2HRS2GO: Amazon.com gets overdue reality check

4 min read

Anyone who was caught off guard by the discouraging news on Amazon.com Friday was either not paying attention or hopelessly brainwashed by the analysts who shamelessly pushed the online retailer to such a ridiculous valuation in the first place.

Morgan Stanley's Mary Meeker and Merrill Lynch's Henry Blodget, two of the most influential Internet analysts on Wall Street, said Amazon.com's (Nasdaq: AMZN) second- and third-quarter sales might not meet their estimates.


But I thought everyone was buying everything online and, of course, they were buying it from Amazon.com. This can't be good news.

And that's not even the worst news, believe it or not.

Lehman Brothers convertible bond analyst Ravi Suria wrote a scathing research report, saying Amazon.com is "displaying the operational and cash flow characteristics of a normal retailer, despite its 'virtual' pedigree."


This is no laughing matter for investors holding not only Amazon.com but any of the other online retailing stocks that made all the headlines in the past year.

The terrifying combination of sluggish sales, serious debt concerns and, so far, nine-figure losses in each quarter make Amazon.com seem as vulnerable as some of the second- and third-tier 'Net stocks that have crumbled in the past six months.

No wonder the stock fell 9 1/16, or 22 percent, to a 52-week low of 32 15/16.

But what should really concern investors, not just Internet or Amazon.com investors, is the fact that it took one brave bond analyst from Lehman Brothers to expose the soft underbelly of Amazon.com's balance sheet.

To make a long story even longer, convertible notes looked like a great deal back when it and other 'Net stocks were doubling in a month or two.

Now that the stock is struggling, those convertible notes have converted to real debt on the company's bottom line.

But why did Wall Street have to learn of this from a bond analyst and not from the equity analysts who, in theory, are supposed to be able to recite these companies' balance sheets by rote?

And one can only wonder how Suria's report was received at Lehman. We've got an analyst on one side of the building recommending this stock to clients and another telling us how this company is no longer immune to "real-world" economics and is basically in the same position as any number of struggling "traditional" retailers.

"From a bond perspective, we find the credit extremely weak and deteriorating," Suria wrote. "The company's inability to make hard cash per unit sold, is clearly manifested in the weak balance sheet, poor working capital management and massive negative operating cash flow - the financial characteristics that have driven innumerable retailers to disaster throughout history."

At this point, I'd like to nominate Suria as a candidate for Time's Man of the Year for 2000. He surely deserves it more than CEO Jeff Bezos did last year.

It will interesting to see, 10 years hence, if Bezos is remembered more as an entrepreneurial genius or ringmaster of the biggest flop in Wall Street's long and storied history.

Amazon.com has lost about $2.9 billion in market cap Friday. And it has lost more than $19.5 billion since Jan. 3.

"Adding to the operational weakness is the mounting pile of debt, as Amazon has essentially funded its revenues through a variety of sources over the past year," Suria said. "From 1997 through the last quarter, the company has received $2.8 billion in funding, while its revenues have been $2.9 billion - a whopping $0.95 for every dollar of merchandise sold."

So all these rave revenue figures investors have been hearing about were a mirage. Any company can post 150 percent revenue growth if it has the cash to manufacture the sales.

Hell, like I've said before, you can get a lot of traffic and incredible "sales" growth offering $1 bills on the Internet for 85 cents a piece.

And with Blodget and Meeker telling everyone not to expect much until the fourth quarter, it's hard to believe that anyone is holding this stock anymore.

Suria says Amazon.com only has the cash to survive until the first quarter of 2001. That's a best-case scenario.

Amazon.com currently isn't expected to turn a profit until sometime in 2002, if ever.

After barely topping analysts' estimates in its first quarter, Amazon.com said it was now focusing on profits and would trim costs in order to get there.

But that's not the problem, stupid.

"The issue here is not bloated costs, but doubts about the validity of the business model," Suria said. "(Amazon.com) will run out of cash within the next four quarters unless it manages to pull a financing rabbit out of its rather magical hat."

This information was readily available to every buy- and sell-side analyst covering this stock yet it's the bond guy that finally called a spade a spade.

Sure, some analysts were talking about slowing sales in the next few quarters and some even had the foresight, a quarter or two ago, to inquire about profitability.

But at this moment, 24 of the 31 professionals following the stock rate it either a "buy" or "strong buy" just as they did when it was trading at $300 a share.

The brokerage firms have made their money. Bezos and hundreds of other Amazon.com employees have made their money, big money. The venture capitalists have made their money. Even the analysts have made their money.

Have you?