Amazon outlives Lehman's early obituary

A year ago, analyst Ravi Suria made headlines when he predicted that Amazon would burn through its cash and go broke by the end of the first fiscal quarter of 2001.

The online retail giant was spending too much, owed too much, and had too little in the bank--it was "under extremely high risk," said Suria, then a Lehman Brothers bond analyst.

With the Internet bubble already losing air, Suria's report went off like a bomb. Amazon, which called the report "hogwash," saw its stock tumble 20 percent the day it was released. And it ignited an almost yearlong scrutiny of the company by analysts, investors and reporters alike.

Yet today, with scores of busted e-commerce companies fading into history, Amazon is still ringing up orders. The company reported that its coffers held more than $600 million at the end of the first quarter.

When asked about Suria's report, company spokesman Bill Curry said, "Look at the numbers."

Some analysts suggest that the report might be part of the reason Amazon had the $600 million at the end of the first quarter. It may have prompted the company to take a more conservative approach in expanding and implementing its business plan, they say.

The company was famous for its hyperaggressive growth rate when Suria's report triggered an avalanche of skepticism from Wall Street about the e-tailer, which burned through $1.4 billion in 2000.

Even such upbeat analysts as Henry Blodget and Mary Meeker issued cautious statements about Amazon after the report by Suria, who is now an analyst at Duquesne Capital Management. Suria declined to comment for this report.

That doubt may have prodded the company to curb spending, drop costly expansion plans and streamline operations, analysts say.

"The pressure that the capital markets put on the company has resulted in big and positive changes at Amazon," said Lanny Baker, Internet analyst for Salomon Smith Barney. "It forced them to gain a better understanding and improve their vendor relationships, inventory and fulfillment processes.

"I guess that goes under 'What doesn't kill you makes you stronger.'"

Once the initial expansion was behind the company, it settled into proving its business model. Amazon laid off 1,500 employees, shut down distribution centers, and discarded slow-selling products.

This new determination, the company said, led it to beat Wall Street expectations for the first quarter. In April, Amazon reported a 22 percent increase in sales, and losses were narrower than expected.

The combination of belt tightening and increased sales at Amazon has Steve Weinstein, research analyst for Pacific Crest, doubting whether Suria's prediction that Amazon will go broke will ever come true.

"In order to suffer a cash crunch, Amazon would have to miss big during a holiday period," Weinstein said. "As long as they execute, it seems as though they have money enough to run their model."

Suria measured Amazon's spending by how much the company burned in the first quarter last year and then projected out that same burn rate for the rest of the year. But retailers usually spend more in the first quarter to pay off goods they bought for the holidays, Weinstein said.

Suria's findings also didn't take into account that Amazon would slow spending in the other three quarters or cut costs.

The analyst's negative report was based on a simple premise: Amazon had more money going out than was coming in.

And the company is still losing money today, despite all its cost cutting and deciding to use less packaging on lawn chairs.

Still, Chief Executive Jeff Bezos told analysts this month that he expects the company to show operating profits--albeit pro forma profits--by the end of the year. Amazon reported a net loss for the first quarter of $234 million, or 66 cents a share. Last year's first-quarter net loss was $308 million, or 90 cents a share.

Said Smith Barney's Baker: "At the end of the day, we still don't know if it's going to work."