Amazon Falls on Growth Worries

A hazy outlook for Amazon.com's (AMZN) lucrative partnership business continues to weigh on the stock.

As the company's first quarter nears an end, investors are plenty nervous about the long-term outlook for the online retailer. Amazon shares jumped some 40% after the company posted its long-awaited first-ever quarterly profit in last year's fourth quarter. But worries about key executive departures and the sustainability of Amazon's fast-growing, high-margin services business have punished the shares in recent weeks.

Now comes a note from Lehman Brothers Internet analyst Holly Becker that raises several concerns about Amazon's future, focusing in part on the prospect that Amazon's service business could run out of steam. Shares fell 7% early before rebounding to trade lately at $14.32, down 51 cents or 3.4%.

Opacity

One of Becker's top concerns is a lack of visibility in the company's services business, which includes its well-known partnerships with bricks-and-mortar retailers such as Toys R Us (TOY) and Target (TGT) and media giant AOL Time Warner (AOL). The business is fast-growing and boosts higher margins than its other segments -- yet how long that can last is unclear, some observers say. Indeed, in recent weeks, news that Toys R Us had sought to renegotiate the terms of its Amazon alliance, first reported by TheStreet.com, drove shares down, a point Becker highlighted in her report.

Analysts have long complained that Amazon isn't as forthcoming with details about its business as many other retailers, and they say this is especially discouraging in light of investors' newfound desire for financial transparency. Moreover, some observers have questioned how profitable these deals can be to Amazon's partners, which could easily short-circuit the deals and the growth Amazon has been getting from them. Both Amazon and Toys R Us have declined to return several phone calls seeking comment on the deal.

"We believe that if Toys R Us and Amazon's other partners do not become profitable soon, they may exit their online businesses completely, which will obviously be problematic for Amazon," Becker writes, noting that Toys R Us' online business lost $76 million last year. She says it is "likely" that the terms have been renegotiated. "Either way, we expect Amazon's contribution from this partner to decline significantly," she writes.

Running Dry? Some question Amazon's growth

While Amazon is stingy on the details of its services division, Becker estimates that Toys R Us revenue is about $122 million, or more than half of Amazon's total services revenue in 2001 of $225 million. "We wish there were more details provided, given the importance of this segment in driving growth and profitability," Becker writes.

Ah, Valuation

Becker, who has a market perform rating on the stock, also warns that shares look increasingly expensive. That too is a long-held concern of many Amazon bears, who note that the company still isn't profitable on an ongoing basis -- yet, its shares are valued more richly than many strongly profitable peers in the retail field.

"As hard as we try, Amazon does not look cheap," she writes. On a price-to-sales basis, a formula many use in evaluating Amazon's valuation because it does not yet have full-year profits, Amazon is more expensive than Wal-Mart (WMT), Best Buy (BBY), Lowe's (LOW) and Home Depot (HD), she notes.

Amazon, which is scheduled to report first-quarter earnings on April 23, is expected to lose 9 cents a share, compared with a 21-cent loss a year ago, according to Thomson Financial/First Call. Investors' anxiety probably won't let up, at least until they see those numbers.

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