SAN FRANCISCO -- One of the last slides of this morning's Amazon.com (Nasdaq: AMZN) presentation summed up the company's business thesis perfectly.
Against a blue background stood a chart showing the company's path to profitability. Seven tentacles represented various revenue streams: books; music; video; toys/electronics; auctions; and United Kingdom/Germany. All snaked higher at accelerating rates as they moved further down the timeline. Nice model.
Now if only the chart actually had numbers. Not a single digit adorned either axis.
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"Trust Us" has been Amazon's investment mantra since the company went public in 1997. And despite a recent flurry of questions (Remember "Amazon.bomb" from Barron's?) about the model, Amazon shareholders won't get anything get more substantial in the foreseeable future, judging by CFO Joy Covey's presentation today at the annual Internet & Communications Conference organized by Volpe Brown Whelan & Co.
Covey didn't say anything we haven't already heard. Amazon is top dog in the e-commerce pound, with number one rankings in customers (11 million) and sales ($1.25 billion run rate in ྟ), rapid global expansion, and a burgeoning warehouse of customer data it can use to generate repeat buys (70 percent of customers have repeat orders).
Profit is important to Amazon, Covey says, but not before share gains and brand expansion.
"If we have to err, it's going to be on the side of overbuilding," she said. "A lot of conventional wisdom about building businesses and business models no longer applies."
Amazon's plan for more warehouse construction doesn't change the business model, Covey insisted. The website still claims lower overhead than physical retailers, while expecting faster and better service than online rivals. An expanded distribution network improves Amazon's operating leverage, revenue leverage, fixed cost leverage.
Investors would do well to remember elementary physics: a lever saves energy, but it doesn't save work. Amazon quickly gained enormous brand recognition and a sizable market share, but it's hardly closer to steady earnings than it was when Jeff Bezos started the company four years ago. Amazon. Anyone can gain mass market share by selling cheap; eMachines is doing it, without the supposed benefit and savings of the online model favored by one of Covey's favorite examples, Dell.
Unfortunately, both with retailers like Amazon and manufacturers like eMachines, the real work comes with turning share into a profit. Until this year, the stock market had given Amazon the benefit of the doubt. But a look at the stock over the last four months seems to indicate that isn't true anymore; save for a couple of brief moments, shares of Amazon have been treading water between 50 and 70 all year. Investors are in a wait-and-see mode, and rightfully so.
Amazon seems to believe it can keep throwing the same story at the market. But there's one thing about e-commerce that no one wants to admit: it's not much cheaper than doing business in the real world. Amazon has no physical stores; but it has a website, servers and a network to maintain. Its lack of brick and mortar means it needs bigger warehouses and more shipping. And for customers, it means longer waiting times for many items.
Even Covey admitted that expectations for e-commerce savings have been too high. "People are just starting to understand how difficult fulfillment can be," she said.
An Amazon presentation a year ago would've drawn a full house, even with Microsoft's presentation going on at the same time next door. Now it can't even fill half the seats ballroom. It'll stay that way until the market sees real progress to profits.
Market indices stayed negative in mid-afternoon. The Nasdaq Composite Index was down 54.66 to 2707.09, the S&P 500 lower by 21.14 to 1262.17, and the Dow Jones Industrial Average falling by 169.38 to 10134.01. 22GO>