Amazon.com Inc – 9 November 1998
2
On Friday, Barnes & Noble announced that it would
acquire Ingram Books, the world's largest book
distributorship. We believe that the announcement has
special significance for Amazon.com, the company which
we see as most imminently at risk from Barnes & Noble's
increasingly expansive online bookselling effort.
Following Barnes & Noble's recent deal with
Bertelsmann, those two companies (through
barnesandnoble.com) should now have end-to-end
command over much of the creation, distribution,
marketing and sale of a meaningful portion of the U.S.
market for published intellectual content. The issue here
seems very plain: Amazon.com's largest suppliers (Ingram
accounted for approximately 58% of the company's
volume last year, and Bertelsmann is the world's largest
publisher) are now either aligned with or part of its
principal competitor.
Following the news release by Barnes & Noble,
Amazon.com issued a statement in which the company's
management suggested that their customers should “worry
not” with regard to the company's ability to continue to
obtain book inventory. We agree with that assessment:
there seems little chance that there will be any meaningful
near-term disruption in Amazon.com's supply chain. At
the same time, the transaction underscores our existing
investment thesis: We believe that Amazon.com enjoys
almost no significant competitive advantage in a market
characterized by razor-thin operating margins.
The company's success in generating revenues has come at
the cost of very great (and persistent) operating losses.
Were Amazon.com to reduce its sales and marketing
expenses in an effort to shrink its losses, we expect that the
company would see an immediate and dramatic impact on
its market share and revenue growth rate. Moreover, we
note that euphoric corporate spending intended to generate
a return based on future revenues tends not to work if the
business at issue is highly competitive, has no meaningful
barriers to entry (on an agency basis) and operates within
the margin structure which applies to consumer book sales
(or music, videos, retail software sales, etc.) While
Amazon.com has recently framed the discussion of its
business prospects more broadly (to include a variety of
other product segments), we would suggest that there exist
few economies of scale to exploit by moving into markets
which are largely unrelated to its core business.
We continue to believe that Amazon.com is probably the
most generously-valued of all publicly-traded Internet
companies, and we continue to recommend caution with
regard to the shares. We maintain our Reduce/Neutral
rating on the stock.
[AMZN] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from
registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
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