AMZN will be $10 stock, see Barron's article below:
May 31, 1999
Amazon.bomb
Investors are beginning to realize that this storybook stock has problems
By Jacqueline Doherty
Until a few weeks ago, investors couldn't get enough of Amazon.com. Perhaps it was because Amazon's story is so easy to like. Founder Jeff Bezos did what many people only dream of: He chucked a high-paying, stable job to become his own boss and seek his fortune as an Internet pioneer. Just over a month ago, the stock market was indicating that Amazon was worth a remarkable $36 billion and that Bezos' own stake was worth $13 billion.
Sidebar: Powells.com
But since early May, a lot of investors have been learning that a good story does not always make a good stock. From an April high of 221 1/4, Amazon shares have been sliced nearly in half, to 118 3/4, cutting the company's worth to about $19 billion and reducing Bezos' fortune to $7 billion. The stock could fall a lot further. Remember, adjusted for stock splits, these shares were worth just $3 apiece when they were first issued to the public two years ago. Several analyses, including two in this magazine, have indicated that the shares could be worth less than $10 apiece.
Unfortunately for Bezos, Amazon is now entering a stage in which investors will be less willing to rely on his charisma and more demanding of answers to tough questions like, when will this company actually turn a profit? And how will Amazon triumph over a slew of new competitors who have deep pockets and new technologies?
We tried to ask Bezos, but he declined to make himself or any other executives of the company available. He can ignore Barron's, but he can't ignore the questions.
Amazon last year posted a loss of $125 million on revenues of $610 million. And in this year's first quarter it got even worse, as the company posted a loss of $61.7 million on revenues of $293.6 million.
So far Bezos has been able to mollify most investors by telling them that his company is not just an online bookseller, but instead a retailer of many things. He has, in fact, moved into selling music CDs and drugs online. But these products can have even lower profit margins than books.
More important, the addition of entirely new product lines such as CDs and drugs has masked the slowing growth in Amazon's basic book business. In 1997, Amazon's book sales grew by 825%. Last year growth slowed to 260%. This year, Amazon stopped reporting its revenues by category. But analysts have concluded that the growth in book revenues will drop to 90% in 1999, and it will be even lower next year. A slowdown by any measure.
Despite all the hoopla surrounding Amazon, Bezos has not really revolutionized the book industry at all. In essence, he is a middleman, and he will likely be outflanked by companies that sell their wares directly to consumers. To begin with, publishing houses themselves could sell their books online. And new technologies promise to cut costs even further by allowing consumers to download books via the Internet. Books can be printed out on traditional computer printers or put into a new notebook-sized computer device that displays books on its screen a page at a time.
One such device is the Rocket eBook, sold for $499 each by NuvoMedia. It's true that the retail price will have to fall further before Americans buy eBooks en masse. But it will happen. Right now eBook users can download the digitized content of a book from several Internet sites. There are 550 titles available, with Stephen King's novels and Monica's Story among the most notable.
Who owns NuvoMedia? The company is private, but Barnes & Noble's Internet unit and the German publishing giant Bertelsmann each own a 17% stake, which they bought at the beginning of last year.
Such new publishing technologies have incited a battle over who has the rights to the electronic versions of books and what the royalty structure of electronic books should be. Essentially, the fighting is about how the profits should be divided. "It's an extraordinarily touchy issue in the industry right now," says William Black, a consultant to the publishing industry through his own firm, Black & Co.
Here's another potential threat to Amazon: What's to stop famous authors from establishing their own Websites to sell their books? If Madonna can have her own record label, the theory goes, why can't Stephen King or Danielle Steel have their own book imprint?
Perhaps the premier company in selling its wares directly over the 'Net is Dell Computer, which takes in $14 million a day by peddling its goods online. You can bet that this has put a big dent in computer sales at traditional retail stores.
Likewise, it can't be lost on Bezos that Bertelsmann has taken a 41% stake in Barnes & Noble's online venture, barnesandnoble.com. Bertelsmann, which owns such high-profile publishing houses as Random House and Bantam Doubleday Dell, "is going to try to take the market away from Amazon," predicts Stephanie Oda, publisher of Subtext, a newsletter about the publishing industry.
Bertelsmann Chief Executive Officer Thomas Middelhoff concedes this much: "We will sell books more like Michael Dell sells computers."
The eBook could totally alter the economics of book publishing. That's why Barnes & Noble owns a stake. Bertelsmann, too.
The direct-sales principle is changing the music industry as well, and that could mean trouble for Amazon's effort to sell CDs. Just last week Universal Music, a division of Seagram, and BMG Entertainment, Bertelsmann's music arm, teamed up with AT&T and Matsushita Electric of Japan to create technology to sell music over the Internet.
Against this backdrop, Amazon is looking more and more like a traditional retailer, complete with an expensive network of warehouses loaded down with inventory. So far this year, Amazon has bought two warehouses in Kentucky and signed leases for facilities in Nevada and Kansas, adding to its two existing sites in Seattle and Delaware. In other words, Amazon is buying a lot of costly bricks and mortar, the very stuff that is supposedly bloating costs at traditional retailers.
Those traditional retailers, meanwhile, are moving onto Amazon's turf. Just last week, Barnes & Noble's online arm, barnesandnoble.com, raised $421.6 million on the stock market, suggesting the unit has an overall value of $2.5 billion. Even Borders, the bookstore chain that has been the farthest behind in the race to capture online eyeballs on the 'Net, just announced a cross-marketing agreement with Internet upstart About.com.
In the retail drug area, traditional players such as CVS and Walgreen are boosting their online efforts. Earlier this month CVS, the country's largest drugstore chain, announced it will purchase the Internet's first online drugstore, Seattle-based Soma.com, for $30 million. Walgreen plans to launch its Website in August. All manner of other retailers can be expected to follow suit.
"Once Wal-Mart decides to go after Amazon, there's no contest," declares Kurt Barnard, president of Barnard's Retail Trend Report. "Wal-Mart has resources Amazon can't even dream about."
Soon Amazon will be encountering competition on the Internet from even the nation's mom-and-pop bookstores. By August, the American Booksellers Association will launch BookSense.com, a program that will let local stores launch individual Websites with their own logos, designs and book reviews. The association will provide back-office support, including credit-card processing for Internet sales and an online catalogue of 1.6 million book titles.
The association estimates that only about 2% of adult books purchased in the U.S. last year were sold via the Internet. That means it's still early enough for smaller bookstores to take a shot at grabbing 'Net customers.
"The first mover does not always win. The importance of being first is a mantra in the Internet world, but it's wrong. The ones that are the most efficient will be successful," says one retail analyst. "In retailing, anyone can build a great-looking store. The hard part is building a great-looking store that makes money."
Figuring out how to make a profit won't be easy. Publishers usually sell books to retailers at 44%-48% of the book's suggested list price. Similarly, wholesalers sell books to retailers at 40%-42% of the list price. Either way, when retailers offer customers a 50% discount, there's a good chance that they're losing money on the deal. Yet just recently Amazon decided to offer 50% off on the books on the New York Times' best sellers list, and barnesandnoble.com and Borders.com quickly followed Amazon's lead.
Adding to the cutthroat competition are various Websites with search engines that track down whatever book you want at the lowest price. On top of all that, there's the site called Buybooks.com, which has a stated business plan of undercutting Amazon's prices by at least 10%.
In this tough environment, it probably shouldn't be surprising that Amazon is losing so much money. In fact, the company had negative operating margins of about 10% in the first quarter, meaning it spent $1.10 to bring in each $1 of revenues. And results are expected to get worse in the second quarter, when operating margins should be a negative 23% as the company raises its spending on advertising and warehouses dramatically, says Sara Zeilstra, consumer e-commerce analyst at Warburg Dillon Read. She has a "hold" rating on the stock.
Bulls on Amazon stock prefer to look at Amazon's gross margin, positive 22.1%. But that takes into account only the actual cost of the books and not the company's other operating costs, like advertising. If Amazon stopped spending on advertising to build its brand name, the company could turn a profit, the bulls contend.
Cover Story, Part 2
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