Leader: No guts, little glory for Amazon.com pundits

After building up Amazon.com for more than a year as if it were the next IBM or General Electric, leading Internet analysts are now starting to buckle. Even "Mr. Amazon" himself, Merrill Lynch's Henry Blodget, cut the stock's near-term rating.

What's going on around here?

It's not like Amazon.com missed estimates by a 10 or 15 cents a share in its third quarter. In fact, it beat the Street estimate, losing only $86m (£53m), or 26 cents a share, on sales of $356m. Still, the likes of Oppenheimer, Prudential Securities, CIBC World Markets, C.E. Unterberg Towbin and Banc of America Securities all cut the stock.

Just 10 months ago, all of these analysts couldn't push Amazon shares hard enough. At $300 or $400 a share, these analysts still kept telling clients to buy the stock. They all knew the stock was overvalued. And that's putting politely. It was like a laboratory experience gone awry. And now that it's blown up in their faces, most of these Amazon.com cheerleaders are jumping ship.

Well, not really. They're just hedging.

It's almost comical to see how some of these analysts are trying to cover their tails. Blodget cut his near-term rating to "accumulate" from "buy" while maintaining his long-term "buy" recommendation. Like every other analyst, he believes in the model and the potential of Amazon.com, but he's worried about escalating expenses and shrinking profit margins. Judging from his fence-straddling research note, Blodget wants it both ways: He wants the recognition of "discovering" Amazon.com from the get-go and riding it to a glorious finish. But he also needs to taper his unbridled optimism to maintain credibility. "We still believe in Amazon.com -- we really do," Blodget said in the note.

Who's he really trying to convince? We really don't know. "We continue to believe that Amazon will win the eCommerce game, one day becoming a huge, profitable powerhouse," he said. "At some point soon, however, we believe investors will become as tired as we are of endless postponement of gratification."

First of all, anyone who bought Amazon.com a year ago has already realised some serious gratification. Trading at just $20 a share in October 1998, the stock has split 3-for-1 and 2-for-1 in the interim and now sits at around $70 a share. It might not be fair to mock Blodget, but he has to take the good with the bad. A genius for setting an incredible 12-month target of $400 a share just 10 months ago, now he's acting like a confused child.

Second, why are these analysts getting so upset with Amazon.com when the company's simply doing what it said it would do all along? CEO Jeff Bezos and company know that improving the top line will go a long way toward regaining momentum on Wall Street. It's a proven fact. Quarter after quarter, analysts keep telling the media, investors and anyone else who will listen that sales growth is king. Profits mean nothing. It's a land grab on the Net, they say, and Amazon's the best squatter of them all.

We're still in the infancy of the Internet, especially in terms of online commerce. Why are these analysts changing their tune heading into what promises to be the most prolific holiday shopping season in the online world's brief history? It's not like Amazon.com announced out of the blue that it was going to spend more money to upgrade its services and add personnel to insure new and returning customers that their orders will arrive in time for Christmas morning.

Maybe these analysts haven't figured out what Bezos already knows: credibility breeds success. Fortunately, a couple of analysts, namely Mary Meeker at Morgan Stanley Dean Witter and Lise Buyer at CS First Boston, didn't join the rest of the sheep by downgrading the stock as it heads into the strongest quarter of the fiscal year.

Keep in mind, Amazon.com added another 2.4 million customers this quarter, well above most estimates of 2.1 million. That brings the total to 13.1 million customers. What will happen in the fourth quarter?

So if everyone knows this a good company that continues to grow by leaps and bounds, what's everyone getting so worried about? "I'm as big a believer as anybody, but what analysts and investors are struggling with is the balance between new opportunities and ramp of spending," said Jamie Kiggen, an analyst at Donaldson, Lufkin & Jenrette, during the conference call.

Blodget wondered aloud if analysts should just expect losses near 25 percent of total sales for the next several quarters and Bezos told him that wasn't a bad idea. Clearly, Bezos knows how these analysts work. And now that he's used them to boost Amazon's market capitalisation well above $23bn, he's sticking to his guns.

Prudential Securities analyst Mark Rowen cut the stock to a "hold" this week saying "we are left with the grim realisation that Amazon.com should be working on a variable gross profit margin of 2 to 3 percent in the fourth quarter."

Grim? Perhaps. But shouldn't these guys have seen this coming for a while now?

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