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Torrent Tales: Amazon.com--Earth's Biggest Bookstore?

If we asked you what was the hottest retail outfit in your home town, chances are you wouldn't say the local bookstore. So why is Amazon.com (NASDAQ:AMZN) stock doing so well?

Plenty of short sellers have interest in AMZN, with its market capitalization that has surpassed $2 billion recently. They're betting that any stock with ongoing losses, up against stronger bricks and mortar rivals, has a tough field to plow. In 1997 AMZN lost $1.27 per share and trades at more than 12x 1997 sales.

A River Runs Through It

Amazon.Com

NASDAQ:AMZN

Shares outstanding

23.02

AMZN 4-23-98

$ 81.00

Market capitalization

$ 1,864.70

- pro forma or current working capital

$ 93.52

+ long-term debt

$ 76.52

= Enterprise value

$ 1,847.71

Sales and Income/Loss

1997 annual sales

$ 147.76

Earnings per share (or loss per share)

$ (1.27)

Projected 1998 sales

$ 365.00

Projected 1998 losses per share

$ (1.40)

Revenue & Earning Multiples

Mkt. cap/ trailing sales

12.6x

Mkt. cap/ projected '98 sales

5.1x

Book Sales Stats

Estimated U.S. books sales 1998

$ 28,000

Estimated global books sales 1998

$ 80,000

Amazon's current % of U.S. (est.98)

1.3%

Amazon's current % of world (est.98)

0.5%

U.S. Market only…

Amazon at 3%

$ 840.00

Amazon at 5%

$ 1,400.00

Amazon at 7%

$ 1,960.00

Estimated U.S. book sales

Year 2001

$ 32,000.00

Amazon's estimated sales share 2001

$ 1,280.00

Percent

4%

Note: All figures in millions except share price

EPS and multiples

) 1998 Mecklermedia Corp.

Plenty of analysts cry that AMZN is in a thin margin business. Land-based rival Barnes & Noble (NYSE:BKS) is often touted as the peer here. It's lucky to squeak by with 1% to 3% net margins.

Trailing 12 months to January 31, 1998 BKS posted $2.8 billion revenue with $56.8 million net income, a 2.1% net margin. But remember that's a lot of bricks and mortar, overhead, distribution, books to shelve, books to return to the publisher, employees to pay, etc. BKS trades under 1x sales.

So comparing Amazon to Barnes is not apples to apples. BKS must carry a lot of real-world baggage in order to maintain its market share. Yes, we know that having stores and clout is valuable, especially with publishers who want to move books. But we also believe that virtual retailing as a model is superior in many ways to land-based ones.

The reasons are quite clear: no stores = no stores to support in every phase of the food chain. Amazon is able to float freely on the world's new store--the Internet--with scales of opportunity that bricks and mortar can never realize.

With the launch of its own rival Web effort, barnesandnoble.com, the thinking is that Amazon.com loses advantages.

In Web-to-Web wars the price-leadership status and discount angle is becoming a moot point. Price is important but they are eye for eye here. That'll hurt AMZN's margins and cost it more sales and marketing probably.

Yet after comparing the two Web efforts, we still believe that Amazon's user experience--and this we hold as paramount--is superior to Barnes and Noble's.

For Web-based enterprises, that user experience is the most important factor in the success or failure of their effort. From the first click of a mouse (or soon TV), we believe that easy to follow and clearly understandable Web sites will win over rivals every time. Sometimes it's as simple as the choice of graphics or fonts, which sounds ridiculous to a world used to valuing windows and shelves.

In the Web space every icon, link, word, and element on that Web page is your store's door, windows, shelves, counter top, etc. If that assemblage isn't well thought out, clean, efficient, and fast via today's modems, then it's probably costing that Web site/store customers.

Given that Net-centric approach, Amazon.com could be a serious bookstore rival within a few years, free of the need to support bricks and mortar, expanding globally through the Internet's free-ranging wires, and leveraging the virtual retailer experience.

Possible Internet commerce taxation may hold it back at some juncture, and Amazon.com's small pool of capital--$93 million working capital and $75 million credit facility--seem shy of going global in a world where Microsoft spends $300 million to market just one product.

With more and more people turning to the Internet for purchasing, however, we forecast that Amazon could grow its existing 1.3% of the U.S. book market share to 4% by 2001, or $1.2 billion sales.

And we haven't factored in global sales growth potential here.

All in, net income could turn positive by next year, boosted by the fact that Amazon can exploit its user profiles for commerce deals, break into music sales ('maybe' since it's so well known for books), and keep the Web store clean and uncluttered.

So as the short story players keep shorting AMZN, those who try to read ahead can perhaps read between the lines, and proffer a guess as to whether or not the tale ever ends.