road. It may say it’s making great time or great mileage on its gas. But when the kids scream “are we there yet,” they want a better answer from Bezos than “soon.” If Daddy doesn’t give a better answer, the kids may not help it get provisions at the next rest stop.
Reality Check column archive
• The click-through conundrum (9/25)
• Are portals passe? (10/2)
• Internet stock stars fall back to earth (10/9)
• Street braces for Apple's next act (10/17) |
