Several Analysts have questioned Barrions' Article. Here are some of them. Enjoy!
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ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
AMAZON.COM (AMZN/OTC)
Amazon.Bomb?
Henry Blodget (1) 212 449-0773
ACCUMULATE*
Long Term
BUY
Reason for Report: Negative Barron's Article
Price: $118 3/4
Estimates (Dec) 1998A 1999E 2000E
EPS: d$0.50 d$1.74 d$1.85
P/E: NM NM NM
EPS Change (YoY): NM NM
Consensus EPS: d$1.70 d$1.27
(First Call: 18-May-1999)
Q2 EPS (Jun): d$0.12 d$0.52
Cash Flow/Share: NA NA NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: D-2-1-9
Mkt. Value / Shares Outstanding (mn): $18,643.8 / 157
Book Value/Share (Dec-1998): $0.49
Price/Book Ratio: 242.3x
Stock Data
52-Week Range: $221 1/4-$13 3/4
Symbol / Exchange: AMZN / OTC
Options: Phila
Institutional Ownership-Spectrum: 35.1%
Brokers Covering (First Call): 23
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: In Line (28-Jan-1999)
Market Analysis; Technical Rating: Below Average (21-May-1999)
*Intermediate term opinion last changed on 09-Mar-1999.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Although the article raised few new concerns, we expect it to contribute
to the negative sentiment regarding the sector in general and AMZN in
particular-and cause further near term weakness in the stock.
o Barron's revisited most of the persistent concerns about Amazon.com,
including the lack of profitability, increasing investments in bricks and
mortar, competition, valuation, and slowing growth. Although all of these are
logical concerns, they aren't new. As previously described, the only issues
that are of real concern to us with regard to Amazon.com's stock performance
are 1) slowing growth and 2) the challenge of expanding into additional product
categories.
o We continue to expect to see near-term weakness in the stock.
Summary. Barron's argued that investors are just now beginning to see some
problems with Amazon.com's story-and that this has caused the stock to pull
back 50% from its high six weeks ago. Although a footnote acknowledging that
1) investors have always had concerns about Amazon.com, 2) almost every other
stock in the internet sector has pulled back nearly 50% in the last six weeks,
and 3) sector-wide pullbacks of nearly the same magnitude have occurred many
times in the development of the industry, might have helped place the weakness
in context, it is obviously important to consider the magazine's assertions.
These included the following:
Amazon.com isn't profitable now-so it probably will never be worth much of
anything. As any smart investor understands, there is a big difference between
"losing" money and "investing" money. In the former case, a company's
valuation relative to competitors deserves to be compressed. In the latter,
depending on the ROI of the invested dollars, it might actually deserve to be
inflated. In our opinion (which is, admittedly, based not on a detailed
knowledge of where, exactly, Amazon.com is spending its money but on our
confidence in management), Amazon.com is investing money, not losing it, so
near-term profitability is not a good measure of future worth. Put another
way, if Amazon.com were to cut back on its investments in order to post a near-
term profit, we believe it would be worth considerably less in three to five
years than it will be if its current investments pay off. It would clearly be
easier to have believe in the long-term value of the franchise if Amazon.com
were both investing and making a substantial amount of money (as Yahoo! is, for
example), but the magnitude of the investments necessary in the online
retailing industry appear to be such that we don't have that luxury.
Amazon.com is just another middleman, and increasing competition from authors
and publishers selling direct, other booksellers, and Wal-Mart will soon render
it less attractive. Amazon.com is indeed a middleman, but in industries in
which middlemen are valuable-such as retailing-the best ones can be worth a
lot, even if they have skimpy margins (see Wal-Mart's $200B valuation). We
continue to believe that there are important differences between Dell selling
direct in the computer industry and publishers or authors selling direct in the
book or music industries-differences that we believe favor the existence of
middlemen in the latter industries. The most important of these are the number
of manufacturers and discrete products in each respective industry: in the
computer industry, there are a relatively small number of manufacturers and
products-a state-of-the-art desktop is essentially the same machine regardless
of who makes it. In the book and music industries, on the other hand, there
are thousands of manufacturers (artists and publishers) and millions of
products (books and discs). Although the internet will make it easy for
publishers and artists to sell direct, we continue to believe that for two main
reasons-1) the value of aggregation, and 2) channel conflict resulting from
competing with distributors-"middlemen" such as Amazon.com will continue to
thrive in online retailing.
Amazon.com is buying up more bricks and mortar distribution centers, so it is
beginning to look more and more like a traditional retailer. This is true, but
it is not a surprise, and it is not necessarily a negative. Orders have to be
fulfilled, and if Amazon.com can control the level of service and the points of
margin associated with the fulfillment as opposed to giving them to a third-
party distributor, all the better for it, its customers, and its
shareholders.
Amazon.com's "pro forma" results (pre-merger-related expenses) are irrelevant-
what really matters are GAAP net losses. This is not true, in our opinion. In
this industry, as a result of the subjectivity and randomness involved in
calculating 1) goodwill amortization schedules, 2) goodwill, 3) acquired R&D
write-offs, and 4) the fair market value of both acquiror and acquiree, as well
as the existence of "permissable" pooling mergers, we do not believe that GAAP
earnings offer a true picture of the power of company's business. Instead, we
believe that investors should focus on operating earnings and return on
invested capital.
Amazon.com's revenue growth is slowing. This is true, and, as discussed below,
it is an issue for the stock price, but it is not a surprise.
To Barron's concerns, we would also add one of our own:
Amazon.com will face significant challenges as it expands horizontally into new
categories, including brand-management and execution. These may not only make
it harder for the company to be as dominant in new categories as it is in
existing categories, but may jeopardize its dominance in existing categories.
Conclusion. As mentioned, the two concerns we have with regard to the stock's
near-term performance are the slowing revenue growth and horizontal expansion
(we are comfortable with the others). We believe that Amazon.com's investor
base is in transition, with momentum investors exiting the stock. Because we
do not expect to see the company's sequential growth stabilize or accelerate
until Q4, we expect this weakness to continue.
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