Debate Rages Even as Amazon Leaps Over Profit Pitfall

Take this, Wall Street.

That's what Amazon.com (AMZN) CEO Jeff Bezos must have been thinking when he awoke early Tuesday to tell investors his company had finally made money. After all, only a year ago, rumors had the well-publicized but perennially unprofitable online bookseller on the verge of bankruptcy.

That speculation, which obviously proved false, was but one early salvo in what became a months-long, marketwide argument over whether Amazon would survive. Now, with Amazon having posted a fourth-quarter pro forma profit of 9 cents a share and a stronger-than-expected cash position, conjecture about the company's survival has all but ended. Though many Wall Streeters remain lukewarm on the stock, saying it's pricey compared with its peers, few if any expect it to plunge from current levels. A day after a 24% jump on the back of its strong performance, Amazon slipped 7 cents, to $12.53.

Relevance

That's not to say everyone on Wall Street is now of one mind about the company; clearly that's not so. But "I would assume that investors no longer consider the insolvency question to be relevant," says Gary Lutin, who last year hosted a series of forums sponsored by the New York Society of Security Analysts on the question of Amazon's finances, disclosure practices and creditworthiness.

At the time, Amazon was under fire not only for its plan to grow at the expense of the bottom line, but also for its contentious relations with the press and investors, and for its hard-to-understand financial statements. A number of participants in the forum were among those on Wall Street who doubted Amazon could turn itself into a profitable enterprise. For its part, Amazon pulled out of the NYSSA forums last year, contending that they advanced the agenda of short-sellers at the expense of their public-education objective.

"I think we asked legitimate questions, and they answered them, legitimately," says Jerry Flum, chairman and chief executive of credit rating agency CreditRiskMonitor.com, who participated in the forums. Noting the sharp improvement in the latest period's financials, he adds, "I think you have to tip your hat to Jeff Bezos."

Ravishing

The insolvency debate was triggered by a highly publicized report by Ravi Suria, then a debt analyst at Lehman Brothers, that had predicted a "creditor squeeze" in the second half of 2001. Suria's report cautioned that the company's working capital -- current assets minus liabilities -- would fall to a level that would force credit managers at Amazon's vendors to tighten terms. Vendor squeezes cause trouble because merchants, who cannot afford to keep massive amounts of cash on hand to pay vendors upfront, are highly sensitive to any change in their standing with creditors.

While vendors expressed some caution at the time in interviews with TheStreet.com and other media outlets, the so-called vendor squeeze never came to pass. Neither did the claims that Amazon's opaque financials were hinting at trouble to come; the company started reconciling its pro forma numbers with GAAP numbers last April, defusing that issue.

"I would give them very high grades for their reporting right now," Lutin says. "I think they have really demonstrated the right way to do things." Suria, who now works for Duquesne Capital Management, wasn't available to comment for this article.

Long Road

If Amazon executives were gloating at making their critics eat their words, they weren't letting on. "It was a good feeling because everyone worked so hard," says Bill Curry, Amazon's spokesman. "But we've all reminded ourselves that we have a long way to go."

Indeed, though the company projected a full-year operating profit for 2002 in its statement Tuesday, it remains unprofitable on an ongoing basis, even with its preferred pro forma accounting. And though Amazon stock has dropped an average of 45% annually over the last three years, it still remains pricey by some measures, including price-to-sales (since Amazon has no full-year earnings, a price-to-earnings ratio isn't available).

As a result, the Amazon debate continues on Wall Street, though on different terms. Now the main question appears to be the stock's valuation, rather than the company's health.

Mark Rowen of Prudential Securities, an early Amazon bear who pinned a sell rating on Amazon last February, calls the quarter "fantastic," but he isn't pushing the stock. He notes that consumer electronics sales grew just 5% in the latest period, after adjusting for toys and video games that were included in last year's report but booked this year under its alliance with Toys R Us(TOYS).

"In our opinion, a higher -- or lower -- valuation of Amazon will hinge on the success -- or failure -- of consumer electronics," wrote Rowen, who upgraded Amazon to hold in August after the company inked a deal with Circuit City(CC). "We still have our doubts about this segment."

But Kristine Koerber of WR Hambrecht, who abandoned Amazon last year when she thought it would never turn a profit, saw fit to raise earnings estimates and boost her rating to buy from neutral. "We have regained our confidence in the company's business model and are impressed by management's operational prowess," the analyst wrote Wednesday.

And the beat goes on.

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