An INTERACTIVE JOURNAL News Roundup
The strange tale of Amazon.com took another turn Thursday, as a Merrill
Lynch analyst weighed in with a price target that couldn't be more different
than the one making the rounds in the market Wednesday.
On Wednesday, CIBC Oppenheimer analyst Henry Blodget lifted his
long-term price target on the stock to $400 from $150, spurring a rally in
the already-euphoric Internet-retail sector. But on Thursday, Merrill's
Jonathan Cohen weighed in with an 12- to 18-month price target of just
$50 -- and predicted the Internet retailer's losses would mount as it adds
new products to its repertoire.
But whether investors were interested in Mr. Cohen's analysis was another
question.
In trading on the Nasdaq Stock Market Thursday, shares of Amazon were
down a modest 6 1/4, or 2%, at 282 3/4. Meanwhile, the Nasdaq
Composite Index climbed 20.30 to 2029.70, while Morgan Stanley's
high-tech 35 index marched ahead 18.20 to 793.60.
Mr. Cohen's assessment of Amazon, offered
during a conference call Thursday morning,
couldn't have been much more damning.
Amazon should trade between two and four
times calendar revenues, Mr. Cohen said,
adding that the company needs to achieve $3
billion to $4 billion in revenue to achieve a 5%
to 6% operating margin.
After the holiday-shopping season, Mr. Cohen said, he expects investors
to begin focusing on Amazon's high cost structure. Selling books is a
low-margin business and traditional book retailers such as Barnes &
Noble and Borders Group can sell books for less because they have
distribution systems in place and can achieve better economies of scale, he
said.
Mr. Cohen said he doesn't expect Amazon's ventures into selling new
products to help matters. In fact, those initiatives will likely add to the
company's losses, he said.
Part of the problem for Amazon is that the best commerce sites are ones
that people visit to do other things besides making purchases.
"I don't know anyone who uses Amazon as their home page," he said.
During the conference call, an investor asked him to compare his negative
feelings on Amazon and earlier negative opinion on America Online --
which has since turned positive. Mr. Cohen said that he became positive
on AOL at lower price levels and added that AOL's business model is
very different than Amazon's.
The bottom line Mr. Cohen offered was that there has been no change in
Amazon's fundamentals or in Merrill's rating on the stock: a near-term
reduce and a long-term neutral.
On Wednesday, Mr. Blodget -- actually considered to be in the bearish
camp when it comes to Internet analysts -- doubled his price target and
added an extra $100 to it for good measure. Amazon is "in the early stages
of building a global electronic retailing franchise that could generate $10
billion in revenue and earnings per share of $10 within five years," he said
in a research note.
To get to his target, Mr. Blodget put a 40 multiple on 2004 earnings of
$10 a share, based on his $10 billion revenue estimate. Presto: Amazon
was a $400 stock.
Granted, Amazon's revenue has been growing at a rapid clip in recent
quarters, fueled by the huge increase in Christmas sales. Based on revenue
estimates for the fourth quarter of $190 million, Amazon's revenue "run"
rate will approach $1 billion at the end of the year.
Mr. Blodget also looked to technological advances to give Amazon a
boost, saying that the company's operating margins could ultimately exceed
10% "if the promise of digital delivery of music, books, software and other
products comes closer to reality over the next several years."
But at the moment, of course, Amazon hasn't yet proved it can produce
earnings. The bigger the company gets the more it loses. Indeed as its
revenue grows, so do expectations for losses. This year, it's expected to
lose about $1.66 a share. Next year, however, its losses are expected to
grow to $1.79 a share, with some per-share loss estimates as big as $3.50
to $4.
Even Mr. Blodget hastened to clarify in a
research note later Wednesday that his new
target was for one year from now, not next
quarter. "Amazon.com is a long way from
proving that it will ever make money, and an
investment in the shares clearly requires a
strong stomach and a great deal of faith," he
said in the clarification.
But investors seemed about as interested in that clarification as they were
by the dire talk from Mr. Cohen. At the close of trading Wednesday,
Amazon's stock-market value exceeded $14.5 billion, or about eight times
that of Barnes & Noble, which actually makes a profit on the books it
sells.
The wild run-up provided some fun for hedge-fund players, most of which
have a hard time keeping a straight face in a defense of Amazon's share
price, but don't mind trading the stock for a quick profit anyway. Seth
Tobias of Circle T Partners said he bought 2,000 shares at the opening,
sold it five minutes later and made a handsome profit. "It's the most
outrageously priced equity in the world," he concedes. "But with every
piece of positive news, whether it's a reiteration of a buy or a new product,
the stock goes straight up 20 to 50 points. There's no reason you can't
make a profit on that."
Thursday's Market Activity
Elsewhere in the technology sector, Mr. Cohen's warning had as little
effect on other Internet retailers as it did on Amazon. Books-A-Million,
the most-actively traded Nasdaq share Wednesday, slipped 3/8 to 17 3/4;
Cdnow inched up 1/16 to 17 11/16 and merger partner N2K climbed
3/16 to 13 11/16; and Barnes & Noble shares were unchanged at 32. The
red-hot online-auction companies stayed on their winning streak, however:
eBay shot up 17 to 240 1/2, and Ubid climbed 4 9/16 to 41 1/2.
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