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OCTOBER 23, 2003
By Rob Hof Amazon & Co.: Still Floating on Froth Sure, the e-tailer's stock just got bashed. Nevertheless, it and the other Net high-fliers remain valued for nothing less than perfection This year, Internet investors have returned to the stock market in droves. Many are the same "momentum investors" who lost their shirts in 2000 when the bubble burst on their overinflated hopes. And since the beginning of 2003, they've watched gleefully as Amazon.com's (AMZN ) stock has tripled, and online marketplace eBay's (EBAY ) stock has doubled. So it's no surprise that when Amazon predicted on Oct. 21 that its growth next year would slow to as little as 16%, four percentage points off earlier forecasts, investors ran for the exits. On Oct. 22, the online retailer's stock fell 9%, to $54.01. SOBER LATER. Has the new Internet mini-bubble come to an end? Probably not. When eBay reported its third-quarter results last week, with revenues that rose 84%, to $531 million, investors knocked its stock down 5% the next day. Yet since then, it has risen almost to where it was before. And higher growth projections by online DVD rental-service Netflix (NFLX ) pushed its stock up 5% on Oct. 20 to its highest point since it went public last year. Still, smart investors might want to examine this froth as 2003 comes to a close. If the tech crash of three years ago had one hard lesson to offer, it's that euphoria over future earnings potential usually gives way to a more sober assessment when companies mature. Have you looked at the stocks of Microsoft (MSFT ) and Time Warner (TWX ), owner of AOL, lately? The dip in Amazon's stock came despite the e-tailer posting yet another solid performance in the third quarter. It not only chalked up its first net profit outside a holiday quarter -- $16 million -- but its sales shot up 33%, to $1.13 billion, slightly above what analysts had expected. Moreover, Amazon says it's likely to see sales growth of as much as 34% in the crucial fourth quarter, which Chief Executive Jeffrey P. Bezos predicted would be its biggest holiday season yet. As a result, analysts expect it to post enough of a fourth-quarter net profit to produce its first full year in the black. "APPROPRIATELY CONSERVATIVE". None of that, however, was enough to persuade investors to hang onto Amazon's stock, let alone keep buying it. Its forecast of 16% revenue growth for 2004, so far below this year's, rattled investors, who have driven the stock from a low of $5.51 a share in October, 2001, to more than $60 recently. Chief Financial Officer Tom Szkutak says only that Amazon is being "appropriately conservative" in forecasting a relatively slow growth rate. Underneath the covers, investors may have less to worry about than Amazon's cautious outlook implies. For one thing, its strategy of constantly lowering prices and offering free shipping on orders over $25 has clearly recharged both sales growth and profits, as the higher volume of merchandise running through its distribution centers has them humming more efficiently. That's a strategy that Bezos said will continue. "Lowering prices will go on for years and years and years," he said, echoing Wal-Mart Stores' (WMT ) successful mantra. "That's just how we're going to do business." FAT COMMISSIONS. Moreover, Amazon's strategy of increasingly serving as a cyber-shopping mall is paying off even though it may have a negative impact on sales growth. Some 22% of unit sales in the third quarter were by other merchants, from Target (TGT ) and Toys "R" Us (TOY ) to hundreds of thousands of individuals and small businesses that sell their wares through Amazon's site. That's up from 17% a year ago. Because Amazon takes only a commission, not the full retail prices, on those sales, that has dampened sales growth to some degree, notes Safa Rashtchy, analyst with U.S. Bancorp Piper Jaffray. But those commissions carry gross profit margins of 60% or more, more than double Amazon's margins on its own retail sales. That's what has helped it earn a profit. Still, even after the pullbacks, the stocks of Amazon and other Internet leaders may well be priced on assumptions that little can go wrong. eBay's price-earnings ratio, for instance, stands at 93 -- more than triple the overall market's. Given the continuing challenges and risks in the world economy, investors' still-buoyant attitude toward the stocks that not long ago symbolized the excesses of the business world may get them into trouble once again.  Hof covers Silicon Valley from BusinessWeek's San Mateo bureau Edited by Douglas Harbrecht
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