Thursday, July 22, 1999
DJIA 10964.16 -38.62 (-0.35%) S&P 500 1365.27 -14.02 (-1.02%) Nasdaq 2705.73 -56.04 (-2.03%) Russell 2000 451.83 -2.80 (-0.62%) 30-Year Bond 90 2/32 -26/32 5.97 Yield

An Investment Opinion
by Louis Corrigan

Amazon's Long-Term Investing

Shares of leading online retailer Amazon.com (Nasdaq: AMZN) plunged $14 13/16 to $110 5/8 this morning following last night's report of roughly in-line second quarter results and warnings about steepening losses as the company spends heavily to build out its distribution infrastructure. The sell-off follows a pattern set last quarter when the stock rallied to new highs before the earnings report only to be crushed by the projection of increased losses to come. Amazon shares had recently rallied 50% off the mid-June low of around $90 a share.

Second quarter revenues soared 171% to $314.4 million from $116.0 million a year ago. (They were up just 7% from the first quarter's $293.6 million.) That was reportedly in the middle of the $306 million to $325 million range projected by Wall Street analysts, though some may have been looking for an even higher number. Including $55.2 million in costs related to mergers, acquisitions, and stock-based compensation, Amazon lost $138 million in the period, or $0.86 per share. On an operating basis, the net loss amounted to $82.8 million, or $0.51 per share, in line with expectations.

The relatively modest sequential revenue uptick owes something to the fact that Amazon did not add any new product categories or "verticals" during the quarter. In the past week, however, it launched stores devoted to toys and consumer electronics, two categories that add about $107 billion in potential U.S. market opportunity to Amazon's targeted fields, bringing its total targeted U.S. market opportunity to about $157 billion, or $385 billion on a worldwide basis. Chair/CEO Jeff Bezos noted that Amazon simply won't be able to manage these new ventures with maximum efficiency at first. Still, these new verticals should position Amazon well for holiday sales. CFO Joy Covey indicated on the conference call that the company anticipated sequential third quarter revenue growth to exceed the second quarter's 7% rate.

What's also spooked some short-term investors is the rate at which Amazon is adding distribution capacity -- and the cost of doing so. During the second quarter, Amazon announced plans to open three new distribution centers (two in Kentucky and one outside Atlanta) to improve customer service in the Midwest and Southeast. The total buildout of the new, highly automated facilities this year will cost a staggering $300 million and leave Amazon with four million square feet of space in seven facilities by the holiday season -- a tenfold increase in just one year.

Adding capacity before it's absolutely needed punishes operating margins in the short term. Yet, Bezos has repeatedly stated that Amazon is aiming to provide the best customer service possible, and this buildout makes absolute sense in that context and in the context of Amazon's increasing market opportunity. In that regard, the most impressive second quarter stats are that Amazon added 2.3 million new customer accounts during the period, raising its total to 10.7 million. A year ago, it had just 3.1 million customers. So far this year, it's added 4.5 million new accounts. And 70% of orders placed during Q2 came from repeat customers, an uptick from recent quarters. This stunning growth and the repeat business speak to how spectacularly Amazon is succeeding in satisfying customers, who tell their friends about their great experience.

Amazon's goal is to increase the value of its customers by continuing to add new verticals. The metrics that matter, then, are the growing number of customers, the growing number of product categories, and the continued dedication, foremost, to customer service. By all of these measures, Amazon continues on course. Short-term losses should be a non-issue for Amazon investors. Bezos & Co. are building a business for the long, long haul.


Enterprise network security software developer Network Associates (Nasdaq: NETA) rose $1 5/16 to $18 3/8 after reporting a Q2 loss of $1.05 per share, which was in line with the downwardly revised First Call mean estimate. Channel inventories, which have plagued the company recently, appear to be "at the right level" of 8 to 12 weeks, CEO Bill Larson reportedly said during a conference call. The company also said its NAI Labs security research unit has won two federally funded contracts to develop next-generation intrusion detection technologies.

Communications electronics semiconductor systems supplier Conexant Systems (Nasdaq: CNXT) connected for a $9 gain to $67 after posting fiscal Q3 EPS of $0.24, up from $0.08 last quarter and $0.05 ahead of the IBES mean estimate. Revenues increased 20% sequentially to $380 million, thanks to 76% sequential sales growth for the firm's network access products. The company forecasted 10% sequential revenue growth for Q4 and higher operating margins than the 8% turned in during Q3.

Cancer and autoimmune diseases treatment developer Coulter Pharmaceutical (Nasdaq: CLTR) gained $3 1/8 to $27 after the FDA granted priority review status to its Bexxar radioimmunotherapy product for certain types of non-Hodgkin's lymphoma, which is being co-developed and marketed by SmithKline Beecham (NYSE: SBH).

Enterprise storage management software firm Legato Systems (Nasdaq: LGTO) was lifted $6 11/16 to $81 1/4 after posting Q2 EPS of $0.29 (excluding merger-related charges), up from $0.09 a year ago and ahead of the First Call mean estimate of $0.25. Revenues rose 65% year-over-year and 20% sequentially to $62 million. The company also set a two-for-one stock split payable Aug. 16.

Internet relationship management software firm Vignette Corp. (Nasdaq: VIGN) moved ahead $8 3/16 to $75 3/4 after posting a Q2 loss of $0.22 per share (excluding merger charges and amortization related to stock options), which was not quite as bad as the loss of $0.25 per share expected by the analysts surveyed by IBES. The company said it added 67 new customers in the quarter, including Compaq Computer (NYSE: CPQ) and Time Warner's (NYSE: TWX) Turner Entertainment Group.

Servers and visual workstations maker Silicon Graphics (NYSE: SGI) advanced $1/2 to $16 1/2 after reporting fiscal Q4 EPS of $0.12 (excluding a one-time gain), well above the Zacks analysts' estimates range of a loss of $0.13 per share to earnings of $0.09. Revenues rose 7% from a year ago to $829 million thanks to "strong momentum" for its Origin servers.

Local telecommunications company Cincinnati Bell (NYSE: CSN) rose $1 1/4 to $21 1/16, erasing some of yesterday's 16% loss, as investors warmed up to its proposed $3.2 billion acquisition of competitive local exchange carrier IXC Communications (Nasdaq: IIXC). IXC added another $2 1/16 to $41 13/16 this morning.

Tissue, personal care, and healthcare products company Kimberly-Clark (NYSE: KMB) rolled up a $3 3/8 gain to $60 3/8 after reporting Q2 EPS of $0.72 (before one-time items), up from $0.58 a year ago and ahead of analysts' mean estimate of $0.69. The company also said it has restated financial results for 1995 through the first quarter of 1999 following a SEC review, increasing the company's cumulative earnings for the period by approximately $0.20 per share. The company recorded additional depreciation of about $0.01 per share in the 1999 second quarter and will record similar charges of around $0.03 per share over the balance of 1999 and a similar amount next year.

Earnings Movers

ANTEC Corp. (Nasdaq: ANTC) up $3 5/16 to $39 5/8; Q2 EPS: $0.21 vs. $0.09 last year; estimate: $0.19

Asymetrix Learning Systems (Nasdaq: ASYM) up $1 19/32 to $8 29/32; Q2 EPS: loss of $0.14 vs. loss of $0.32 last year; estimate: loss of $0.14

Basin Exploration (Nasdaq: BSNX) up $1 1/4 to $19 3/4; Q2 EPS: $0.23 (no income tax provision) vs. $0.05 last year; estimate: $0.08

CommScope (NYSE: CTV) up $3 1/16 to $33; Q2 EPS: $0.33 vs. $0.17 last year; estimate: $0.29

Deltek Systems (Nasdaq: DLTK) up $2 7/16 to $12 3/16; Q2 EPS: $0.25 (excluding charges) vs. $0.18 last year; estimate: $0.22

Englehard Corp. (NYSE: EC) up $1 1/16 to $22; Q2 EPS: $0.41 vs. $0.35 last year; estimate: $0.37

ESS Technology (Nasdaq: ESST) up $1 5/16 to $13 3/4; Q2 EPS: $0.18 vs. loss of $0.32 last year; estimate: $0.14

Harmonic (Nasdaq: HLIT) up $12 1/2 to $77 1/2; Q2 EPS: $0.25 vs. loss of $0.25 last year; estimate: $0.13

Peregrine Systems (Nasdaq: PRGN) up $2 1/8 to $28 3/8; fiscal Q1 EPS: $0.14 (excluding charges) vs. $0.08 last year; estimate: $0.12

Providian Financial Corp. (NYSE: PVN) up $5 1/4 to $98 3/8; Q2 EPS: $0.87 vs. $0.43 last year; estimate: $0.85

Zebra Technologies Corp. (Nasdaq: ZBRA) up $2 7/8 to $43 3/8; Q2 EPS: $0.57 (excluding charges) vs. $0.45 last year; estimate: $0.52


Xerox Corp. (NYSE: XRX) descended $4 1/8 to $51 1/4 this morning as the company turned in Q2 EPS of $0.62 per share, better than last year's pre-charge $0.54 but flat with market projections. "Any continuation of the current weak European exchange rates, together with ongoing weakness in Brazil and Japan, make this earnings growth a much more challenging objective for the remainder of the year,'' said CEO Rick Thoman.

Online services provider America Online (NYSE: AOL) dialed up a loss of $2 7/16 to $112 5/8 this morning. The company last night turned in fiscal Q4 earnings of $156 million, or $0.13 per share before charges, up from $58 million, or $0.05 per share, from the same quarter a year ago. That was ahead of the analysts' mean estimate of $0.11 a share. For the full fiscal year, revenues reached $4.8 billion, compared with $3.1 billion the year before. Earnings totaled $396 million, or $0.34 a share, before one-time items. More on the story can be found in this morning's Breakfast With the Fool.

Telecommunications billing and customer services company International Telecommunication Data Systems (Nasdaq: ITDS) fell $5 3/8 to $10 5/16 this morning. The company agreed to a per-subscriber payment plan -- instead of the previous fixed monthly fee -- with Nextel Communications (Nasdaq: NXTL) and said Q2 EPS was $0.26, a penny better than projected. Deutsche Banc Alex. Brown cut its rating on the stock to "buy" from "strong buy."

Business system software and services company Compuware Corp. (Nasdaq: CPWR), which reported fiscal Q1 EPS in line with estimates at $0.24, retreated $7 5/8 to $26. Chairman and CEO Peter Karmanos Jr. told investors to expect a 35% to 40% growth rate for full-year fiscal 2000, in line with Wall Street's earnings projections. At least two brokerages cut their ratings on the stock this morning.

High-tech knickknacks retailer Sharper Image Corp. (Nasdaq: SHRP), which announced the offering of 3 million shares of company stock to the public -- a 33% boost to the total currently outstanding -- shed $1 1/4 to $10 11/16 this morning.

Heavy-duty construction equipment company CMI Corp. (NYSE: CMI) broke down $1 1/16 to $9 11/16 despite announcing that Q2 EPS was $0.24, better than Wall Street's two-analyst $0.22 estimate and $0.04 ahead of last year's mark. CEO Tom Engelsman said the company is pursuing "several acquisition opportunities" both here and abroad. Backlog fell slightly from year-ago levels; Engelsman attributed that to increased production efficiency.

Analog integrated circuits and power and signal discrete semiconductors company Microsemi Corp. (Nasdaq: MSCC) slowed $2 1/2 to $7 9/16 after the company said to expect fiscal Q3 EPS of between $0.04 and $0.06, well off First Call's two-analyst estimate of $0.17 and below last year's $0.20. "Lower bookings in the commercial satellite market, as well as pricing pressures in several other markets, could continue or deteriorate further," said Chairman and CEO Philip Frey Jr.

Finnish mobile phone maker Nokia (NYSE: NOK) lost $4 11/16 to $89 15/16 this morning. The company reported second-quarter net profits of 581 million euros, just squeaking past reported analyst estimates but coming in 59% above year-ago levels. The company said sales growth, driven by strong cellular phone sales, may exceed its targeted 25% to 35% figure.

Earnings Movers

Adaptec (Nasdaq: ADPT) down $7/8 to $39 1/8; fiscal Q1 EPS: $0.44 (before gain) vs. $0.12 last year; estimate: $0.39

Becton Dickinson & Co.
(NYSE: BDX) down $1 13/16 to $26 11/16; fiscal Q3 EPS: $0.38 vs. $0.37 last year; estimate: $0.38

Budget Group (NYSE: BD) down $2 1/8 to $10 5/16; Q2 EPS: $0.42 vs. $0.33 last year; estimate: $0.42

General Semiconductor (NYSE: SEM) down $1 3/8 to $7 5/8; Q2 EPS: $0.14 vs. $0.19 last year; estimate: $0.15

i2 Technologies (Nasdaq: ITWO) down $9 21/32 to $32 13/16; Q2 EPS: $0.11 vs. $0.09 last year; estimate: $0.11

Network Solutions (Nasdaq: NSOL) down $4 5/8 to $72 5/8; Q2 EPS: $0.17 vs. $0.07 last year; estimate: $0.16

THQ Inc. (Nasdaq: THQI) down $1 13/16 to $30 7/8; Q2 EPS: $0.36 (before charges) vs. $0.25 last year; estimate: $0.32

Stryker Corp. (NYSE: SYK) down $6 3/8 to $62 3/8; Q2 EPS: $0.38 vs. $0.36 last year; estimate: $0.38


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