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Amazon punters ask: When do we see the profits?

Amazon punters ask: When do we see the profits?

Will October 27, 1999 go down in history as the day of reckoning for Amazon.com and the rest of the e-commerce stocks? An increasingly disgruntled Wall Street crowd thinks so.

In what's becoming an uncomfortably familiar scenario, Amazon CEO Jeff Bezos, in a conference call with analysts, warned that his company would again be racking up losses as it spends, spends, spends to grow its business. The warning proved to be too much for Wall Street. The stock immediately dropped 8 per cent to close at $US 71 and remained down for the last couple of weeks.

Following Bezos' announcement, five firms downgraded Amazon, including Merrill Lynch, Prudential Securities and CIBC World Markets. This is the first time the analyst community has shown solidarity in voicing impatience with Amazon's spend-at-all-costs business philosophy.

Of particular annoyance: Amazon will triple marketing spending in the fourth quarter, and it's staring at a $1 billion deficit before it can hope to break even.

Amazon's pledge to forego profits in the near term as it scales up business has had its critics since day one. But what makes last week's witch hunt so intriguing is who is calling for the company's head - some notorious Amazon bulls.

Even Merrill's Henry Blodgett, the analyst who predicted greatness for Amazon last year, said the company's pledge to continue breakneck spending is becoming `numbingly routine'. While he believes Amazon is in a class of its own, he says that at some point the company has to show it's committed to turning a profit. Otherwise, `we believe investors will become as tired as we are of endless postponement of gratification', he says.

Scott Ehrens, an analyst with Bear Stearns, had more tempered remarks. He maintains his attractive rating, but acknowledges he's concerned about Amazon's rising marketing costs and the expected lower-gross margins that go with it. Lauren Cooks Levitan, of Robertson Stephens, also says she's growing `increasingly impatient', but adds she's confident the firm has the potential to generate `impressive long-term returns on investment'.

No one is criticising Amazon's commitment to turning up the dial on marketing this holiday season. But the increased spending only deepens losses and prolongs the inevitable - unprofitable quarters for the long haul. In the two-and-a-half years since it went public, Amazon is no closer to breaking even today.

Blodgett says some good has resulted. Amazon is finally opening up its books and divulging a breakdown on fulfilment costs. `We're crying for more evidence that what they're doing is leading to a return on investment,' he says.


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