01:48am EDT 1-Jun-99 BancBoston Robertson Stephens (Levitan, Lauren 415-693-3
AMZN: Barron's Arguments Weak, in Our View; Reiterate Strong Buy.
June 1, 1999
A M A Z O N . C O M , I N C .
Barron's Arguments Weak, in Our View; Reiterate Strong Buy.
Lauren Cooks Levitan (415) 693-3309 lauren_cooks_levitan@rsco.com
Keith E. Benjamin, CFA (415) 693-3285 keith_benjamin@rsco.com
BancBoston Robertson Stephens BancBoston Robertson Stephens
AMAZON.COM, Inc. AMZN $118 3/4 6/1/99
Industry: E-Tailing
CHANGE IN... YES/NO WAS IS Lauren Cooks Levitan 415 693 3309
Rating: No SBUY Keith E. Benjamin, CFA 415 693 3285
EPS 1998A: $(0.50)
EPS 1999E: No $(1.73) FY Dec 1998A 1999E 2000E
EPS 2000E: No $(1.05) EPS*: 1Q$(0.07) $(0.23) A
52-Week Range: $221-13 2Q$(0.12) $(0.51)
Shares Outstanding(MM) 175.1 3Q$(0.16) $(0.52)
Market Cap ($MM) $20,791 4Q$(0.14) $(0.46)
Avg Daily Trading Vol (000) 4337 Year$(0.50) $(1.73) $(1.05)
3/99 Bk Value/Sh, pf $0.44 P/E NM NM NM
3/99 Tot Debt/Tot Cap, pf 95% Cal Yr$(0.50) $(1.73) $(1.05)
C1999E ROAE NM CalYr P/E NM NM NM
Price/Book Value: 268.1x Revs ($M) 1998A 1999E 2000E
Net Cash/Sh ($0.52) 1Q $87.4 $293.6 A
Div/Yld: NA 2Q $116.0 $310.0
3-Yr Sec Growth Rate: 50% 3Q $153.7 $330.0
* 1998/1999/2000 EPS exclude amortizati 4Q $252.9 $400.0
adjusted for 3-for-1 split effective 1/ Year $610.0$1,333.6 $2,000.0
Net cash includes $1,443 MM in cash andMkt Cap/Rev 34.1x 15.6x 10.4x
Key Points:
** Barron's wrote a scathing review of AMZN's prospects. We respectfully
disagree.
** We see AMZN evolving from that of a pure-play eTailer of books, etc. to a
future shopping portal.
** We believe this leverage and scalability will drive a superior business
model with multiple high-margin revenue opportunities.
** We stand by our view that Amazon.com has a great strategy and see every
reason to give the management the benefit of the doubt as it executes on
that strategy.
** Reiterate Strong Buy.
SUMMARY
Barron's wrote a scathing review of Amazon.com's prospects that seems longer on
personal insults than original or insightful content. To review the few points
that the author attempts to make, the tone is set by noting the large
valuation, suggesting that was a fault in and of itself, followed by a focus on
competitive risks. The first step is to talk about the annualized growth in
book sales slowing from 825% to about the 90% level. This is the law of large
numbers and not bad, in our view. The next big threat proposed are digital
books downloaded into unreadable and expensive devices. We do not expect that
will be big soon. Next, authors and publishers may start their own web sites.
We believe multi-title aggregation will remain convenient to the average book
buyer. Then there is the old line about existing retailers coming on stronger,
with Barnes & Noble just raising more money, etc. Quotes are included to
counter the beliefs that there is a first-to-market advantage on the Web and
that Wal-Mart will take over when it decides. Of course, Amazon.com will
always face execution risk, but this article would not even have been written
if the leadership position was not the company's to lose. Price competition
clearly exists in the book business, but Amazon's repeat buyer percentages are
so high as to suggest its not the critical factor in the company's success.
Service remains key, in our view. This explains why the company is investing
aggressively in building distribution infrastructure. Unlike companies also
burdened with stores, it should be able to manage inventory far more
efficiently and profitably. The author does not seem to appreciate the need to
differentiate between gross margins and marketing investments to build the
brand. It mentions the new products brought into the site through partial
acquisitions as a defensive strategy, without noting the incremental high
margins from rent to other stores. Some people seem to relish in looking at
stocks as half full. For reference, many in the media challenged AOL on every
possible level, seeming to miss the point at every turn. We stand by our view
that Amazon.com has a great strategy and see every reason to give the
management the benefit of the doubt as it executes on that strategy.
BUSINESS IMPACT
In our opinion, Amazon is the dominant online brand with a book share that we
estimate at over 80%. We continue to favor Amazon's strategy of building out
its infrastructure and sourcing a greater percentage of its books from
publishers, which should help the company sustain healthy product margins in
this pricing environment. Longer term, we believe Amazon should be able to
maintain healthy overall margins as the company's business model shifts to a
larger mix of higher-margin fee-based revenues. We feel Amazon's business model
is evolving from that of a pure-play eTailer of books, etc.. to a future
shopping portal, where we believe leverage and scalability really starts to
drive a superior business model with multiple high-margin revenue
opportunities. Thus, we are maintaining our current estimates and believe our
current revenue estimates of $1,334 million in 1999 and $2,000 million in 2000
could hold considerable upside.
INVESTMENT IMPACT
We ask ourselves where will people shop in five years and which brands will
survive the feverish competition. We believe Amazon is the best positioned
eTailer to compete in today's unpredictable competitive conditions. With the
stock trading off more than 40% from recent highs, we strongly recommend
purchase of Amazon's shares during this period of market weakness and in
advance of potential announcements, such as additional product offerings,
equity investments in other e-tailers, and strategic acquisitions, that we
believe will point to Amazon's growing presence as a true eTailing portal. We
continue to rate the shares of Amazon.com a Strong Buy.
ACTION NOW: The shares of Amazon.com are rated a Strong Buy.
THE COMPANY: Amazon.com, Inc. is a leading on-line provider of books and music
CDs via its Web site, Amazon.com. Amazon.com has established itself as a well-
known Internet brand. The company currently offers more than 4.7 million books,
music CDs, videos, DVDs, computer games, and other titles at competitive
prices. Amazon.com's marketing focuses on its ability to allow browsing and
buying of a much greater quantity of books and other media than could be shown
in the largest book and related retail stores. Amazon.com's growing popularity
seems more a function of the convenience of on-line shopping, in our view. We
believe Amazon.com will try to exploit its growing base of loyal buyers through
expansion of its Web site and product offerings.
INVESTMENT THESIS: WE BELIEVE AMAZON.COM IS WELL POSITIONED TO TAKE
ADVANTAGE OF THE INTERNET AS A NEW MEDIUM FOR MARKETING AND COMMERCE.
WE BELIEVE THE COMPANY HAS ALREADY ESTABLISHED ITSELF AS ONE OF THE FIRST,
LEADING ON-LINE MERCHANTS.
INVESTMENT RISKS: Among the risks are (1) the rapidly emerging market with no
earnings validation of the Internet as an effective commerce medium; (2) an
extremely competitive landscape, including other on-line bookstores and new
entrants and on-line service companies; (3) competitive price pressure; (4)
inventory risks associated with new strategy of buying directly from publishers
and maintaining increased physical inventory in warehouses; (5) significant
payments for placement leading Web networks; and (6) probability of significant
losses for at least the next few years.
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