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December 18, 1998
Tech Week
In War of the Amazon Analysts,
Investors Turn Backs on Merrill
By LISA BRANSTEN, JASON FRY and TIMOTHY HANRAHAN
THE WALL STREET JOURNAL INTERACTIVE EDITION
When Merrill Lynch & Co. speaks, the market usually listens.
Such was not the case Thursday, however, as word leaked out onto Wall
Street that Merrill Lynch analyst Jonathan Cohen had set a $50 price target
on Amazon.com -- even as the shares flirted with $300.
Mr. Cohen's estimated that the shares would be fairly valued at about
one-sixth of its current level and had harsh words for the company's
business model, but the result was only a 4% dip in the stock. On Friday,
Amazon's shares continued to march higher as if nothing had happened,
and they ended the week up $63, or 28%, at $286.
"The market is very sensitive to bad news, but not to naysayers," says
Scott Ehrens, an analyst with Bear Stearns & Co.
That may be the answer to why investors shrugged off Mr. Cohen's
warning. Or maybe it was something else. Like exuberance over the
drumbeat of reports from Web sites and retailers and market researchers
that more and more consumers are eschewing rugby scrums at the mall to
shop online? Irrational exuberance? Millennial fever? Has day trading
become such a national sport that people are buying Amazon stock
certificates for all their loved ones?
Or did the market conclude that Mr. Cohen was just wrong? His dire
prognostications were preceded on Wednesday by an exuberant
assessment from CIBC Oppenheimer's Henry Blodget -- known,
ironically, as something of an Internet bear -- that Amazon's shares were
bound for $400 over the next 12 months.
Where Mr. Blodget said po-tay-to, Mr. Cohen said po-tah-to. Mr.
Blodget predicted Amazon was "in the early stages" of building a franchise
worth $10 billion a year in revenue and earnings per share of $10 within
five years. Mr. Cohen didn't look that far out, but warned Amazon needed
to achieve $3 billion to $4 billion in revenue for a paltry 5% to 6%
operating margin.
Mr. Blodget looked for technological advances to increase those operating
margins, eyeing the promise of digital delivery of music, books, software
and other products. Mr. Cohen's prediction: Investors will take a hard look
at Amazon's cost structure after the holidays, and adding new product lines
will likely only add to the losses. And as if that weren't enough, he
complained, nobody he knows uses Amazon as their home page.
Merrill is certainly one of the most influential brokerage houses in the
world, but perhaps investors may have shrugged off Mr. Cohen's advice
this time because he's been negative on Amazon so long. Mr. Cohen has
been recommending that investors reduce their holdings of the stock at
least since early September -- when the shares were trading closer to $80.
Mr. Cohen is by far the most negative of the 20 analysts covering Amazon,
and the only one who has the equivalent of a "sell" rating on the stock.
Twelve analysts covering the stock have it rated either "buy" or "strong
buy," and seven rate it a "hold," according to a survey by First Call.
Mr. Cohen isn't negative about all things Internet, though -- he does like
portals. In April, shares of Yahoo! Inc., Excite Inc., Infoseek Corp. and
Lycos Inc. surged when he initiated coverage of the companies with bullish
comments about their businesses.
And just last Tuesday, shares of Infoseek jumped after Mr. Cohen made
some positive comments about the test version of the Go Network, the
company's joint venture with Walt Disney Co. and upgraded his short-term
rating on Infoseek to "accumulate." (He currently rates Yahoo as a
short-term "neutral," Excite as an "accumulate" and Lycos as a "buy," but
sees all four portals as long-term buys. He sees Amazon, by comparison,
as a short-term "reduce" and a long-term "neutral.")
Mr. Cohen noted that selling books is traditionally a low-margin business,
noting that the likes of Barnes & Noble Inc. and Borders Group Inc. can
sell books for less because of their set distribution systems and better
economies of scale.
But so far, that hasn't mattered. Barnes & Noble did everything in its
power to derail Amazon, including filing a frivolous lawsuit against it right
before it went public, and predictions that it would whip Amazon with its
own book-selling site were once a dime a dozen. But Amazon has
remained atop the pile despite the fact that its book prices are indeed often
undercut by others -- something the rise of comparison-shopping services
has made readily apparent to Web surfers. Branding and customer service,
it would seem, count more on the Internet than people think -- while
real-world muscle counts much, much less.
"I'm not sure why it's become a focus," Mr. Cohen said Friday of the
hubbub over price targets. "The more relevant story is the fundamental
prospects of the company."
But whatever the rationale behind this week's warring Amazon price
targets, fewer and fewer analysts seem willing to do what Messrs. Blodget
and Cohen did.
Lauren Cooks Levitan of BancBoston Robertson Stephens is one of the
analysts who have thrown in the towel on the idea of offering price targets
at all -- although she has kept a "buy" rating on Amazon's stock.
In her weekly report on Internet retailers, Ms. Levitan cited the market's
reaction to Mr. Blodget's $400 price target as one reason she stopped
publishing a price target for Amazon a few weeks back.
"The challenge with pinpointing a price target higher than the current price is
that one needs to see tremendous, albeit achievable, revenue growth and
profitability, which is expected to take many years," she wrote.
"Unfortunately, investors bidding stocks up to price targets seems to be
creating self-fulfilling projections."
In other tech news this week:
Hardware and Software
The federal judge presiding over the Microsoft Corp. antitrust trial ended
proceedings for the year by saying that America Online Inc.'s planned $4.2
billion buyout of Netscape Communications Corp. "might be a very
significant change in the playing field." The comments by U.S. District
Judge Thomas Penfield Jackson lead to speculation that while he could still
find that Microsoft violated antitrust law, any remedy implemented by him
could be less restrictive (see article).
Separately, Microsoft said it will appeal a
federal judge's order that the software giant
rewrite parts of its Windows 98 operating
system. Last month, U.S. District Judge Ronald Whyte ordered Microsoft
to change Internet Explorer 4.0 and other software that incorporates Java
programming, or stop shipping the products within 90 days (see article).
Finally, Microsoft advanced its strategy to turn software upgrades into a
subscription service, investing $200 million in Qwest Communications Inc.
in exchange for a share of revenue from Qwest's new Internet-based
services (see article).
Oracle Corp. and Sun Microsystems Inc. are licensing major parts of each
other's software, opening another line of attack in their continuing battle
with Microsoft Corp. (see article).
Mattel Inc. announced plans to buy Learning Co. for about $3.04 billion in
stock. Learning Co. is a big player in computer games and educational
software (see article).
3Dfx Interactive Inc., a chip maker pursuing its own brand of add-on
graphics cards for personal-computer games, agreed to buy STB Systems
Inc. for stock currently valued at about $108 million (see article).
Internet and Online
AtHome Corp., seeking to spur the market for interactive advertising on
the Web, agreed to acquire Narrative Communications Corp. for as much
as $103.1 million in stock. AtHome is especially interested in using
Narrative's technology to create compelling ads for the new generation of
digital set-top boxes being distributed by cable companies (see article).
America Online Inc. plans to launch Spanish- and Portuguese-language
version of the popular service through a 50-50 joint venture with
Venezuelan media conglomerate Cisneros Group of Cos. (see article).
Yahoo is adopting technology to let users update calendar and address
information stored on multiple computers without entering the data more
than once (see article).
MCI WorldCom Inc. said it acquired about 15% of OzEmail Ltd., one of
Australia's leading Internet service providers, and will make a cash offer to
buy all of OzEmail for US$322.8 million (see article).
Faced with a rash of online piracy, the world's biggest record companies
are forming a coalition to develop a technological standard to protect music
delivered via the Internet (see article).
Shares of InfoSpace.com Inc. gained 33% in their first day of trading after
the Internet content provider sold $75 million of stock in its initial public
offering (see article).
Deja News Inc. named former ESPN Internet head Tom Phillips as its new
CEO and said it will move its headquarters to New York, furthering the
company's effort to transform its discussion service into a major Web
destination (see article).
Telecommunications
Hughes Electronics Corp., stepping up consolidation of the fast-growing
satellite-television industry, agreed to acquire marketing partner U.S.
Satellite Broadcasting Co. in a transaction valued at $1.3 billion. By
combining its DirecTV unit with USSB, a step long favored by Wall Street,
Hughes will be able to offer consumers one-stop shopping for premium
movie broadcasts (see article).
Alltel Corp. announced its second major acquisition this year, saying it
agreed to buy Aliant Communications Inc. in a deal valued at $1.5 billion.
Alltel recently acquired cellular phone company 360 Communications Co.
as part of an effort to offer an array of telecom services (see article).
Newbridge Networks Corp. said it has agreed to sell its 30% stake in
privately held affiliate Vienna Systems Corp. to Finnish telecommunications
company Nokia Oy for 135 million Canadian dollars, or $87.5 million, and
has entered a sales, marketing and product-development pact with Nokia
(see article).
Earnings
Acer Inc. warned that a "combination of factors," most notably a rise in the
value of Taiwan's currency against the U.S. dollar and
worse-than-expected earnings from at least two affiliates, will make it
impossible to reach its profit forecast for 1998 (see article).
Adobe Systems Inc. blew by analysts' estimates because of controlled
expenses and a strong reception for its new electronic-publishing products
(see article).
Cylink Corp., a maker of security equipment for computer networks,
reported a wider-than-expected third-quarter loss and restated its financial
results for the past year (see article).
Solectron Corp. topped analysts' expectations for the fiscal first quarter,
propelled by a growing outsourcing trend among brand-name electronics
makers (see article).
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