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Wall Street boos Amazon's juggling act

The e-tailer's balancing act between turning a profit and growing sales has fallen flat, say analysts who lower estimates and downgrade the stock.

    Amazon.com's balancing act between turning a profit and growing sales has fallen flat, according to Wall Street analysts who lowered estimates and downgraded the stock in some cases Tuesday.

    The e-tailer announced Monday that its second-quarter loss was smaller than expected, but sales growth had slowed. Those results, coupled with projections of lower-than-expected sales in upcoming quarters, rattled investors as shares fell $3.03, or 19 percent, to $13.

    The company's pro forma operating loss was 16 cents a share, well above First Call's consensus for a loss of 22 cents a share. It was also better than the 33 cents a share lost in last year's comparable quarter. But sales growth for the quarter slowed. Revenue was $668 million, down from the $700 million Amazon had reported in the first quarter.

    Amazon's pro forma results exclude a host of costs and charges. Including those items, Amazon lost $168.4 million, or 47 cents a share.

    Although many analysts listed Amazon's bottom line progress as a positive, they widely panned the company's growth projections.

    "Amazon management is in similar circumstances to a circus clown; as it tries to keep one plate spinning (profit improvement), it finds another is about to fall (revenue)," Prudential Securities analyst Mark Rowen wrote. The analyst reiterated his rare "sell" rating and a $9 price target on the stock.

    For the third quarter, Amazon said sales are now expected to be between $625 million and $675 million. That is lower than First Call's expectation for net sales of $732.9 million. On the bottom line, pro forma operating losses are expected to be flat or slightly down from the second quarter?s, Amazon said, putting them around 16 cents a share, much better than First Call's forecast of 20 cents per share.

    For the fourth quarter, Amazon said net sales are expected to increase between 10 percent and 20 percent ($1.07 billion to $1.17 billion) from sales of $972 million a year ago. Wall Street was projecting sales of $1.26 billion for the fourth quarter, according to First Call.

    On the bright side, Amazon predicted a pro forma profit in the fourth quarter, but analysts said the trade-off between profits and revenue growth was too drastic. It is quite a turnaround for Amazon watchers--analysts had criticized the company for sacrificing the bottom line for revenue growth and urged management to focus on the bottom line.

    "So much for hyper growth!" Lehman Brothers' Holly Becker wrote in a research note. The analyst praised the company for "taking such significant bottom line progress," but noted that "the earnings progress came at a price--top line growth is really suffering."

    "At $16 a share, Amazon?s $5.8 billion market cap is impossible to justify, particularly in light of its new lower growth targets," Becker added.

    She lowered her estimates for the year to be in line with the company?s revised outlook. She now expects fiscal 2001 revenue to be $3.1 billion, down from $3.3 billion. That makes growth in 2001 just 14 percent, much lower than the 68 percent in 2000.

    J.P. Morgan analyst Stephen Fitzgibbons lowered his rating on the stock given the company's sales forecasts. Fitzgibbons downgraded the stock to "market perform" from "long-term buy" and said the revisions to second-quarter estimates were severe enough to call his three- to five-year outlook for the company into question.

    The only thing analysts were happy about was the company's announcement that AOL Time Warner will invest $100 million in the company as part of a multiyear marketing agreement.

    While not a large stake in the company, at only 2 percent of shares outstanding, Fitzgibbons said the deal is a "strong endorsement of Amazon's unique capabilities in the area of online merchandising."