David:
Great article.
Someone tell Genni Combes, the H&Q analyst, that she'd sound less like a ditzy idiot, if she wouldn't confuse vertical integration with diversification or horizontal/product diversification. And these are the analysts!!! A senior one yet!
LP
Company Focus
For daredevils only: Amazon.com
The online bookseller's sales are raging, but earnings aren't likely till the millennium. It's a wild way to bet
on a retailing sea-change.
By George S. Mack
The purchase of a book or compact disc at online retailer Amazon.com (AMZN) is as fast, smooth and
seductive as a good mystery novel. And the company's growth has been just as much a page-turner ever
since chief executive Jeffrey P. Bezos booted up an old PC and started the company at home just four
years ago.
The company began changing the way stuff is sold in this country almost from its inception -- but soon
after it began selling shares to the public in May 1997, it became almost as much a stock-market
phenomenon as a retailing phenomenon. The company is already selling nearly $500 million worth of
stories and tunes -- and investors and speculators are expecting that figure to ramp up so quickly they've
bid the share price up six-fold in the past year.
There's little question that the company's execution on its march toward $10 billion in annual sales so far
has been little short of brilliant. But can it continue to meet fantastic expectations? This story won't lecture
about valuation -- there's been enough of that pious finger-wagging in the financial media lately -- until near
the end. Instead, we'll look more closely at the company itself.
Some great reviews
Senior analyst Genni Combes at brokerage Hambrecht & Quist will go out on a limb: She believes the
company can meet all of its expectations -- and more. She doesn't usually publish target prices on stocks,
but at a time when Amazon was trading in the mid-$70s she said she fully expected to see the price
higher in a year -- and still hasn't changed her "buy" rating.
This year she estimates a loss of $1.14 per share on a 200% explosion in revenues that will reach $442
million. In 1999 she expects less red ink for a loss of 45 cents per share and a 42% increase in sales to
$625 million. Finally, the company will turn the corner to profitability, she believes, in 2000 with 32 cents
per share profit on sales of $800 million.
Details
Company Facts
1-yr Chart
Overview
Financials
Advisor FYI
Company Facts
1-yr Chart
Overview
Financials
Advisor FYI
Company Facts
1-yr Chart
Overview
Financials
Advisor FYI
Despite her hesitation to peg a target price, Combes loves the Amazon story. Because revenues have shot
up, she says, the company is "clearly the No. 1 player in the book market" in the fastest-growing sales
medium of all time -- eclipsing traditional standard-bearers Barnes & Noble (BKS) and Borders Group
(BGP). And she sees the most recent "vertical expansion" into music, video and DVD sales as a very
positive move.
Combes notes that it's important not to underestimate the company's decision last year to store
consumers' credit-card and shipping information on its computers -- a move that seemed daring at the
time, considering privacy fears -- since it has turned the once-clumsy process of Web buying into
something impulsive and fun. Unlike other Internet commerce sites, which inevitably lose customers as
they hunt for their card info and end up having second thoughts or distracted, Amazon makes a sale as
easy as a single click of a mouse button.
Combes also likes to see the company expanding its ease-of-purchase concept geographically with
acquisition of online book retailers Telebook in Germany and Bookpages in the United Kingdom. She says
Amazon can leverage its technology, customer service and "e-merchandising expertise" into sales
throughout Europe and Asia to cash in on the worldwide $80-billion book and $40-billion music market.
Referring to Amazon as an "A-plus" company, she says management has proven that they can "scale
their operations quite effectively."
Business does continue to accelerate toward those goals, albeit from a tiny base, as sales for first quarter
1998 were $87.4 million -- a 446% increase over the $16 million from the first quarter of 1997. The company
says cumulative customer accounts have grown to more than 2.3 million -- a 50% increase in the three
months since Dec. 31, 1997 as well as a 564% increase since the end of the first quarter of 1997.
The stock's story
But what about the stock? Moments after the company announced outstanding first-quarter results and a
stock split in late April, Amazon shares began gushing ahead like a tidal wave -- pressuring an
8-million-share herd of short-sellers' to cover their positions. The squeeze has continued in historic
proportions. Folks who had borrowed shares in expectation that they'd be able to buy them back cheaper
later had to go to the open market to buy like mad -- putting further pressure on the stock. The more
desperate the shorts got to cover, the more the price of the scant number of shares rose in an amazing,
unlikely spiral. One result has been short-sellers loss of appetite for more punishment.
Ownership is so highly concentrated in the hands of insiders -- especially founder Jeff Bezos with his 41%
of the 48.3 million outstanding shares -- that there is almost no "float," or shares available for trading in the
market. The company's investor-relations staff estimates the float on the lower end of 10 million to 15
million shares. No big mystery then as to how Amazon can move 10% or more in a day: Very little buying
or selling pressure is needed to move the price of so few shares.
Indeed, from June 1 through July 14, the Interactive Week Index (IIX) of Internet stocks moved up 29%
while Amazon advanced 169% with volume on some days approaching 9 million shares.
The good news for anyone who's long the stock: Bezos said through a spokesperson that he has no
intention of issuing new shares to take advantage of the rise, at least for the time being. If there were such
a dilutive plan, the company wouldn't have issued $325 million in rather expensive junk debt, believes one
analyst. Indeed, the interest among institutional investors in the debt was so great that it belies the notion
that Amazon's stock-price jump is simply a creature of crazed and inexperienced retail investors:
In early May, 10-year senior notes were issued at a very high 10% yield to maturity; major banks,
brokerages and pension funds were reported to have literally begged to get into the high-yield
bonds, which were rated "highly speculative" by Moody's Investors Service.
Demand for the low-rated debt was so fierce that the offering was upped from an original $275
million to $326 million.
Details
Amazon.com
Financial Data
Financial Statements
Growth Rates
Profit Margins
Price Ratios
The debt will keep Amazon's bottom line in the red until at least 2000 even though David Risher, senior vice
president for product development, said the company has no specific use in mind for the capital.
Essentially, he said, it's a bundle of cash to draw on for a rainy day -- or "future opportunities" such as
acquisitions or expansion.
Risher, who was founder and publisher of Investor in his last role at Microsoft (MSFT) before heading
across Lake Washington to his new job in Seattle, points out that investors are especially high on the
company's personnel. Aside from Bezos, whom he met originally at Princeton and credits with giving
decision-making authority to employees at every level, he mentioned chief information officer Richard
Dalzell, who came over from Wal-Mart Stores (WMT) and treasurer Randy Tinsley, a transplant from Intel
(INTC). Combes, the analyst, thinks highly of chief financial officer Joy Covey, whom she describes as a
"decision-maker" whose presence makes a material difference for the company.
New chapters in retailing
All that multidisciplinary brainpower has yielded some interesting new retail concepts:
Go to a search engine like AltaVista and plug in the name of an author or book title, and you'll get a
link to Amazon with a description of your book.
Through a technique called "collaborative filtering" on Amazon's own site, you might also find two,
three or more titles on the same subject. Sign up for e-mail advisory service, and Amazon sends
you suggestions on new books that use the name of customers' favorite authors in the "from" field.
Customers provide their own book reviews and respond to others' views in easy-to-use bulletin
boards that have created a unique retail community. The site drives sales by making customers feel
as if the online store is a gathering place for smart friends.
An "associates" program allows companies and organizations with Web sites to refer business to
Amazon via hyperlinks for the purpose of deriving commissions of 5% to 15% of gross sales. There
are now 60,000 linking associates dishing off sales to Amazon -- a powerful and cheap referral
service.
Cast of characters
Still, Amazon's competitors are legion. Barnes & Noble has read the book on Amazon and is rallying to
make up lost ground with a $40 million ad and promotion campaign for its more than 1,000 stores and fast,
attractive Web site. Analysts expect Barnes & Noble online sales to grow from just $14 million last year to
better than $100 million this year.
Company Facts
Musicland Stores
Cendant
Wal-Mart
Best Buy
Costco
These rivals have a lot to spend on marketing without having to turn to investors or debt: Barnes & Noble
did $2.8 billion in sales last year and Borders Group did $2.3 billion. In contrast, Amazon depends on its
expensive line of credit and past stock offerings for its marketing money since it's still not generating
enough cash flow alone. Other rivals on the horizon include Musicland Stores (MLG), Cendant Corp. (CD)
and German publisher Bertlesmann AG as well as Wal-Mart and other retailers like Best Buy (BBY) and
Costco (COST).
So far, Bezos and his tight-knit clan don't appear to be getting vertigo from the height of their shares.
"There hasn't been a whole lot of insider selling," says Craig Columbus of Disclosure Inc.
All officers and directors combined own 30.4 million shares for more than 60% of the company, with Bezos
holding 19.76 million shares, or 41%. L. John Doerr, along with venture capital firm Kleiner Perkins Caufield
& Byers, owns nearly 12%. Jacklyn Gise Bezos and Miguel Bezos -- parents of the CEO -- control 6.5%.
Because there are so few shares available, institutions are thought to hold something in the vicinity of
10%.
Reading between the lines
Does it make sense to buy now, or keep holding? Depends on your time horizon.
Veteran momentum investor Louis G. Navellier said he doesn't mind owning companies with no earnings or
high price-to-earnings ratios "as long as there's incredible growth." But he says this one doesn't read well.
"Amazon has hit our reward-risk criteria, and it's on our `buy list,'" says Navellier, "But it doesn't pass our
fundamental screens -- most notably it scores very poorly on our growth-to-relative P/E screen."
Company Focus
Recent articles:
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a bitter taste? by Risa
E. Kaplan, 7/10/98
The Buckle has
some cool stock by
Risa E. Kaplan, 6/26/98
A booster shot from
MiniMed by George S.
Mack, 6/19/98
In English, this means the rise in the company's stock price has outpaced its impressive growth rate.
Investors and speculators may take delight in their 750% total return for the past 12 months, but a retailer
selling at more than 400 times earnings expected in the year 2000? Navellier calls the recent rises and
plunges of 6% to 10% a day "unreal" and believes that other momentum players in the market are milking
the stock -- all the while preparing to unload.
For at least two more years, there will be no river of earnings netted out of Amazon. Analysts and investors
are valuing the company on the basis of its future; in this case, that's a long time off. Because of the
extreme volatility during the past two months, few analysts were willing to comment for the record. While
the company's long-term future is no doubt bright -- even phenomenal -- investors should read between the
lines and listen to what some analysts are not saying.
Otherwise, you may need a strong stomach to reach the end of this summer thriller. |
