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What's ailing Amazon?
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February 16, 2001: 5:13 p.m. ET
A roundup of analysts' comments on the troubled Web retailer
By Susan L. Thomas
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NEW YORK (Business2.com) - The hardballs just keep coming Amazon's way. Just Thursday, Prudential Securities analyst Mark Rowen lobbed a rare "sell" rating on the stock. Then there was the recent controversial report by Ravi Suria, Lehman Brothers senior vice president of convertibles strategy. Suria sent Wall Street types and investors into a tizzy when he questioned Amazon's liquidity in the second half of the year.
Certainly Amazon (AMZN: Research, Estimates) must be feeling a little irked at its financial followers these days, especially since the online retailer has in essence bowed to the Street by distancing itself from its long-touted growth-over-profits mantra. The No. 1 bookseller on the Web recently said it would hit operational breakeven in the fourth quarter.
Business 2.0 Online spoke with several analysts who follow Amazon closely to get their take on the company's financial health, and its prospects for reaching operational breakeven by the end of their year.
Analyst: Adria Markus, Epoch Partners
Rating: Epoch does not rate
Her take: "Amazon's performance in 2000 shows the company to be on a path toward becoming a profitable and efficient retailer. But, as evidenced by a considerable reduction in growth expectations for 2001, efficiency will have to come at the expense of growth this year, which highlights Amazon's key dilemma: The company needs to grow at a pace that justifies its market cap, move quickly towards profitability, and do so without requiring more cash.
 Unfortunately, something's got to give. And, in light of Amazon's announced layoffs and facility closures, the decision to eliminate unprofitable products from inventory, and the lower growth outlook, management has clearly chosen profitability over growth.
But Amazon's current market value implies a five-year compound annual growth rate (CAGR) of over 40 percent. That kind of growth will be hard to deliver, particularly in light of the fact that not only have 2001 growth expectations come down to 20 to 30 percent, but its core U.S. books, music, and video business has already slowed considerably, growing only 11 percent in the fourth quarter."
Analyst: Shawn Milne, Wit SoundView (WITC: Research, Estimates)
Rating: Buy
His take: "I don't think it's as bad as people think it is," says Milne. He says Amazon was likely taking advantage of the economic conditions in giving cautious guidance about its business for the year. "Conservatism was the call there."
Although Milne says he believes Amazon can reach its operational breakeven target of the fourth quarter, he says the company needs to become more efficient, and fulfillment has to improve.
"They need to right-size the distribution capacity for the U.S. business." Milne wouldn't be surprised, he adds, if Amazon closed more distribution centers. "I think they should try to max out [the distribution centers]," Milne says. "This company built this infrastructure in times of cheap capital."
As for the stock, Milne says the bad news is already built in. The third and fourth quarters could get better for the business, but the next quarter or two will prove more difficult. "I do think that the e-commerce [sector] in general will see some stabilization," says Milne of the second half of the year.
Analyst: Jeetil Patel, Deutsche Bank Alex. Brown
Rating: Market perform
His take: "They put a stake in the sand," says Patel. Every step they've taken since the earnings announcement has been to position the company for profitability, adds Patel. How Amazon gets there -- by increasing revenue or cutting costs -- is the question.
Amazon is moving toward acting like a more traditional retailer and therefore, the company needs to be able to manage inventory better, says Patel. The company needs to be able to sell an expanded product line that customers will buy, or increase revenue from the existing product line.
"The key question is: Can they sell an expanded selection of products?" says Patel. In looking at whether Amazon has shown it can do that, he adds, "Thus far, no." Amazon also appears to be losing some customer loyalty.
"My perspective is the customer base isn't as active as they've historically been," says Patel. So far, he adds, Amazon hasn't shown it is addressing that problem. "We haven't see a whole lot besides an e-mail service."
Patel is more positive about Amazon's cash position. "At this point," he says, "they appear to be well positioned."
Analyst: Allyson Rodgers, Ragen Mackenzie (RMG: Research, Estimates)
Rating: Accumulate
Her take: "I would characterize [Amazon] as risky, but showing demonstrable improvement quarter by quarter," Rodgers says. "They are several years away from GAAP [generally accepted accounting principles] profitability."
This is not a stock for those who are not risk-tolerant, adds Rodgers. Amazon needs to improve its inventory control and gain traction in its new products initiatives and categories, according to Rodgers. How business does later this year, she says, will largely depend on the economy. 
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