>2/2/01 1:24 PM ET
So Amazon.com (AMZN:Nasdaq - news), Internet merchant extraordinaire, has finally given investors and analysts what they wanted: a date with profitability.
Wading Out
Amazon investors fleeing
But since the company predicted Tuesday in releasing fourth-quarter earnings that it would become profitable on a limited basis in the last quarter of 2001, Amazon's stock has fallen sharply, including a $1.06 drop Friday to $15.19. That and a flurry of reports hitting Wall Street suggest that plenty of analysts and investors simply don't believe the company can meet its goal.
Analysts complain that the company is continually cooking up new metrics to gussy up its financial health, making historical comparisons difficult. Meanwhile, a slowing economy and a pullback in online retailing growth have made investors hesitant about trusting even the best-intentioned dot-com companies to turn profitable. All this has investors turning up their noses at Amazon's stock, which despite an 80% plunge over the last year remains more richly valued than many solidly profitable traditional retailers.
More, Please
For its part, Amazon stands by its guidance and its investor relations practices. And to be sure, no one accuses the company of failing to comply with Securities and Exchange Commission disclosure regulations. But analysts have long hoped to wring more financial data out of Amazon.com management.
"It really gets crazy," says Holly Gustafson, an analyst at Legg Mason Wood Walker. "They're not being incorrect, but I don't know that they are being entirely transparent." (Gustafson recently dropped her rating to buy from strong buy, and her firm does not have an underwriting relationship with Amazon.)
In one recent example, the company said its nonmedia businesses -- such as toys, hardware, kitchenware and electronic goods -- saw 47% more U.S. customers making purchases in the fourth quarter. But analysts say the company wouldn't break down this figure further, even though many analysts hoped to know how much Amazon's co-branded site with Toys R Us (TOY:NYSE - news) contributed to the growth.
Flowing South
Amazon backs off 1999 highs
"They should have broken out toys from last year," says Holly Guthrie, an analyst at Janney Montgomery Scott. "It's difficult to gauge what's happening this year vs. last year." (Guthrie has a hold rating on Amazon, and her firm hasn't done underwriting.)
Also, analysts complain they often face new metrics with no way to put them in context. Here's one example: For the past couple of quarters the company has offered repeat-order numbers -- the proportion of customers who ordered more than once during the quarter -- but analysts don't have year-ago figures for comparison.
"We've just started to disclose it," says Bill Curry, spokesman at Amazon. He says analysts wanted a figure that approximates the same-store sales figure used to judge traditional retailers. "We are trying to provide some proxy to that."
The result: Some analysts have a tough time believing management when it says it will turn a profit by the fourth quarter, according to Gustafson.
Responds Curry: "We've said all along that there are no guarantees."
Skepticism
Take Robertson Stephens analyst Lauren Cooks Levitan. She revised her estimates in a report released Wednesday, and still expects the company to lose nearly $40 million for the 2001 fourth quarter, using the accounting method that the company said would show a profit. (Amazon has focused on pro forma results, which exclude items such as amortization of goodwill and investment gains and losses. In its profitability proclamation, the company went a step further, excluding interest expense.)
"Given our ongoing concerns regarding Amazon's rapidly declining year-over-year revenue growth rates in core product categories and an increasing reliance on Amazon's newer categories to generate substantial revenue growth, we believe such an achievement poses a considerable challenge to the company," Cooks Levitan wrote in her report. "As a result, our current estimates are below management guidelines." In its earnings report Tuesday, Amazon slashed 2001 sales growth targets, to 20%-30% from around 40%; to meet the profitability target, Cooks Levitan says the company would need sales growth in the ballpark of 40%. (She has a market performer rating on the stock, and her firm doesn't have an underwriting relationship with Amazon.)
Another analyst, Tom Courtney of Banc of America Securities, estimates the company will lose about $6.7 million in the coming fourth quarter, using the same accounting mechanisms the company says will show a profit.
In addition, most analysts now think the company will lose more over the entire year of 2001 -- based on information in this week's earnings statement and using the company's normal accounting procedures -- than they had expected ahead of the earnings release. Courtney, for example, adjusted his estimates, based on the expected sales slowdown, and now predicts Amazon will lose 90 cents a share in 2001, compared to his previous estimate of an 80-cent loss. For the fourth quarter, the company should lose 10 cents a share, according to Courtney's estimates, a penny more than his previous projection. (Courtney has a market performer rating on the stock, meaning he thinks investors shouldn't go near it. His firm hasn't done underwriting for Amazon.)
The Blame Game
Courtney lowered his estimates based on the sales slowdown, while questioning management's view that the slowing economy is to blame. "We note that the change in 2001 revenue guidance from Home Depot (HD:NYSE - news), another dominant retailer, over the past six months has only been reduced 7%, as opposed to the 15% reduction in top-line guidance from Amazon over the past three quarters," says Courtney.
Even those who are optimistic have reservations. "It's a close call for the fourth quarter next year," says Shawn Milne, analyst at Wit Soundview, one of the more bullish analysts covering Amazon. "We think they can get there, but it will be a tough call." (Milne has a buy rating on Amazon, and his firm does not have a banking relationship with the company.)
"I don't buy all this that the economy impacted the company," says Milne, referring to a common growth-shortfall scapegoat. "What I think is that this is another retail story. The bears got what they wanted from this report. But those who say Amazon is completely done are going overboard."
Price Competition
The company's balance sheet remains healthy, showing about $1.1 billion in cash at the end of the fourth quarter -- plenty, say most analysts, to sustain the company through the end of the year without tapping the capital markets. So the question comes down to whether Amazon shares look attractive enough to pull investors back in.
Consider this evidence, compiled by Sanford Bernstein analyst Faye Landes, that Amazon's shares are still overvalued despite being well off their all-time high: based on recent share prices, Amazon is still trading at 1.95 times projected 2001 sales. This makes it more expensive than virtually all of the nation's retailers -- companies like the Gap (GPS:NYSE - news), Target (TGT:NYSE - news), Toys R Us, Wal-Mart (WMT:NYSE - news), Costco (COST:Nasdaq - news) and Kmart (KM:NYSE - news). The only retailer in the analysis with a higher price-to-sales ratio was Home Depot, at 2 times. (Landes rates Amazon underperform, and her firm doesn't do underwriting for the company.)
And if Amazon can't persuade investors that it's making real progress, that kind of premium is certainly not going to hold. |
