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

To: H James Morris who wrote (141325)	4/5/2002 4:37:36 PM
From: Ted The Technician	Read Replies (2) \| Respond to of 164684

>>Why Amazon's Flowing Downhill From Here<< Found the article: --------------------------- Why Amazon's Flowing Downhill From Here By Glenn Curtis Columnist 04/03/2002 09:55 AM EST Last month I speculated that Amazon.com stock had likely hit bottom. My reasoning: Bezos & Co. was cutting the flow of red ink as promised, and the bookseller was steadily broadening its product arsenal. But now, with the stock down almost 20% from its high of last month, I'm thinking my call was a bit premature. I think investors should sit this one out until there's some real sustained good news or a sharp drop in the stock. Either of those events could reopen the Amazon-as-value case. Why the sudden change of heart? It turns out that the company may lose part of one of its most important revenue sources, a lucrative partnership with Toys R Us. You see, despite having posted a 53% year-over-year increase in e-commerce revenue, Toysrus.com is still losing a bundle of money (more than $76 million in 2001, to be exact). And for this reason, there's talk that the toymaker may scale back its online spending markedly over the next several years. That's bad for Amazon, because the Toys R Us deal represents more than half of the company's high-margin fulfillment services revenue, according to some estimates. Overall, the Toys R Us relationship represents only about 4% of annual sales, but obviously the profit issue is key here. But understand, it's not the financial aspect I'm worried about. Amazon is a news stock, meaning it doesn't trade on a multiple of earnings or revenue, but more on the flow of information. And right now, a setback in a big-name relationship could weigh down the stock, big time. Hold your horses, people. I know what you are thinking. How about the notion that a retailer such as Toys R Us must build out its e-commerce system and establish relationships with other big-name distribution channels (such as Amazon) in order to remain competitive over the long haul? My answer to that is simple. Toysrus.com represents a mere 2.5% of Toys R Us' total revenue. Even if the company were to scrap its entire dot-com effort, it would still fare quite well, given that other major toy sellers, including KB and Disney, have similarly failed to establish a major presence on the Web. Put another way, an Internet strategy may be important. But Toys R' Us has bigger fish to fry, given its recent inability to lure customers into its bread-and-butter bricks-and-mortar locations. The bottom line here, folks, is that a loss of revenue from Toys R Us, while certainly not Amazon's death knell, could put a damper on its financial outlook in both 2002 and 2003. And remember, the company has had enough problem generating profits and revenue growth even without partnership problems. For this reason, I now think it makes sense to wait before pulling the trigger on this one. At this point, in order for me to turn bullish, I'll need at least one of three things to happen: * The company will need to post at least two consecutive quarters of operating profit (I won't hold my breath) and improve margins throughout the year. * The shares will need to trade under $10 a share, from their recent $14.25. (My gut says that at 3 to 4 times cash, the downside risk would be limited.) * Amazon will have to set up a few more high-margin fulfillment deals, a la Toys R Us. But until some of that happens, in my mind, Amazon.com will remain a show-me stock. Be sure to sign up for a free two-week trial to my newsletter, the Era of Value. © 1996-2002 TheStreet.com, Inc. All rights reserved.