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Waiting for a Shift in the Mighty Amazon

The expected fourth-quarter loss could be its biggest ever, but analysts aren't concerned.

SAN FRANCISCO -- The cat is out of the bag for's

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fourth-quarter earnings following a Jan. 5 preannouncement, but there will still be nuggets worth examining in the release, set for this afternoon.

Amazon said Jan. 5 that fourth-quarter sales totaled about $250 million, up from $150 million in the third quarter. Big questions remain: What's happening to margins? Will sales and marketing continue to consume a growing piece of the revenue pie? And how does the online book behemoth maintain its leadership position?


First Call

consensus estimate calls for a loss of 18 cents a share, compared with a loss of 16 cents in the third quarter and a loss of 7 cents a share for the year-ago fourth quarter. An 18-cent loss for the quarter would be the largest ever for Amazon.

The good news is that analysts expect Amazon to report narrower losses going forward, though there's no sign of profitability through 2000. The First Call consensus (alas, of just two analysts) forecasts a loss of 7 cents a share for full-year 2001. While 2001 might seem far, the right answers to some of the big questions could make investors cheer now.

For one, when will sales-and-marketing spending stabilize? Sales-and-marketing expenses rose to 24.4% of revenue in the third quarter from 22.8% in the second quarter and 22.3% in the first. "The cost structure is still out of whack," says Jay Ferrara, who manages the


Principal Preservation PSE Tech 100 fund, which holds Amazon and showed a 54% return in 1998. "Costs continue to go up," he says, "but I do understand that they are investing for the future."

Amazon's gross margins were expected to fall when it entered the music business last summer and the video business during the fourth quarter. Rather than falling, they've grown steadily -- to 22.7% in the third quarter from 19.5% in the fourth quarter a year ago -- thanks to better supply-chain management and higher shipping margins.

But the question is, can they continue to rise? Amazon warned earlier this month of low margins on books and videos, plus aggressive product pricing, despite the strong sales. But some analysts say lower margins don't necessarily spell bad news. If margins fell due to pricing, that would be bad, says Scott Appleby, an analyst at

ABN Amro

who rates the stock hold. "But an acceptable reason would be that they just blew out music or video sales. That would suggest that success was the cause of margin compression." (ABN has no underwriting relationship with Amazon.)

Amazon faces a challenge in pricing, especially in light of




recent decision to sell some items at cost. For example,

Divine Secrets of the Ya Ya Sisterhood

by Rebecca Wells is just $7 at That's nearly 40% cheaper than Amazon's price of $11.20.

"Amazon's competitive advantages are going to erode," says Ferrara. "Amazon was the first one to the party. And the stock was bid up by day-traders, and people are trying to search out the next


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. I understand trying to hit a home run. But at a certain point, the prices became too high for momentum and day-traders."

BancBoston Robertson Stephens

analyst Keith Benjamin doubted the real threat of and others. "We believe consumers will continue to value aggregators of services, like Amazon, which can reliably deliver merchandise," said Benjamin in his weekly Web report published last Friday. He added that consumers appreciate the "convenience, familiarity and reliability" of and price alone will not drive consumers to the competition.

But if a customer is unhappy, Appleby says, "they can jump to

Barnes & Noble

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in less than a tenth of a second."

Amazon will report results after the markets close Tuesday and the subsequent conference will be available at's


Web site.