I just finished reading Morgan Stanley Dean Witter's top picks for 1998. Amazon.com is on their top list. They don't say much about it . the estimates are as follows. eps 96e -.26, 1997 -1.22, 1998 eps -1.09.
YHOO is profitable now and AMZN's not. Yahoo is making money and will grow earnings at an extreme rate. It business model is
proving profitable. The fact that YHOO can make money with half the sales should tell you something. Also YHOO has more room to do
what it wants. Now they are teaming to be an ISP and have great name recognition. AMZN model has not proven it can make money.
The only thing they can do to expand their product line is to get into CD's etc which is already being done. They will
eventually (5 years or so) slow sales growth to single digits or 15% to be generous. Do you want to pay $60 for the stock that in 5
years say is earning $3 per share and growing at 15%. If it was five years from now and the company can pull off these numbers I
might pay 60 but do you want zero appreciation for five years? Really think about it. Do you think ,assuming that they actually
pull off $1 bln in sales in in 2000 or 2001 that it will double to $2 bln and then $4 bln etc. No way. They more sales they have
the less their sales can grow.
I was gonna buy a 100 shares yesterday even though
I had alot of doubts about what is really going on with
this company. But after reading your post Im clear on it now and for sure Im going to Find Another Place to Put the Money a Relative Left me thanks for taking your time and explaining things so people could understand.
I thank you for your response ,but,if you think the stock can fall 20 or 30 points and you got in at 28 what are you waiting for??Ishorted yeasterday and my major concern is i've been at this game long enough to know nothing is this easy!
rbco-rimpinths is correct.If you read AMZN's 10-Q report they state that their gross margin is down due to lower PRICING!!Its not startup costs BUT their gross margin is down on significantly higher sales.No doubt pricing pressure will continue with BKS and Borders entering the fray. Don't be misled, AMZN has a core profitability problem.
"They do make profits on selling of books. they are not losing money because of pricing policies. They are losing money because of their startup costs,new plant costs, increased advertising and general tangible and intangible infrastructure costs."
This is a huge myth about Amazon: if they simply reduced advertising expenses and product development costs, they could be profitable.
Let's make the assumption that they don't spend a dime on advertising or product development. Of course, this is a ridiculous assumption. Companies must advertise and they must spend some money on product development. But, for the sake of argument, let's assume these are optional expenses related to aggressive expansion. Would they be profitable if they reduced these expenses?
From their third quarter report:
"Marketing and sales expenses increased primarily due to increases in the Company's promotional expenditures, including $3.4 million and $5.2 million for the quarter and nine months ended September 30, 1997, respectively, associated with the Internet aggregator promotional relationships, and increased personnel and related expenses required to implement the Company's marketing strategy and fulfill customer demand."
Two things to note here: first, advertising expenses account for only $3.4 million for the latest quarter. We'll use this
number later. Second, marketing and sales expenses includes expenses associated with fulfilling customer demand. That is, it
includes things such as customer service, warehouse personnel, and other support staff. I surmise that many people assume that these
costs are listed under general and administrative expenses, but "General and administrative expenses consist of payroll and
related expenses for executive, accounting and administrative personnel, recruiting, professional fees and other general corporate
expenses." Amazon deserves credit for holding G&A expenses fairly constant, but it represents only about 10% of their overall
As far as product development, they spent $3.6 million on "payroll and related expenses for development, editorial and
network operations personnel and consultants, systems and telecommunications infrastructure and costs of acquired content." It's
unreasonable to assume that these are just start-up costs, and that these could be reduced significantly if the company wasn't trying to
expand so quickly. Someone has to write the reviews, someone has to maintain the network. But, just for fun, let's assume these
costs could be zero.
Thus, we have expenses of $3.4 million for advertising and $3.6 million for product development for a total of $7 million. The loss from operations for the third quarter of 1997 was $9.2 million. (Income was -$8.5 million due to $0.7 million in interest income.) Even if they didn't spend a dime on advertising or product development (which is an unrealistic assumption), they would still fall short of profitability by $2.2 million.
Bottom line: Amazon is losing money selling books.