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Probably the most hotly debated company in the Business Week Online newsroom over the past couple of years has been Amazon.com (AMZN). At two poles of a good-natured argument have been myself and the site's editor, Bob Arnold.
One of Amazon's staunchest defenders on the staff, I figured my reporting had given me a grasp of the Web's vast potential to turn old business dynamics upside down. Like other Amazon observers, I had questions about the company's growing losses, but I was able to overcome them based on faith that Amazon CEO Jeff Bezos was really onto something. I've been quick to point out the company's revolutionary growth in just five years, to more than 20 million loyal customers and an anticipated $2.8 billion in sales in 2000.
Bob, who has been a reporter and editor at Business Week for 22 years and has nearly three decades of journalism experience, earned some good-natured chiding from our reporting staff for questioning how long the market would stand for Amazon's continued losses. (In the first quarter of this year, Amazon racked up operating losses of $99 million, vs. $31 million in the same quarter a year earlier.) Just to be provocative, Bob has suggested now and then to his usually eager staff that one of them write what until last week would have been a contrarian analysis: The case for why Amazon might one day be "a $30 stock." The idea has been met with groans -- and no takers.
OFF BY 70%.
Well, look who's nearly right. Amazon closed on June 23 just shy of $34 a share after plummeting $8 1/8 that day, or nearly 20%. Since its December, 1999, high of $113, it has lost more than 70% if its market value -- and billions of investors' money.
Amazon's latest slide was triggered by a flurry of analysts' notes warning investors that the company's second-quarter results, due July 26 at 5 p.m. ET, won't beat the Street's estimates for revenue growth. In analyst-speak, that's a way of saying the company might actually fall short.
Merrill Lynch analyst Henry Blodget predicts a slowdown in revenue growth from the same quarter last year. Furthermore, he recently wrote: "If Amazon only hits our Q2 estimate, which we believe is possible, we might have to trim our Q3 revenue estimate." Why? Because Amazon may be burned if an overall slowdown in the growth rate of consumers coming online occurs, as many analysts expect. His third-quarter estimate calls for 14% quarter-to-quarter growth, up from his estimate of 2% sequential growth (to $585 million) in the second quarter. He believes the company is still on track to generate $2.8 billion in sales for all of 2000 and has maintained his "buy" rating. But Blodget doesn't expect any "positive catalysts" for the stock until late summer or early fall when excitement about holiday shopping starts to build. Short-term investors were quick to take the hint: Get out now.
SCARED = SELL.
Mary Meeker of Morgan Stanley Dean Witter also expressed concern on June 23 about Amazon's second-quarter revenue growth. And a Lehman credit analyst says Amazon's credit quality was deteriorating due to its inability to generate positive cash flow. Clearly, analysts are getting worried. And when Wall Street gets worried, investors sell.
In some ways, the latest burst of analyst commentary is hardly surprising (here I go, defending the company again). Given the law of large numbers, which reasons that it's a lot easier to double your sales when you have $10 million than when you have $1 billion, it's logical that Amazon's sales growth rate would slow this year. And how shocking is it that a company that recently lost nearly $100 million in one quarter isn't a good credit risk?
But the bigger question, which hammers away at my own faith in Bezos' strategy, is: Can Amazon ever make any real money? With the hundreds of millions the company is spending on new warehouses and distribution centers, maintaining top-notch customer service and technology, and generally building what Bezos calls "Earth's biggest selection," mere profitability is a hurdle. In this year's first quarter, Amazon sold more than $401 million worth of books, CDs, and videos to its U.S. customers, making $83 million in gross profits (which doesn't take into account any operating expenses) and respectable 21% gross profit margins.
MONSTER RIVAL.
But that segment of its business, which the company says is closest to turning cash-flow positive, still lost $2.4 million when expenses are taken into account. (Its early-stage businesses lost $69 million, and its international businesses lost $27 million net of expenses.) The bottom line: Amazon will have to sell a lot more stuff (at even higher margins) to start making the big bucks, let alone turn a profit.
Bob's untutored skepticism has been based on the idea that as the market starts to demand profits from dot-coms, Amazon will have difficulty delivering the goods quickly enough to please Wall Street. Meantime, he figures it's only logical that brick-and-mortar retailers such as Wal-Mart will get hip sooner rather than later and compete ferociously online against this upstart, which says its goal is to be the Wal-Mart of the Web. Given Wal-Mart's economies of scale, that would be a negative for Amazon. (That's hardly an original argument, by the way: It appeared in the pages of Business Week just about a year ago.)
And now? Bob is guessing that if Amazon can't show earnings, it might attract the acquisitive eye of a bricks-and-mortar retailer that would rather buy 20 million customers and a great technology for holding onto them than try creating it all from scratch. This idea strikes me as far-fetched. After all, Amazon still has a $12 billion market cap. And that could go up a fair bit, if quarterly results actually come in better than expected. Then investors might seize upon last week's decline as a buying opportunity.
Still, more investors (and journalists) are realizing that the old rules of business really do apply on the Web. If Amazon is going to live by those rules anytime soon, it might have to work a few miracles to get back in tune with the market. Yes, Bob, the market right now surely is valuing Amazon a lot closer to a $30 stock than to a $113 stock.
Stone is an associate editor of BW Online and a regular Street Wise columnist
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