Excellent News!!! This just in - after market close, Salomon Smith
Barney initiated coverage of AMZN with 1s (STRONG BUY) and target
price of $175. AMZN should catch fire tomorrow!!! Enjoy!
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04:45pm EST 17-Mar-99 Salomon Smith Barney (Zandi/Rowen (212) 816-5780) AMZN
--SUMMARY:--Amazon.com--Electronic Commerce
*We initiate coverage of Amazon.com, ticker AMZN, with a 1S rating, and a
price target of $175.
*We believe AMZN is building a retail empire for the 21st Century,and
think there is still room for significant upside potential to AMZN shares
*The company's great Web site sets the standard for Internet retailers.
*AMZN is the dominant online retailer in every category which it competes.
*While AMZN's astronomical growth cannot last forever, we don't see the
train slowing anytime soon.
*AMZN's customer acquisition costs are among the lowest on the Internet.
*Concerns include the $20b firm value,which leaves little room for error.
*Among other concerns is competitive pressure, such as loss of book market
share, or gross margin pressure.
--OPINION-------------------------------------------------------------------
· We initiate coverage of Amazon.com, ticker AMZN, with a 1S rating, and
a price target of $175. This represents an upside of approximately 31%
from today's opening price of $133-13/16.
· We're estimating a net loss of $0.29 per share in the Q1'99, which is
right at consensus, a net loss of $0.90 per share for FY'99, which is
$0.02 better than consensus, and a net loss $0.25 per share for FY'00,
$0.05 better than consensus. We anticipate AMZN will turn profitable in
Q4'00.
· Amazon.com is the leading online retailer, with net revenues of $610
million, gross profit of $134 million, and a net loss of $74 million, or
$0.50 per share, excluding mergers and acquisitions activity, in FY'98.
We like Amazon.com for the following six reasons
1. Our first reason is that this story is not just hype -- Amazon.com is
here to stay. We believe AMZN is building a retail empire for the 21st
Century. Just as Wal-Mart, Sears, and Macy's are synonymous with retail
in this century, we believe Amazon.com will be synonymous with retail in
the next century.
· While today's $20 billion valuation is rich, we think there is still
upside potential to AMZN shares.
2. Reason number two is that AMZN has a great Web site - the company
sets the standard for Internet retailers. The store is easy to navigate,
makes it easy to purchase, offers a wide product selection (4.7 million
titles from which to choose ), and offers excellent value.
3. Our third reason is that AMZN is the dominant online retailer in every
category in which it competes.
· It controls an 80% share of the online book market.
· It opened its Music Store in June of '98, and in the very next quarter
announced it was the largest online music retailer.
· It opened its Video Store in November '98, and we believe it is
already the largest online retailer of videos.
· AMZN's success in these new ventures allows the company the
opportunity to expand into other categories. The company has been tight
lipped about its expansion plans, but we think the next category it
attacks will be consumer software, followed by toys (It recently
purchased a 40% stake in Drugstore.com, as a low risk to enter the health
and beauty market).
· We also note that AMZN is becoming a retail portal, through its Shop
the Web service, offering links to other virtual retailers in
non-competitive categories, such as Gap.com in apparel, and Outpost.com
in computer hardware.
4. Point number four is that Amazon.com is a hyper-growth story. While
its astronomical growth cannot last forever, we don't see the train
slowing anytime soon.
· We're projecting sales of $1.2 billion in FY'99, and $1.9 billion in
FY'00.
· The revenue growth will be driven by customer growth. Over the past 2
years, AMZN's registered customers have grown from 180,000 to 6.2
million. That's 6.2 million!
· We note that 20% of AMZN's revenue comes from international customers.
5. Our fifth point is that AMZN's customer acquisition costs are among
the lowest of the Internet retailers. We believe that the Street has not
paid enough attention to this point. Here are the economics...
· We estimate that it cost AMZN around $13 to acquire a new customer,
while its incremental gross profit per customer was $33, in FY'98.
· This means that AMZN's economic pay-back period for new customer
acquisitions is less than 5 months, which is a very attractive
proposition in any business.
· And the economics are even better than our numbers suggest, because
repeat customers accounted for 64% of AMZN's Q4'98 revenue. We
estimate the net present lifetime value of AMZN's customers is currently
around $150-$200 each, and could grow to $400 each as the company expands
into other categories.
6. Our sixth and final point is that AMZN's business model is highly
scalable. Again, we think we the Street has not focused on this point.
· While its true that the company has accumulated $405 million in net
losses from inception, we think investors should focus on the cash flow
of the business.
· They'll find that AMZN's suppliers are funding its business. AMZN has
spent only $27 million in cash, cumulatively, to build a $600 million
business. We think this is extremely impressive.
There are several investment risks to Amazon shares, which investors need
to be aware
1. First, we point out to investors that, at these lofty valuation levels
($20+ billion), AMZN is a speculative stock, and AMZN's lofty firm value
leaves little room for error.
· Our calculations show that in order to meet its market implied value,
AMZN will need to sell around $38 billion in merchandise in ten years
time. While we think $38 billion is achievable, it is not a slam dunk,
and it would rank them up there with retail giants like Sears and JC
Penney (but 28% the size of Wal-Mart).
2. The second risk is sustainable growth.
· Any disappointment in revenue growth, or overall Internet adoption
rates could cause a significant sell-off in the shares.
3. The third risk is competitive pressure.
· An accelerated loss of share in the book market to barnesandnoble.com,
or
· Signs of significant margin pressure from the "at cost" retailers,
like Buy.com, or other competitors.
4. A fourth risk is that AMZN is shifting its business model, and will
increasingly depend upon back-end logistics as a competitive advantage.
The successful execution of this strategy will be critical to the
company's growth, and profitability.
What drives the stock?
We'll look for several key drivers that we believe will drive the stock
price.
1. AMZN's entrance into new product categories should drive the stock
higher.
2. Share gains in the music or video markets also should drive the stock
higher.
3. Revenue growth is a key metric - Our estimates are $270 million in
Q1'99, and $1.2 billion in FY'99. Any significant deviation, up or
down, will likely move the stock price in the same direction.
4. Gross margins are also an important indicator - Our estimates are
21.3% in Q1'99, and 22.4% in FY'99. Again, any significant deviation,
up or down, will likely move the stock price in the same direction.
Models are available upon request. |
