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
– pro forma or current working capital
+ long-term debt
= Enterprise value
Sales and Income/Loss
1997 annual sales
Earnings per share (or loss per share)
Projected 1998 sales
Projected 1998 losses per share
Revenue & Earning Multiples
Mkt. cap/ trailing sales
Mkt. cap/ projected ’98 sales
Book Sales Stats
Estimated U.S. books sales 1998
Estimated global books sales 1998
Amazon’s current % of U.S. (est.98)
Amazon’s current % of world (est.98)
U.S. Market only…
Amazon at 3%
Amazon at 5%
Amazon at 7%
Estimated U.S. book sales
Amazon’s estimated sales share 2001
Note: All figures in millions except share
EPS and multiples
) 1998 Mecklermedia
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
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
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.