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

To: Sarmad Y. Hermiz who wrote (54564)	5/2/1999 9:05:00 AM
From: Glenn D. Rudolph	Respond to of 164684

Amazon.com – 29 April 1999 2 n Q1 Summary / Estimate Change * Revenue increased 16% sequentially and 236% year-over- year to $293.6 million, exceeding our revised estimate of $290 million (but missing the highest whispers). This sequential growth was the slowest in the company's history, but still impressive given the seasonality of the retailing business in general. * The addition of 2.2 million new customers brought gross customer accounts to 8.4 million, exceeding even our revised estimate of 8.0 million. The company added more customers in the quarter than it had in total at this point last year. * Gross margin improved a point to 22.1%, exceeding our estimate of 21.2%. Along with management, we continue to believe that absolute gross profit, rather than percentage gross margin, is most important. * Operating loss margin pre-goodwill of 10.4% exceeded our estimate of 13%. * Cost per new customer appeared to have remained in the low teens ($13?), about the same as Q4. * Operating EPS were a loss of $0.23 versus our estimate and consensus of a loss of $0.29 and a loss of $0.07 last year. * Revenue from existing customers increased to 66%, continuing the increase from 64% in Q4. * Auctions appear to have gotten off to a good start, with an estimated 500,000 customers participating in the first month. If successful, the auction service will lead to a larger market opportunity, higher margins, and less seasonality (auctions are strong in Q1). * CFO Joy Covey will migrate into a new role as Chief Strategy Officer, and Amazon.com will hire a new CFO and COO. Contrary to suggestions circulating after the call, we emphatically do not believe that Covey “was fired.” We believe that her considerable talent will be better utilized in her new role. * We are increasing our 1999 revenue estimate from $1.2 billion to $1.4 billion and our 2000 estimate from $1.7 billion to $2.1 billion. We are slashing our loss estimate in 1999 from $0.90 to $1.74. n Outlook and Recommendation Those who believe that investors enthusiastic about Amazon.com's future are experiencing a collective hallucination have something to cheer about this morning. The company's revenue growth, though impressive in the context of a seasonally weak first quarter, was not as strong as it might have been given the huge customer increase (seasonality was more pronounced than it was last year and than we expected). Over the next several quarters, furthermore, the outlook for almost every conceivable operating metric will deteriorate—except, of course, for two: customer growth and revenue growth. Fortunately for those who have their eye on the distant future, these two are more important for long-term shareholder value than all of the rest combined. Amazon.com is continuing to spend as much money as it physically can on building for the future (CEO Jeff Bezos expressed disappointment that investment in product development hadn't doubled sequentially—because the company simply hadn't been able to find enough quality programmers to hire). Although this strategy is exasperating for those who hold out hope that Amazon.com will someday have a significant cash balance cash (and thought it might be nice to see some proof of this concept sometime this century), we continue to believe that it is the right strategy for building long-term shareholder value. If your objective as a manager is to create the highest value for your shareholders in Year 5, the way to do it is to invest as much as possible in Years 1, 2, and 3—especially when the market opportunity is as vast as this one appears to be and the rest of the industry is moving so quickly. Based on our meetings and conversations with management, we continue to believe that Bezos, Covey & Co. are among the smartest, most disciplined, and visionary management team in the industry (or in any industry, for that matter). For better or worse, richer and poorer, we have faith in their abilities and decisions. We continue to believe that they are doing the right thing. We also continue to believe that online commerce is a massive opportunity and is more difficult than it looks. We believe that the opportunity will spawn one or more susbstantial companies, regardless of what the industry's mature margins turn out to be (Amazon.com is emphatically not “Wal-Mart”—the value-propositions are very different—but there is one important similarity: Wal-Mart is also in the business of helping people buy stuff. Wal-Mart has low margins—2%--but helping people buy stuff is a big business. Wal-Mart helps people buy a lot of stuff—nearly $200 billion a year—which is why Wal-Mart has a $250 billion market cap.). We also continue to believe that Amazon.com is quickly extending its lead over almost every other competitor in the market place and increasing the likelihood that it will win in the end. AMZN remains a small, core holding in our Internet portfolio. We expect that the stock will continue to be highly volatile (i.e., trade significantly below and above the current valuation), but trend higher long-term. n Operating Metrics Revenue increased 236% year-over-year to $293 million, slightly exceeding our revised estimate of $290 million (which we based on a pre-announcement from the Company that said its total customer base had increased to “more than 8 million”). The company added more customers than we expected, but the average customer bought less than we expected—leading to only modest upside over our estimate. Management expects to see some sequential revenue increase in Q2, as continued