Amazon revenue fallout: good, bad and unsteady

Some analysts downgraded the stock, while others saw reasons for optimism in the company's numbers.

Shares were down 69 cents to $14.25 earlier, but by the afternoon, the stock was up about 69 cents, or nearly 5 percent, to $15.63.

The company announced late Monday that revenue will be on target with estimates, and it expects to report a fourth-quarter operating loss of less than $67.2 million on revenue of more than $960 million. The consensus forecast of First Call's analyst survey had been for revenue of $1 billion for Amazon's December quarter.

The bad news
Analysts were overwhelmingly disappointed with gross margins and lower-than-expected revenue growth.

The Seattle-based company got a couple of downgrades. Salomon Smith Barney dropped shares to "outperform" from "buy." Goldman Sachs analyst Anthony Noto dropped the stock to "market outperformer" from "trading buy" and saw cause to lower estimates for 2000 and 2001.

The lower margins were "likely impacted by the free shipping Amazon.com offered for part of the quarter on orders over $100 and the lower margins on relatively strong selling consumer electronics items," Morgan Stanley Dean Witter analyst Mary Meeker noted in her report.

Though Amazon showed progress on key metrics including inventory turns, operating margin, cash generation/balance, growth in new initiatives, marketing leverage, fulfillment costs, and average order size, the company's 42 percent year-over-year revenue growth raises concerns about the growth opportunity in 2001 and "potentially beyond," Noto said in a research note.

Waiting on the fence
Most analysts maintained their ratings but said the numbers were under review.

UBS Warburg analyst Sara Farley maintained a "hold" rating and said that slowing top-line growth signaled trouble.

"With revenue growth already slowing well below 50 percent per year, we believe it will be increasingly difficult for the company to achieve optimal operating scale," Farley said. She added that while the company appears to be improving operations, the tech stock premium associated with Amazon is beginning to erode. Farley said her previous price target of $30 "continues to be under review."

U.S. Bancorp Piper Jaffray analyst Anthony Gikas lowered his price target from $50 to $25 and shaved estimates for 2000 while maintaining a cautious "buy" rating.

"Although it may be premature, we think our forward estimates are likely to go down, and we remain very cautious," Gikas said. He added that if profitability is pushed out, he will downgrade the stock.

He said the current growth estimate for 45 percent in 2001 may be overly optimistic and is under review.

Bear Stearns analyst Jeffrey Fieler maintained an "attractive" rating but noted that with only 40 percent year-over-year growth, "long-term growth estimates for the company will need to be lowered significantly."

He lowered his price target from $55 per share to $30 per share but said that Amazon "continues to be the global leader in the online retailing space."

The good news
Many analysts found the company's promising metrics, along with its superior position compared with peers and strong cash position, as reasons for optimism.

"Shares will outperform the market over a longer time frame (12 months) as Amazon builds on the meaningful progress demonstrated in Q4," Noto said in his research note.

Meeker maintained an "outperform" rating and said that "in a recessionary economic environment, 40 percent year-over-year revenue growth is impressive."

She also saw 4 million new customers as impressive and said inventory levels of lower than $175 million implies annual inventory turns of 18, up from 11 in the third quarter, and the highest turns level since the significant distribution center expansion in 1999.

The company's $1.1 billion in cash and marketable securities is substantial and "should carry the company to profitability," Meeker added.