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

To: JBL who wrote (22837)	10/24/1998 6:22:00 PM
From: Glenn D. Rudolph	Respond to of 164685

The Internet Capitalist SG Cowen Internet Research 3 Long Term Capital bailout, the dollar, treasury/corporate spreads, liquidity), we have been tempted to take a step back and re-asses our fundamentally positive view of the Internet sector. Further, with talk of recession hanging in the air, technology investors have begun to question the conceit of the New Economy and to question heretofore widely held views (like, for example, Internet stocks can do no wrong). So if a recession is possible in the U.S., and markets are becoming less efficient in the process of price discovery, what of Internet stocks? What are the hidden assumptions in our Internet business models? How dependent are the Street's estimates on a general level of economic prosperity? As importantly, how would the stock react to a growing desire for risk reduction in portfolios? Lower or negative GDP growth would have ripple effects throughout the economy, but most specifically on pricing, on demand, and on costs. The Internet names should not necessarily be immune to these effects, but in our view have the greatest buffer zone on each of these factors. So let's go through each of them in succession. Pricing. For AOL (AOL-Strong Buy), we have already looked into the crystal ball on the pricing front and we like what we see. We challenge readers to come up with another example of a consumer goods or services company that is as demand inelastic as AOL; the company raised prices (from $19.95 to $21.95 in the June Q) and actually increased their retention and usage (read: ratings). Pricing for Yahoo!, Excite, and the like, of course, is of no concern, since they are free to consumers. For Internet commerce players like Amazon (AMZN-Strong Buy) pricing has been an issue from the start, since competition has created an environment where only the lowest book pricing is possible. A recession should not create incremental pricing pressure in their market. For Internet infrastructure and software providers (e.g. Sterling Commerce; SE-Buy), pricing could certainly become an issue, evidence of which, so far, is not forthcoming. Demand. Like pricing, demand for Internet content and services provided by AOL, Yahoo!, and Amazon should be fairly immune from macroeconomic events. We believe the demand for Internet content (and thus traffic for Internet media companies like AOL and Yahoo!) should remain robust in the face of a recession since the Web presents greater utility at a lower cost than competing media like TV, movies, or magazines. As well, since we're still clearly in the hyper-growth phase of the Internet (60 million people today going to 170 million in 2000), any recessionary impact is likely to remain a small blip in a graph most decidedly up and to the right. Costs. It is hard to make the case that Internet companies generally would have increased costs in the face of a recession, since a large chunk of their costs come from sales and marketing expenditures which are fairly discretionary. Though the Street has increasingly come to view progress toward profitability (if not profits themselves) as important, these stocks will still be driven by revenue, since we're still in the hyper-growth phase of the Internet as a consumer and business medium. So if a recession per se won't impact the financials of these Internet companies much, we are left with valuations and the Street's appetite for risk as determinants of stock prices. September's and October's valuation retrenchment, perhaps logical in the face of structural risk (liquidity), political risk (impeachment), and macroeconomic risk (recession) most certainly took the bloom off