05:39am EST 30-Mar-99 BT Alex. Brown Incorporated (S. Andrikopoulos/J. Pat) AMZ
AMZN: Blasting Into On-Line Auctions With A Winning Strateg-Strong Buy-Part 1/2
Andrikopoulos, Shaun G. (415) 477-4234 03/30/1999
Patel, Jeetil J (415) 477-4223
Berger, Lance A (415) 732-3004
BT Alex. Brown Incorporated
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AMAZON.COM INC. (AMZN) "STRONG BUY"
Blasting Into On-Line Auctions With A Winning Strategy--Reiterate "Strong Buy"
(1) Investment Rating -Part 1/2
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Date: 03/29/1999 EPS: 1998A 2000E
Price: 149.63 1Q (0.07)R (0.29) NE
52-Wk Range: 199 - 13 2Q (0.12)R (0.28) NE
Ann Dividend:0.0 3Q (0.16) (0.24) NE
Ann Div Yld: 0.00% 4Q (0.14) (0.13) NE
Mkt Cap (mm):23,103 FY(Dec.) (0.50)A (0.93) (0.60)
3-Yr Growth: 75% FY P/EPS NM NM NM
CY EPS (0.50) (0.93) (0.60)
Est. Changed No CY P/EPS NM NM NM
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HIGHLIGHTS:
-- Amazon.com plans to launch an on-line auction service within the next
several weeks, and possibly this week.
-- We feel that Amazon will be successful in (1) leveraging its large audience
of customers to attract sellers to the site, and (2) achieving a critical mass
of sellers and product listings to drive buyers and transactions on the site.
-- The launch supports one of our core theses that Amazon can leverage its
large, loyal and rapidly-growing customer base (currently 8 million) to extend
its advantage into other e-commerce platforms and broad product categories
rapidly and successfully.
-- In an effort to build trust, Amazon.com plans to pick up the tab for buyers
for any fraudulent purchases up to $250.
-- Amazon.com plans to launch a major promotional campaign, including e-mail
program, site integration, and television, print and radio advertising.
-- Amazon could potentially enjoy gross margins of 80-100% and operating
margins of 30%-plus from listing- and commission-based revenues within the
on-line auction service longer term.
-- Amazon.com also indicated that its customer base is currently around 8
million. We feel that the Company should be able to exceed our March quarter
revenue forecast of $265.0 million.
-- We reiterate our "Strong Buy" investment rating on shares of Amazon.com.
DETAILS:
C2C ON-LINE AUCTION SERVICE EXPECTED SHORTLY
Amazon.com announced that it plans to launch a consumer-to-consumer on-line
auction service within the next several weeks, and possibly this week. The
on-line auction service will be integrated as another tab on the Company's
homepage.
We view the auction service as strategic for Amazon on multiple fronts:
(1) We believe that Amazon's entry into the on-line auction space enables the
Company to extend its brand permission into a much broader selection of
products (e.g. collectibles, antiques and other consumer-related items). This
is in contrast to the Company's existing strategy of focusing on product
category launches, such as books, music and videos.
(2) We note that the Company's rich, loyal and rapidly growing base of 8
million customers, coupled with a strong product fulfillment platform, should
prove to be major strategic advantages for the Company as it seeks to build
essential critical mass around its auction service.
(3) We believe that Amazon may be the first within the auction category to
launch a major television marketing and promotional campaign. We feel that the
Company is seizing the opportunity to advertise on TV since none of the other
on-line auction sites have launched TV marketing campaigns to date. With Amazon
entering the market with planned promotions, we believe that other players in
the segment may have missed the window of opportunity to widen their leads with
mass market position through television advertising.
(4) We feel that Amazon's on-line auction service will also catapult the
Company into the attractive $350 billion U.S. trading market. The Company will
pursue a high margin (80-100%) listing and commission revenue model on the
service. This reinforces our core thesis that Amazon's long term operating
margins will likely be driven by leveraging its large database of buyers into
new revenue streams. Auction listing fees alone could drive operating margins
higher than our 9% long term forecast as it expands its high margin advertising
and services revenues.
EXECUTING ON THE ON-LINE AUCTION SPACE WITH A WINNING STRATEGY
Our core thesis surrounding the on-line auction space is that the winning
consumer value proposition will be centered upon delivering superior product
selection. In essence, the higher the number of users an on-line auction
service has, the higher the incentive for sellers to list their products on the
service. We believe that this sets up a virtuous cycle whereby more users lead
to more listings, which lead to more transactions and revenues.
For this reason, eBay, the first mover in this space, was able to out-maneuver
both Excite and Yahoo! as both companies attempted to enter the on-line auction
space with free, ad-supported auctions. Suffice it to say, the barriers to
entry are high, that is unless it's Amazon.com we are talking about. In order
to achieve success in the on-line auction space, it will be critical for the
Company to:
(1) leverage its large audience of customers to attract sellers to the site, &
(2) achieve critical mass of sellers and product listings (hundreds of
thousands) to drive buyers and transactions on the site.
We note that Amazon's approach for c2c on-line auctions will be to offer
industrial strength trading capabilities to sellers and access to a large
bidding community, while targeting buyers via one-to-one marketing initiatives,
such as specific product recommendations and personalized trading services.
EXTENDING ITS BRAND PERMISSION WITH A BROAD PRODUCT ASSORTMENT
The Company plans to launch the service sometime over the next several weeks,
at which time it will list tens of thousands of products on the service, such
as cars, Star Trek memorabilia and baseball cards. Moreover, the Company plans
to offer $300,000 worth of its own products, including Andy Warhol photos and
James Dean posters, via charity auctions on the service. In effect, Amazon.com
is seeding its auction community with its own inventory.
The launch of a c2c on-line auction service supports one of our core theses
that Amazon.com can leverage its large, loyal and rapidly-growing customer base
(currently 8 million) to extend its advantage into other e-commerce platforms
and broad product categories. We believe that this virtual merchandising model
also strategically enhances the Company's brand permission much more rapidly
than adding full-blown product lines.
LEVERAGING ITS CUSTOMER BASE AS A POTENTIAL BIDDING COMMUNITY
We feel that Amazon.com's 8 million customers represent a significant audience
of bidders that will be initially leveraged to attract a solid platform of
sellers. The more bidders, the higher the selling prices, and the more
valuable the audience. In fact, all of Amazon's current customers will be
pre-registered for the service, with the added ability to bid on products using
the Company's new BidClick technology, designed to simplify the bidding process
(similar to its one-click ordering capability). For non-Amazon customers, the
Company has created a four-click set-up process to begin bidding on products on
the site. Amazon.com will also allow consumers to create a customized on-line
auction page, with recommendations of related products up for auction. We
believe these incremental customer service and technology innovations will
allow consumers to seamlessly and efficiently test Amazon's new on-line auction
service.
BUILDING A SOLID FOUNDATION OF SELLERS ON THE SITE
The Company has been actively recruiting sellers over the past month for
auction listings. We anticipate these sellers to initially feature multiple
thousands of products at the launch. Most importantly, Amazon.com is enabling
small businesses to 'bulk load' products onto the auction service. We believe
that this added capability will not only serve to strengthen the breadth of the
product selection but also build up a critical mass of products on the site. We
also feel that a broad selection of product listings will ultimately drive
higher usage of the overall service (i.e. time spent on the site) by Amazon's
customers and prospective customers. This should lead to higher gross profits
generated per average customer in time.
THE AMAZON.COM AUCTION GUARANTEE -- PUTTING ITS MONEY WHERE ITS MOUTH IS
In an effort to build trust on the upcoming on-line auction service, Amazon.com
plans to have an auction guarantee for buyers whereby the Company will pick up
the tab for buyers for any fraudulent purchases up to $250. The Company also
plans to have an internal fraud team in place that will enforce a zero
tolerance policy of fraudulent behavior. Similar to other leading on-line
auction services, Amazon.com will enable consumers to create individual buyer
and seller transaction histories which will capture qualitative information on
prior transactions by those buyers and sellers on the auction service. We note
that consumer-driven ratings have proven successful in building trust and
curbing fraud for other on-line auction services.
MAJOR PROMOTIONAL CAMPAIGN EXPECTED SHORTLY -- LEVERAGING THE CUSTOMER LIST
With its launch, Amazon is illustrating just how deeply it can leverage
synergies with its existing businesses. Amazon.com plans to launch a major
promotional campaign for its on-line auction service shortly. The Company
plans to send out e-mails from Jeff Bezos to its 8 million customers
highlighting the launch of the new auction service. More importantly, should
an Amazon.com customer either win or sell a product on the auction site
(through June 30th), the customer will receive a $10 gift certificate from the
Company (for redemption within any of its product segments). The Company also
plans to include a brochure informing customers of its new on-line auction
service with every single book, CD or video shipment. We note that with more
than 5 million unit shipments per quarter, we feel that the Company should
rapidly drive critical mass. Amazon also plans to integrate auction listings
on every product-specific (books, music, video and gifts) homepage on the site.
We believe that Amazon may be the first company within the auction category to
launch a major television marketing and promotional campaign. We feel that the
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