From: Linda (email@example.com)
Date: Thu Dec 21 2000 - 10:22:11 PST
Problems at eToys Raise Questions for Amazon
By George Mannes
12/18/00 5:50 PM ET
Henry Blodget published a worrisome thesis Monday morning: the eToys
(ETYS:Nasdaq - news) washout could mean that Amazon.com (AMZN:Nasdaq -
news) shareholders are up the creek.
The Merrill Lynch Internet analyst's assessment comes in the wake of
eToys'announcement Friday that it wouldn't just miss its
month-and-a-half-old estimates for fourth quarter sales; in
fact, it wouldn't even make it to the correct hemisphere.
eToys' shares on Monday fell 75 cents, or 73%, to 28 cents. Amazon
was down $3, or 13%, to $19.88.
Now that eToys' revenue for the quarter ending Dec. 31 is expected
to grow a maximum of 22% over last year's fourth quarter, not the
95% to 125% previously expected, the shortfall raises a troubling
question, says Blodget: If e-commerce is supposed to amount to 10%
to 15% of retail sales someday, how come a category leader is
growing at such a piddling rate? Year-over-year revenue growth of 15%
to 20% just won't cut it.
The troubling conclusion that Blodget draws is that, in fact, maybe
the online toy business and all the other e-commerce categories won't
ever carve out that 10% to 15% of retail that he and others have
expected, or if they do, it will be too far into the 21st century to
matter to investors in 2000.
Sure, e-commerce leaders Amazon and eBay (EBAY:Nasdaq - news) might
meet expectations for growth in the current quarter, with Amazon
revenue up 50% from a year ago and eBay up 66%. But it just might be
that Amazon's retail gains are coming from market share wins from
other e-tailers, not market growth for e-commerce as a whole. And this
raises an important question, Blodget writes: "What happens to the
growth rate, when, by the middle of next year, all of the weaker
e-tailers have thrown in the towel and there is no more market share
to gain?" It was concerns about growth rate -- not profitability --
that Blodget said led to his August downgrade of Amazon.com from buy
to accumulate. (Merrill hasn't been an underwriter for Amazon
or eBay, but was a co-manager of eToys' 1999 IPO.)
A scary thought, says Blodget. If the endgame isn't as valuable as he
once thought it was, and the growth peters out, you've got to worry
about Amazon's price. At a compound annual growth rate of 40% over
the next five years, the Seattle-based e-tailer is undervalued
at its Friday close of nearly $23; at 30%, its shares are fairly
valued, and it's still a good investment. At a compound annual
growth rate of 20%, it's expensive. Right now, Blodget estimates
30% to 40%, but he'll be taking a close look at Amazon's fourth
quarter to see whether he can sort the market share from the market
But will there be enough information there? As documented in a
recent TSC story securities analysts' are griping that Amazon doesn't
provide enough information about various aspects of its finances.
On Monday, however, a fair number of people thought they'd seen
[I also just noticed that Individual Investor has given
Amazon.com "the ignominious honor of being the first short-sell
recommendation in the history of the Magic 25"]
Somewhat bravely, Amazon has published a "Delight-O-Meter" on its
home page, enabling customers, investors, competitors, and the media
to track the number of orders the company has filled during the
As I'm writing this, the Delight-O-Meter reads 28,194,079. Pretty
impressive, but the meter started running on November 2, which strikes
me as a bit early considering that - decorations aside - retailers
think of the Christmas season as starting on the day after Thanksgiving,
a day often referred to as "Black Friday." Amazon is special, I guess;
it gets to count sales made on 22 more days than other retailers.
Nonetheless, the meter indicates that volume has been robust over the
past few days, which makes sense giving that Christmas is just nine
days away. What the Delight-O-Meter doesn't tell us, nor will Amazon,
is the average ticket price of the transactions counted since
November 2nd. If too many of the meter's clicks represent the purchase
of a single book or CD, there will be plenty of post-holiday hangovers
in Seattle and on Wall Street.
"The market is not there for your benefit but is there to confuse you,
mislead you and hopefully take your money."
-- Tom Williams
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