River Of Red Drowning Hopes For Amazon.com

In late April I wrote that Amazon.com’s
Q1 earnings report “offered the first tangible
evidence that the company is turning toward profitability.”

AMZN’s net loss for Q1 was $308 million, down from $323 in last year’s fourth
quarter. It was the first sequential quarterly reduction of net loss in the
company’s history.

This, along with 95% year-over-year quarterly revenue growth, emboldened some
Wall Street analysts back then to predict the e-tailing giant could become
profitable by Q2 of next year.

Now it looks (surprise!) like those predictions were premature, for Q2
results show the company headed not for profitability, but even deeper into
the red. Net loss in the second quarter grew to $317 million, or 91 cents a
share, compared to $138 million, or 43 cents a share, in Q2 ’99.

Even worse for Amazon.com CEO Jeff Bezos’ damage-control campaign,
year-to-year quarterly revenue growth slipped to 85%. That means AMZN must
spend even more on marketing and promotion to drive revenue, at least if the
company intends to stick with its “grow into profitability” strategy.

Which, undoubtedly, it will. Trouble is, there still is absolutely no proof
that the model works. Q1’s reduction of net loss now looms as a faint
aberration, and with six years of losses now totaling $1.5 billion,
Amazon’s river of red runs as torrentially as ever.

Swept up in the raging current has been just about any remaining support for
the stock among analysts and investors. After the Q2 numbers were released
Wednesday afternoon, AMZN tumbled to as low as 29 3/4 by late Thursday morning,
the first time shares have dropped below $30 since December 1998.

Adding to the negative sentiments was the announced departure of company
President and Chief Operating Officer Joseph Galli, who is leaving to become
CEO of VerticalNet .

Meanwhile, analysts tripped over themselves to downgrade revenue, earnings
and share price projections for the online retailer. Merrill Lynch,
PaineWebber, and Donaldson, Lufkin & Jenrette all weighed in with lower
expectations, though some hedged by reiterating long-term confidence in
Amazon.com.

The dwindling number of investors who share long-term enthusiasm for AMZN can
now get the stock at a bargain price relative to the past 18 months. But they
may as well wait, for Amazon.com shares will remain dead in the water until
the company can prove its online superstore model will work. And that’s not
likely to happen in the next few quarters, if ever.