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JANUARY 28, 2004
By Rob Hof Amazon's Stock: Hurts So Good After its latest dizzying rise, even the e-tailer's first full-year profit -- and healthy outlook -- wasn't enough to keep traders from selling Until recently, most investors were still asking the question posed by a July 10, 2000, BusinessWeek Cover Story: "Can Amazon make it?". On Jan. 27, the once-struggling online retailer finally answered the question -- probably once and for all. Confounding its longtime critics, Amazon.com (AMZN ) reported its first full-year profit in 2003, earning $35.3 million, or 8 cents a share, on a 34% jump in sales, to $5.3 billion. So why are investors hitting the sell button today, knocking the stock down nearly 6%? Simple: They got way ahead of themselves in pricing Amazon stock. Since the start of last year, it has risen a head-spinning 185%, to a peak of $55.74 a share before its current drop. That gave Amazon a market capitalization of nearly $24 billion, more than those of Sears (S ) and J.C. Penney (JCP ) combined. Even with operating profits expected to jump as much as 68% this year -- up to $455 million -- on sales of up to $6.7 billion, that still produces a lofty price-earnings ratio of over 70, more than triple Microsoft's (MSFT ) 22. KEEPING SHIPPING FREE. Truth be told, Amazon did give investors a bit of worrisome news to chew on in its latest earnings announcement. Thanks to the e-tailer's relentless price-cutting and free-shipping offers, its gross margin in the fourth quarter fell a percentage point, to 22%, from a year ago. That surprised some analysts, who had expected it to stay fairly steady. Piper Jaffray analyst Safa Rashtchy estimated that Amazon spent about $23 million worth of profits, or about 5 cents a share, on those initiatives. What's more, Chief Executive Jeffrey P. Bezos remains unapologetic about his strategy. By continuing to cut marketing and distribution costs, he vowed, Amazon will cut prices even more this year and maintain free shipping on orders of more than $25. "We've made a deliberate decision," Bezos said in a conference call with analysts. "Instead of giving the money to the television networks, [we] give it back to the customers." As a result, added Chief Financial Officer Tom Szkutak, "you should expect to see pressure on gross margins." RAISED SIGHTS. What's clear is that Amazon is likely on the right track for the long term. Despite the fourth-quarter drop in gross margin, operating profits rose sharply in 2003, quadrupling to $271 million. More important, Amazon managed to hike its free cash flow in 2003 by 156%, to $346 million, even as it paid off $464 million of its more than $2 billion in debt. "That's what really counts," says Shawn C. Milne, analyst with Schwab SoundView Capital Markets, which has a neutral rating on Amazon based on its high valuation. The e-tailer also raised its forecasts for 2004. It now predicts that sales will rise 18% to 27%, to as much as $6.7 billion, up from its previous forecast of up to $6.25 billion. And it expects a 31% to 68% jump in operating profits, to as much as $455 million. Says Milne: "The long-term outlook for this company remains very positive." That's something a lot of folks never expected to hear -- especially the longtime naysayers.  Hof covers Amazon from BusinessWeek's San Mateo bureau Edited by Douglas Harbrecht
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