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Analysts doubt Amazon prospects

Analysts panned (Nasdaq: AMZN) on Wednesday after the online retailer's fourth quarter earnings report showed slowing sales.

Brokerage analysts weren't buying the company's economic excuses, and questioned its ability to turn a profit in the fourth quarter without additional cuts.

Shares of were down $0.25 to $18.69 Wednesday morning. The stock was near the low end of its 52-week range of $85.94 to $13.56.

Amazon on Tuesday reported results in line with the company's pre-announcement on Jan. 9. The company committed to an operating profit by the fourth quarter, but lowered sales targets for the next several quarters.

Until recently, Amazon had consistently increased its loss expectations in a trade-off for projections of higher sales. But now that it's determined to turn a profit by the fourth quarter of 2001, top-line concerns have gone out the window.

Over the past six months, sales targets have been ratcheted down repeatedly; analyst consensus estimates have moved from a June range of $5 billion to $6 billion in 2001 sales to a forecast of $3.8 million before yesterday's report.

After lowering expectations again following the latest news, many analysts now see 2001 sales at about $3.4 billion, or just 23 percent above 2000.

The new focus on profitability has incited a new plan to streamline operations and reduce expenses. But many analysts believe that Amazon will have to make more cuts to reach profitability, and question the company for putting all the blame on the economy.

"It's not the economy, stupid."

Lehman Brothers analyst Holly Becker was among the most critical on Wall Street.

"Once again, Amazon is attributing these paltry expectations to `the economy` -- we believe that there is more to it than that," said Becker in a research note.

Becker, one of the first stock analysts last year to question's long-term viability, reiterated a "market perform" rating.

Robertson Stephens analyst Lauren Cooks Levitan agreed that "Amazon management attempted to spin its Q4 results and downwardly revised forward looking guidance as the product of poor economic conditions."

Levitan warned investors not to get suckered by management's spin, and suggested they take a look at the harsh realities of Amazon's business model.

The Robertson Stephens analyst cited four problems at Amazon that management failed to acknowledge:

  • The company has overbuilt its business.

  • Core businesses continues to slow, putting more pressure on lower margin, newer categories to generate substantial revenues.

  • The margin potential of new categories puts limits long-term potential of the business model

  • Triple digit and growing return on invested capital is hard to achieve with falling margins.

Not all analysts were as doubtful. Morgan Stanley's Mary Meeker, who was more upbeat on the company's quarter, accepted's explanation.

Meeker listed a slowing economy, less buzz about dot-coms, a shopping "dislocation" caused by the election imbroglio and an overall slowdown in online shopping as reasons for the company's slower revenue growth.

Other explanations for softer growth include the company's attempt to shave off marketing costs. Amazon`s marketing levels have fallen to just 5.7 percent of sales, which some analysts suggest is curbing sales growth. Over the next year, Amazon may have to raise marketing spending to meet growth targets, analysts said.

Is profitability a mirage?

If the company has to raise spending, can it meet its goal of fourth quarter operating profits?

"Our estimates do not reflect this milestone," Levitan said.

According to her calculations, in order to achieve profitability in the fourth quarter of 2001, Amazon's total revenue has to grow 40 percent year-over-year to $1.38 billion, on flat-to-lower marketing expenses. Levitan expects the company will hit profitability a year later in the fourth quarter of 2002.

Levitan also wasn't convinced the company could hit its target because management didn't show that the company's diversification efforts have been successful, that fulfillment costs can improve efficiency and that the fundamental economics of their business model can generate long-term profitability.

Becker said she continues to believe the company will meet its target, and Meeker simply said the "company doesn't have a choice anymore. It has to deliver operating income in (the fourth quarter)."

Meeker said not only did she expect the company to hit the target, she expected this would be the last time the company lowers its guidance.

What to do with the stock

Analysts locked horns over whether the company was fairly valued. Some suggested the new revenue targets had already been priced into shares, while others saw plenty of downside to come.

"This quarter`s growth rate makes our $10 to $15 per share valuation estimate for this segment look rich -- to say the least," Becker wrote. Unless growth accelerates, the analyst said she will adjust her valuation estimate to $5 to $10 per share.

Levitan agreed that shares will "continue to remain under pressure, with potential for increased downside risk."

Goldman Sachs analyst Anthony Noto, who maintained a "market outperformer," said the question of what to do with the stock boils down to two questions:

  • Will e-commerce will be at least 10 percent of retail sales over the next 5 years?

  • Will Amazon continue to improve operating measurements to achieve operating margins of at least 5 percent?

    Noto thinks the answer to both these questions is yes, and recommends investors "add to positions on weakness."