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

To: umbro who wrote (22786)	10/24/1998 6:43:00 PM
From: Glenn D. Rudolph	Respond to of 164684

The Internet Capitalist SG Cowen Internet Research 10 bidding to creep back into these stocks, most especially in the leaders of the space, AOL, AMZN, and YHOO. We'll wait to see how AOL and Amazon report this week (our bet is they will have great quarters), but it's becoming more apparent that Internet companies' fundamentals may be back in the driver's seat and steering these stocks. Why Increasing Returns Matter To Valuations Many of us on the sell-side have been speaking about the economic concept of increasing returns for a few quarters now, but at times when confidence is low and risk premiums seem extraordinarily high, it helps to re-visit the underlying concept and determine why the dynamic of increasing returns matter to investors. So grab a cup of coffee while we digress into econometrics. Increasing returns is an concept that describes the tendency of players in certain types of markets (knowledge-based as opposed to resource-based) to continually increase their lead over the competition until their market position is unassailable. In effect, increasing returns markets naturally create temporary monopolies (for a definition of temporary monopoly, see “Wordperfect” in the Webster's New College dictionary). These processes are based on mechanisms of positive feedback that tend to reinforce success and exaggerate decline; over time, a small gap in market share between two industry participants can, and often does, become a canyon. In sum, increasing returns business dynamics are extremely powerful to companies that can leverage them. Importantly, increasing returns markets have a handful of characteristics in common with each other: high up-front costs (e.g. brand and/or technology development), customer groove-in (e.g. “stickiness”), and the presence of network effects (e.g. a greater number of users begets a greater number of users). It is our firm belief that many Internet/New Media business models operate under increasing-returns business dynamics. The characteristics described above apply to each of the Internet companies in our universe to some degree and most certainly should weigh in any Internet valuation exercise. Increasing returns are not theoretical; we are already seeing the impact they are having on these companies' P&Ls. Sales and marketing, usually an Internet company's single most important expense line, is also heavily influenced by the dynamics of increasing returns. In the case of AOL, because they have such a large (and happy) subscriber base, the costs of acquiring each incremental new subscriber over time is lower than the previous subscriber, thanks to word-of-mouth buzz, greater leverage with acquisition channel partners (like IBM, Compaq, Dell), and media buying economies of scale. We think the analogy to a software publisher's business model, though somewhat loose fitting, is apt: it costs Microsoft several hundred million dollars to ship the first version of Windows 98 (thanks, in part, to high R&D costs), but each subsequent copy of Windows 98 cost Microsoft pennies to produce, because much of the cost is sunk up-front in the form of R&D. For AOL, the more than $1 billion that they have invested “up-front” in the brand for the last ten years now gives them the ability to attract new subscribers much more effectively than they were ever able to. Recent quarters' marketing expense data support this conclusion; AOL is now spending the lowest percentage of revenue (12%) on marketing in its history, thanks to the concept of increasing returns. So when media reports lament the rise (and fall) of Internet stocks and issue a clarion call that they are being absurdly

To: umbro who wrote (22786)	10/26/1998 8:41:00 PM
From: umbro	Read Replies (1) \| Respond to of 164684

AMZN options report for 10/26/98 AMZN price: 121.438 Options Study for: NOV put break-even: 102.33 OI = 6682 VOL = 2670 call break-even: 128.15 OI = 13181 VOL = 2475 max. pain: 100.01 R = 0.5 R = 1.1 Options Study for: DEC put break-even: 100.17 OI = 418 VOL = 159 call break-even: 135.27 OI = 429 VOL = 185 max. pain: 110.12 R = 1.0 R = 0.9 Options Study for: JAN put break-even: 94.14 OI = 5073 VOL = 189 call break-even: 140.10 OI = 7663 VOL = 874 max. pain: 100.01 R = 0.7 R = 0.2 Options Study for: APR put break-even: 90.27 OI = 1120 VOL = 212 call break-even: 145.79 OI = 1613 VOL = 67 max. pain: 109.98 R = 0.7 R = 3.2 net long/short: 0.96 mil. i.v. for NOV = 0.78 i.v. for DEC = 0.82 i.v. for JAN = 0.84 i.v. for APR = 0.87 Implied volatility continues to drop with the Nov. options. Looks like nobody is worried, and the rally continues. A noticeable blip up in put volume in the April options is probably one reason those implied vols. remain higher. The Nov. 120 straddle breaks even at 102 on the low end, and 138 on the high end.