Amazon.com Tumbles Despite Doubling of Holiday Sales

Updated from 9:18 a.m. EST

Despite a Nasdaq recovery late Wednesday, shares of Amazon.com (AMZN Quote), one of its largest components, closed near their intra-day lows as investors looked past a substantial holiday sales increase towards a profitless near-term future.

Amazon.com said Wednesday that its holiday sales had more than doubled, but that this increase would not reduce its net losses because of inventory build-ups and write-downs.

Amazon.com closed Wednesday down 12 3/16, or 15%, to 69 3/4.

Amazon.com, the Seattle-based online mega-mall, said fourth-quarter sales totaled more than $650 million, compared with $253 million in the quarter a year earlier.

For the full year of 1998, Amazon.com recorded $610 million in sales.

Amazon.com said it has reached $2.6 billion in annualized sales, based on this quarter's revenues, but noted that investors should not expect this to fall to the bottom line in earnings.

Henry Blodget, an influential analyst at Merrill Lynch, issued a report on Amazon Wednesday in which he said the market was likely to be disappointed with its quarterly report based on "very aggressive expectations."

Further, Blodget continued, there is "very little to prop up" business-to-consumer stocks like Amazon if sentiment changes in this sector. He has a rating of intermediate-term accumulate on the stock and his firm has done no recent underwritings for Amazon.

By contrast, Timothy Fogarty, an analyst at ING Barings still rates Amazon a strong buy. "What is getting lost today is that Amazon solidifies and extends its lead among online retailers," he said. What investors are reacting to is that "the whisper number was around $700 million and we have greater costs than expected." His firm has not underwritten any Amazon.com offering.

"There are two positives that come out of this," said Lauren Cooks Levitan, an analyst at Robertson Stephens who downgraded the stock to buy from strong buy after the news. "First they demonstrated they could scale the back end by delivering 99% of the items on time. And the second is diversification. More than half of sales came from areas besides the U.S. book business in toys and electronics."

Robertson Stephens has done no recent underwriting for the online retailer.

However, higher revenues continue to be coupled with no bottom-line surprise on the upside, Cooks Levitan said. "I think the market will punish them for that."

A company spokesman could not say how much inventory would be carried forward into the next quarter, nor how much the losses for the current quarter would be.

"As a result, our higher seasonal sales will not translate into lower net losses in the fourth quarter," said Warren Jenson, chief financial officer. "In addition, we will incur higher-than-expected inventory-related charges and write-downs, in large part because we carried deep inventory in start-up businesses such as toys and electronics."

Asked whether Jenson's statement that toys and electronics are "start-up businesses" could be misleading, the company spokesman responded, "If you call them new product lines, nobody's going to argue with you."

Start-up businesses typically don't have an enormous infrastructure already in place as Amazon.com does.

Investors are now turning over stones for the coming quarter. For the first time analysts expect Amazon to report lower sales in sequential quarters around $500 million. "It would probably change the dynamics for the stock somewhat," said Fogarty. "But I'd be surprised if this were news to investors."

Barring any move into any completely new businesses, Amazon should break even in late 2002, according to Fogarty.

According to Media Metrix, a company that measures Internet traffic, Amazon.com was the top-ranked e-commerce site for the period from Nov. 22 to Dec. 26.

"You have to remember this is a seasonal business. To look for sequential growth would be highly unrealistic," Cooks Levitan said.