Suddenly, no one loves Amazon

Even's staunchest bulls are pulling in their horns. None other than Henry Blodget, the Merrill Lynch Internet analyst, cut his rating on last week after the online retailer reported slightly disappointing second-quarter earnings.

This is the same guy who in December 1998, while an analyst at CIBC Oppenheimer, made a bold, career-enhancing call predicting that Amazon shares, then trading for about $US240 a share, would top $US400. Within a few weeks, the shares blew past Blodget's target, trading as high as $US600. (Soon after, Blodget landed a job at Merrill Lynch.) But that was a different era. Last week, Amazon shares dropped to $US30. On a presplit basis, that would be about $US180, far below where Blodget made his famous call. Blodget isn't the only jittery Amazon analyst. According to First Call, seven of the 30 analysts who track Amazon cut their ratings last week, including long-time bull Lauren Cooks Levitan of Robertson Stephens. One day earlier; hours before Amazon reported earnings; Lehman Brothers analyst Holly Becker downgraded the stock, issuing a report titled "Throwing in the towel on Amazon".

Just weeks earlier, Becker publicly supported Amazon after a bearish report from Lehman bond analyst Ravi Suria sent Amazon shares down 20 per cent. In the ongoing tug-of-war between the bulls and bears for Amazon, last week's events provided new ammunition for the naysayers. While the bulls contend Amazon is developing into a world-class retailer, the bears see the company as overvalued with weak operations. Whatever the outcome of the debate, last week was tough for Amazon and not only because some supporters turned on it.

Early in the week, Amazon's No. 2 exec, president and COO Joe Galli, resigned to become CEO of VerticalNet, a business-to-business exchange. Galli, whose former wife and two young children live in Baltimore, cited personal reasons for leaving Amazon. Yet Galli's compensation package, laden with four million Amazon options, is worth little; the strike price for those options is nearly double Amazon's current stock price. Galli refuses to discuss his compensation package at VerticalNet, but insists his departure "is not about the money".

Amazon's report was hardly a disaster. It had an operating loss of 33 cents a share, narrower than the 35 cents a share that analysts expected. New businesses, particularly consumer electronics and overseas operations, are thriving. Gross margins and sales per customer were up. In the quarter, Amazon added 2.5 million new customers. On the other hand, Amazon fell short of its own projection of 90 per cent sales growth, growing 84 per cent to $US578 million.

And Levitan notes that missing revenues by a few million was not Amazon's only sin. The company also warned that deals with other retailers that pay for placement on Amazon's homepage would have to be renegotiated, calling into question a key source of high-margin revenue. Blodget is now a bit sheepish about his infamous Amazon call. "I am glad it went to $US400," he says. "I would have expected it to stay there. But it has cost Amazon a lot more money to support the revenue than we had expected." As for his downgrade, Blodget adds: "We should probably have cut our ratings eight months ago. But analysts are always late. The market leads the Street." * Miguel Helft writes for the The Industry Standard

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