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

To: Jenne who wrote (34077)	1/10/1999 6:31:00 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Will Amazon ever be profitable? By Peter D. Henig Red Herring Online January 5, 1999 "It's a great growth field, but where are the earnings?" says Charles Crane, chief market strategist for Key Asset Management. That question was on a lot of people's minds as Amazon.com (AMZN) announced fourth-quarter sales of $250 million -- more than triple its sales from a year ago -- but at the same time announced that the growth would not reduce anticipated losses for the quarter. While Amazon's announcement indicates that its full-year 1998 sales could reach as high as $607 million -- up from $66 million in 1997, reflecting nearly 1,000 percent top-line growth -- it also highlights the continuing challenge facing most Internet investors: How long must they wait for profitability? INVESTORS HANG IN THERE Amazon's strong revenue numbers come on the heels of online service provider America Online's (AOL) announcement Monday that its subscribers spent $1.2 billion through the AOL network, the online equivalent of a shopping mall, during the holiday season. Yet even though the evidence is proving what most analysts and investors expected -- that retail purchasing on the Web is nothing short of booming -- a clear distinction is being drawn between who's making money on that boom and who isn't. In one corner, AOL and Yahoo (YHOO) are currently profitable and are leveraging their brand identities and market leadership positions into ever-stronger operating margins. In the other corner, Amazon and the slew of other online retailers behind it aren't even close to making money. But Amazon's cautionary statements were greeted by -- what else? -- a rally in the company's stock. Share prices were up more than $6 on Tuesday to $124.50 (Amazon split 3 for 1, effective this morning). "They are continuing to put all of the pieces in place for the longer term strategy to be successful," says Jill Frankle, Internet analyst with International Data Corporation, "which means that stronger sales won't necessarily translate into a stronger bottom line." Ms. Frankle and other analysts point to Amazon's expansion into the lower profit margin music and video businesses, its engagement in price wars for customer acquisition, and its impending expansion into other product lines and overseas markets as reasons why the company is still swallowing cash. But how long will investors tolerate expansion and branding at the expense of bottom-line results? HOW LONG MUST I WAIT? "People should be concerned about the slip in margins," says Ken Cassar, analyst with Jupiter Communications. "But investors will really need to watch over the next couple of quarters which direction margins head. ... They shouldn't go much lower than this." That seems to be the consensus among Amazon watchers. The market will continue to show amazing tolerance of losses in the short term. But 1999 may be the year when that tolerance grows thin, particularly if a glut of Internet IPOs floods the market, allowing investors to become more choosy in their Internet investment decisions. "I don't think there will be this level of tolerance in the future if we have significantly more Internet offerings," agrees Ms. Frankle. In fact, although the announcement today was "more of a message about top line growth," as Ms. Frankle describes it, Amazon's statements continue to highlight the precarious position Internet stocks now find themselves in. "Declining margins are not a cause for concern right now, but a slip in sales growth would be," says Ms. Frankle. Mr. Cassar goes further. "One of the problems with Amazon's stock price is that now it has to go into all of the other product lines to justify its valuation," he says. "That's what people expect." Those product lines might include higher margin businesses such as home electronics and toys -- the latter of which can produce margins up to 35 percent, according to Mr. Cassar. However, the costs of entering those markets and acquiring new Internet shoppers will continue to weigh against any potential revenue gains, at least through the end of 1999, postponing profitability way into 2000 and beyond. Can Internet investors continue to wait? "That's what people don't necessarily realize about the Internet," says Ms. Frankle. "It's actually an investment for the long term."