By Randy Befumo
May 15, 1997

Shares of AMAZON.COM (Nasdaq: AMZN), one of the most awaited initial public offerings of the year opened strongly this morning. Priced at $18 a stub, the three million shares opened at $29 1/4 and began to trade down almost immediately. The shares were trading at around $24 1/2 at 11:30 AM EST.

What happened?

The well-known Internet-based book retailer had originally planned to issue 2.5 million shares in the $12 to $14 range, but demand for the offering had run so high that underwriters Deutsche Morgan Grenfell, Alex. Brown, and Hambrecht & Quist had to adjust figures upward. With 23 million shares outstanding, today's trading prices at $562 million net the $65 to $68 million in proceeds it will receive from the offering.

With BARNES & NOBLE (NYSE: BKS) currently valued at $1.4 billion, Amazon's emergence into the public markets at almost half that value has surprised a number of investors from a valuation standpoint.'s combination of marketing presence, cost advantages due to its operating model, customer focus, and rapid revenue growth explain much of the premium.

Marketing Presence

How much would it cost in advertising and marketing dollars to start an Internet book retailer today with the ubiquity of, often mentioned in the same breath as older, more established players like Barnes and Noble? This alone is probably worth $150 to $200 million in marketing -- money that any other company would have to spend to achieve the same results.

Superior Operating Model is poised to become the DELL COMPUTER (Nasdaq: DELL) of the book world, operating with a financial model that has strong cost advantages over that of its more hidebound competition. keeps less inventory and has only a few buildings to worry about, meaning less money is tied up in working capital and physical infrastructure. Whereas traditional bookstores tie up millions of dollars in inventory to keep their shelves stocked, only orders the book after you decide to purchase it, minimizing the amount of time it takes to convert its sales to cash.

Customer Focus is also directly targeting one of the best segments of the book-buying public, college-educated computer users, a demographic responsible for a large percentage of total book sales. It is literally skimming the cream off the top of the book-buying public, as this is one of the few groups of repeat book buyers. Additionally,'s user-generated book reviews on its website actually promote customer demand among those who are only browsing.

Rapid Growth

Sales in fiscal 1996 were $15.8 million with $8.5 million coming in the fourth fiscal quarter. Recent first quarter results for 1997 showed revenues of $16 million, topping what the company generated in sales in the entire prior fiscal year and doubling the fourth quarter. A nice slug of cash from the offering should give the working capital to extend this sales momentum as it increases its marketing efforts.

What Does It Mean?

Although the valuation of about 14 times trailing sales seems very high, as long as investors are prepared for future operating losses there does not seem to be a lot of immediate bad news that could happen to the company. Competitive pressures from Barnes & Noble are overdone, to say the least. Although Barnes & Noble certainly enjoys a size advantage, its distribution centers are designed to deliver many books to a few retail locations, not a few books to many retail customers. It will take time before Barnes & Noble can effectively compete with on the direct sales level. If you look at based on its first quarter revenue run-rate of $64 million and build in some growth assumptions through the year because of the inevitable marketing effort that will come, the trailing sales multiple drops to 3 to 5 times by the end of the year.

WHAT HAPPENED TO THE STOCKS? was down $4 1/2 to $24 3/4 from its opening price of $29 1/4 this morning, though it was still up $6 3/4 from its $18 initial public offering level. Barnes & Noble was up $2 to $41, possibly benefiting from all of the attention being paid to online booksellers.