04:08pm EST 29-Mar-99 EVEREN Securities AMZN
AMZN: Announces entry into auction business, reiterate 2-1 rating (1/2)
EVEREN Securities, Inc. Equity Research Note
March 29, 1999
Anthony Blenk, CFA Andrea Grosz
(312) 574-5939 (312) 574-6235
Company: Amazon.com, Inc. (AMZN-$139 1/16 as of 7:00 am CST)
Industry: Internet
Int. Term Rating: 2- Market Performer Target Price: Under review
Long Term Rating: 1- Outperformer Target Price: Under review
Suitability: High Risk
Amazon.com announced entry into auction business; re-iterate 2-1.
Dividend: 0.00 PE 1999: N.M. BkValue:$0.58/sh.
Yield: 0.00% PE 2000: N.M. 52-Wk. Range: $199 - $13
ROE: N.M. Insider Hldgs: 83% Shares Outstanding: 153 million
Inst. Hldgs: 10% Next Reporting Date: 4/27/99
FY: Dec. EPS 1997A 1998A 1999E 2000E
Q1 (Mar) ($0.03) ($0.07) ($0.29) ($0.15)
Q2 (Jun) (0.06) (0.12) (0.27) (0.15)
Q3 (Sep) (0.07) (0.16) (0.21) (0.10)
Q4 (Dec) (0.08) (0.14) (0.12) 0.03
Year ($0.24) $(0.50) $(0.90) ($0.37)
Consensus Est ($0.91) ($0.29)
* Quarterly totals for EPS may not sum to full year totals
because of inclusion of warrants only in profitable quarters'
share counts. EPS excludes amortization & other non-cash merger-
related charges resulting from the acquisition of two companies
in the first quarter of 1998, as well as from the Junglee
acquisition in the September quarter. Estimates do reflect
additional operating expenses entailed by the inclusion of the
operations of Junglee and Planetall.
*Rev(mil) 1997A 1998A 1999E 2000E
Q1 $16.0 $87.4 A $274 $430
Q2 27.9 116 A 314 448
Q3 37.9 154 A 362 490
Q4 66.0 253.9A 450 594
Year $133.4 $610.0 $1,400 $1,962
Summary & Conclusion
Amazon's entry into the classified-based auction business marks
the third high-reach competitor to enter this space, after
Yahoo!, Inc. (YHOO, $171 3/8, 2-1), Excite, Inc (XCIT, $140 1/4)
. While we do not see any of these challenging eBay's (dollar
volume in auctions or even in auction transactions or for the
next 6-12 months, we believe that over time competition may erode
eBay's dominance in particular sub-segments of the classifieds-
based auction business, particularly in copyrighted material like
books, recorded music and videos. The key impact on Amazon.com's
financials is that the classifieds auction business is highly
profitable, and this could affect out-year operating margins
positively.
Key Points
* The "classifieds auction" model is a web commerce business
model wherein a site hosts classified ads offering for sale by
individuals and businesses items for which typically there is a
limited local market. Furbies, toys, dolls, collectibles, as
well as watches and jewelry are among the items offered. Since
the site operates as an intermediary, and does not buy goods for
resale, like ONSALE, Inc. (ONSL, $35 3/8, 2-1) the gross margins
for eBay, by far the leader of this model, are similar to a
portal site's 80-90%, not an a web commerce site's 8-25%. Ebay's
gross margins in the December quarter were about 85%. The key to
success here is traffic from web users interested in buying
unique items via the auction method. While both Yahoo!, Inc.
(Feb, 99 user count 31 million) and Excite (Feb, 99 user count 31
million) have user bases much larger than any commerce site,
their success in auctions has not come close to eBay's. The
reason eBay continues to lead is that 1) it has scale advantages
over the other two sites in the auction space purely in terms of
the range of items offered and the amount of bidding history for
the buyers and sellers. 2)It is also developing a brand name
among web users as the best place to look for unique items. The
means by which people are comfortable placing bids on a
classifieds auction site are the depth of information about those
who offer the items (prior auction history, comments from
customers, etc.) and also depth of information about the items
offered themselves. The key success metric is the number of
auctions which actually close, i.e., find buyers at or above the
"reserve," or minimum, price.
* Amazon.com's reach is about 60% greater than eBay's, as noted
in the chart below. Moreover, Amazon.com has about 6.2 million
customers as of December 31, 1998, and we believe that a very
high percentage of these - perhaps over 90% -- are satisfied and
would consider using Amazon for other services such as auctions.
Furthermore, copyrighted material is the third largest content
area on eBay, with 205,000 items listed as of today. It seems
clear that books, music and videos are probably the areas which
Amazon's auction classified will attract the greatest number of
classified ads initially, but that as unique items have appeal as
gifts, and as Amazon.com has a gift site, non-copyright items
will also gain mass in terms of classified volume over time.
TABLE 1
CATEGORY ITEMS LISTED PERCENT OF
TOTAL ITEMS RANK
Collectibles 584,472 33% 1
Sports Memorablia 220,882 12% 2
Books, Movies, Music 205,568 12% 3
Toys & Beanies(r) 204,271 11% 4
Miscellaneous 131,221 7% 5
Pottery & Glass 115,811 7% 6
Coins & Stamps 69,268 4% 7
Jewelry, Gemstones 68,325 4% 8
Computers 60,756 3% 9
Antiques 49,183 3% 10
Dolls, Figures 37,775 2% 11
Photo & Electronics 29,356 2% 12
Total Items 1,776,888 100%
Sources: Company reports and EVEREN Securities, Inc. estimates
TABLE 2
Amazon.com and eBay user bases
(in 000's) Feb-99 Jan-99
Amazon.com
Home/Work 10,516 9,033
Home 7,523 6,458
Work 3,886 3,134
Ebay
Home/Work 6,547 6,175
Home 5,390 4,889
Work 2,146 2,028
Amazon user 161% 146%
base as a
percent of
eBay's
* The financial impact of the auction site is likely to be
minimal over the next 12 months, as Amazon.com focuses on
building a critical mass of classifieds. From day one, the
company will be charging listing and transaction fees similar to
the model which is currently still in practice at eBay. While
revenue impact is likely to be minimal, gross margins are very
high for the classifieds auction model, they would impact
positively the company's gross margins.
* The salient innovative feature of the site is its anti-fraud
provisions, which should raise the standard for all classifieds
auction sites. The company policy will be to compensate all
victims of fraud up to maximum $250 whether the cause was
negligent product description or simple failure to deliver. We
believe other sites will adopt these consumer protections.
* Over the past two months, as the issues of deteriorating mix
have been felt in Amazon.com's stock price, the company's
actions have been focused on improving profitability by
capitalizing on its reach, the largest among all web commerce
sites. Furthermore, we believe that having about two-thirds of
this reach as actual paying customers means that the user count
of Amazon implies a greater e-commerce potential. Particularly
noticeable have been its efforts to add advertising to its
revenue mix, and the classifieds auction model has similar high
gross margin attributes. The critical inhibition to
Amazon.com's stock price has been its poor gross margins; with
this limitation gone, the stock could move significantly higher.
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