Suddenly the Amazon Flows Downstream Too

Now that Amazon.com's run-up has been interrupted, analysts are sounding cautionary notes.
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SAN FRANCISCO -- Suddenly, it's not so easy to be a Wall Street analyst writing reports on Amazon.com (AMZN) - Get Report. Long a slippery stock, Amazon was easy for analysts to cover: Just praise this puppy and stay out of its way.

Rapid revenue growth and aggressive spending on expansion outweighed standard fundamentals. The few who dared to stand in the way of Amazon's rocketing ride up were quickly knocked down.

In the days before Amazon reported its first-quarter earnings, the stock slipped 7%, while the

TheStreet.com Internet Sector

, or

DOT

, index dropped just 3%. Following the

report, Amazon stock has lost a third of its value. The DOT was off just 6.5% during the same period.

As Amazon.com's stock has slid, there has emerged a new skepticism regarding the company. Once again, it's driven more by Amazon's stock price than its business.

The skepticism comes at a handy time: It gives analysts a little more fudge room if the stock keeps going down. They can say that they warned investors with a downgrade or a cautious statement. If the stock rebounds, they'll point to the catalysts they "predicted" alongside their downgrades.

Reversing Direction
Stock price and volume of Amazon
vs. performance of DOT index

Amazon.com itself hasn't changed: Its first-quarter report looked very much like the previous reports, with lots of better-than-expected numbers and more

spending on the horizon to expand its staff, brand and distribution facilities. Amazon was just powering forward in its quest to become the dominant Internet retailer.

Now analysts are finding a new use for their

Mont Blanc

pens: scratching their heads over the company's outlook.

BT Alex. Brown

analyst Shaun Andrikopoulos downgraded Amazon.com to buy from strong buy following the earnings, indicating a possible shift away from Wall Street's approval of the company's doctrine of spend, spend, spend. (BT Alex. Brown has an underwriting relationship with Amazon.com.)

All 23 analysts who officially cover the stock deepened their expected losses for this year and next year, according to Chuck Hill, director of research at

First Call

. The consensus loss for 1999 is now $1.71 per share, wider than a previous estimate of a 91-cent loss. For 2000, analysts expect losses of $1.26 per share, widening from an earlier estimate of a 29-cent loss.

Some of Amazon's biggest fans are hedging their bullishness. While

Merrill Lynch

analyst Henry Blodget insisted in a recent report that aggressive spending is the best plan for Amazon in the long term, he quickly added, "This belief is based on faith, not evidence."

You can almost hear reality creeping up behind Blodget's back. Back in March, a more sanguine Blodget said, "Amazon.com is investing money, not losing money." Blodget rates the stock accumulate, and his firm was not an underwriter for the company.

Faith aside, many analysts agree Amazon would be foolish to quit its rapid-growth strategy too soon. "It's in their best interest to spend now," says Shannon Krizo, a research analyst for

Froley Revy Investment

, which participated in Amazon's convertible bond offering. "We're still in the tornado phase of the Internet." And unlike other rapidly growing tech companies such as

USWeb

(USWB)

and

Network Associates

(NETA)

, Amazon's expansion has come with Wall Street's unfailing confidence in the management.

Amazon.com has been downgraded before. Based on valuation,

Wheat First Union

,

Dain Rauscher Wessels

and

NationsBanc Montgomery Securities

lowered their ratings last year. The stock quickly proved those calls to be, at best, ill-timed. None of those firms has been an Amazon underwriter.

This also isn't the first time the company has reported stronger-than-expected results alongside plans for more aggressive spending. But it is one of the few times the stock has been downgraded because of it. After the third quarter of 1998, the stock was actually upgraded by NationsBanc to buy, under the same conditions: stronger revenue and plans for more losses.

In addition to acknowledging that the company had a solid first quarter, Andrikopoulos of BT Alex. Brown raised his 1999 revenue estimates right there with the downgrade. "Although we understand and appreciate the long-term opportunity facing the company over the next three to five years," wrote Andrikopoulos, "we believe that, in the near term, the company will undergo a major investment cycle necessary to fully capitalize on the long-term growth prospects on a global level."

Spend or sink: That's been the mantra ingrained on the business plans of Internet companies. The joke that bigger losses bring bigger market caps has quickly hardened into a chestnut in the young Internet industry. For the most part, Wall Street has encouraged that behavior and has scolded those that weren't investing enough in the future.

And so all along, Amazon.com has been a revenue story, not an earnings story. In just a few years, the company has sprouted into a Net powerhouse; it's expected to pack in at least $1.4 billion in revenue this year. The extra spending shouldn't have come as any surprise because the company has announced stronger spending for several quarters.

"This is the same as it's always been," says Glen Kacher, an analyst at

Integral Capital Partners

, which holds the stock. For most investors, such spending has been a nonevent. When Amazon presented at an investment conference last week, "one guy asked about profitability" in a breakout session with management, says Kacher, "and everyone else rolled their eyes."

Maybe all those paying big bucks for this professional advice should do the same.