Monday, July 6, 1998
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An Investment Opinion
by Dale Wettlaufer

Amazon Price Right?

Amazon.com (Nasdaq: AMZN) leapt $8 to $132 in yet another spectacular morning of trading for the online retailing pioneer. In less than 30 trading sessions, the stock has surged more than 80 points, tacking on more than $3.75 billion in market capitalization to a prior market cap that many short-sellers thought was insane to begin with. The company now has a market cap in excess of $6 billion, which doesn't even count a bunch of options that go "in the money" each quarter and with each large advance in the company's share price.

The more value-oriented investor probably started looking askance at the market value of Amazon.com more than a couple ticks ago, wondering if it is past intrinsic value. For our purposes of intrinsic value, there are two definitions: 1) The specific current price that will yield an investment performance in line with a market average over a future time period, and 2) the net present value of all the cash that can ever be taken out of the business. If the price of the stock is set so that it qualifies for the second definition, theoretically, it should meet the first definition. There's no guarantee that those two will always match, though.

Current Amazon.com bears point to the company's losses, wondering how a company could be priced at twice the market cap of more established competitors like Barnes & Noble (NYSE: BKS) and Borders Group (NYSE: BGP). It's pretty simple, though. Investment in working capital at the established chains is more intensive than at Amazon, which means that less shareholders' cash will be tied up in slow-turning inventory while vendors such as Simon & Schuster are kind enough to finance the booksellers' inventory at 45-90 days. Amazon has a competitive advantage because it can turn its working capital assets more quickly than its competitors. Amazon can also turn its fixed assets more quickly. (An investor has to bring the value of all these companies' lease obligations onto the asset side of the balance sheet.)

All of this matches what investors want to see -- less capital invested in inventory and receivables and more capital invested in building the brand name. However, Amazon is being accorded a huge valuation bonus because of its pioneer status. Barnes & Noble is on the prowl, though, with advertisements that come at you with a pretty effective message. Borders is out there, too, but it appears that it is still tweaking things before it gets going with marketing its Web store. Amazon is excellent at execution almost every time a customer orders a book, and now, CDs. That's a crucial part of online retailing. B&N stumbles a little more often, according to our unscientific research. However, the others can learn how to execute, if they are worth their salt as major retailers.

That being the case, investors might be overestimating the competitive position of Amazon down the road. To wit, the company may not be able to earn a super-normal return on invested capital for as many years as investors expect, especially in other retailing segments where receivables terms aren't set as irrationally and anachronistically as in the publishing industry. Amazon bulls should probably take stock here and reassess what they expect out of the company. It's a big wide world out there with lots of opportunities for Amazon to exploit, but at a certain price you can can get far ahead of intrinsic value.


Internet content aggregator and portal company Lycos Inc. (Nasdaq: LCOS) rose $10 7/16 to $89 1/2 after setting a two-for-one stock split, payable in August. Other Internet-related firms gained as well. Excite (Nasdaq: XCIT) picked up $4 3/4 to $103 11/16, Netscape Communications (Nasdaq: NSCP) tacked on $2 7/16 to $43 3/4, NetGravity (Nasdaq: NETG) gained $9 1/4 to $28 3/8, and USWeb Corp. (Nasdaq: USWB) moved up $3 7/8 to $29.

PC and computer products reseller Egghead.com Inc. (Nasdaq: EGGS) added $2 9/16 to $11 9/16 after saying revenues from its Internet auction site rose more than 95% sequentially in the fiscal quarter ended June 27 to $13.7 million. The number of registered bidders using the site has increased from 29,000 to 168,000 over the past nine months, the firm said.

Zapata Corp. (NYSE: ZAP) surged $2 5/8 to $12 1/2 after saying it will split into two publicly traded companies. The new Zapata Corp. will include the company's marine protein and food packaging businesses, while ZAP Corp. will operate the firm's Internet operations (which, alas, does not include Excite (Nasdaq: XCIT)). In connection with the spilt, ZAP will acquire or invest in 21 Internet content and e-commerce sites under its "portal" strategy with the goal of becoming "one of the largest Internet companies in the world."

Internet software developer Inktomi Corp. (Nasdaq: INKT) climbed $10 to $58 after Goldman Sachs started coverage with a "market outperform" rating and Hambrecht & Quist assigned the firm a "buy" rating. Both brokerage firms were underwriters for Inktomi's June 10 initial public offering.

Managed care provider Oxford Health Plans (Nasdaq: OXHP) gained $1 1/16 to $16 on speculation by some analysts that the firm may be a buyout candidate based on its low valuation levels and strong name brand.

Baan Co. NV (Nasdaq: BAANF) rose $3 7/8 to $40 7/8 after the Dutch maker of enterprise application software said it will simplify its organizational structure and reshuffle responsibilities among some of its top-tier managers. According to the company, Baan will be more clearly delineated from the separate Baan Investment BV, which will be renamed Vanenburg Ventures BV. Baan Investment owns a 39% stake in the company.

Theragenics Corp. (Nasdaq: THRX) bounced back $1 21/32 to $16 15/32 after the maker of implantable radiation devices for treating prostate cancer fell 55% Thursday on concerns over rising competition.

S3 Inc. (Nasdaq: SIII) advanced $7/16 to $5 15/32 after Diamond Multimedia (Nasdaq: DIMD) said it will use the company's Savage 3D graphics accelerator technology for a new high-performance graphics add-in card to be available by Christmas 1998.

Blood type identification systems maker Immucor Inc. (Nasdaq: BLUD) gained $1 1/2 to $10 after the Food and Drug Administration approved the company's ABS2000 product, which is a fully automated device designed for blood banks.

Enterprise decision support systems (DSS) software developer MicroStrategy Inc. (Nasdaq: MSTR) moved up $1 1/2 to $27 3/4 after Friedman, Billings, Ramsey started coverage with a "buy" rating and Merrill Lynch assigned the company a "near-term accumulate" rating. Both investment banks were underwriters for MicroStrategy's initial public offering on June 11.


Birmingham, Alabama-based regional department store company Proffitt's Inc. (NYSE: PFT) lost $4 1/4 to $36 7/16 after announcing that it will merge with Saks Fifth Avenue parent Saks Holdings (NYSE: SKS) in an all-stock deal valued at around $2.1 billion. Saks gained slightly, adding $3/16 to $29 3/16. Saks shareholders will receive 0.82 Proffitt's share for every Saks share, which values Saks at $33.36 per share, a 15% premium to its last closing price of $29. After the merger, Saks Fifth Avenue will become a subsidiary of Proffitt's Inc., whose corporate name will be changed to Saks Inc. Click here for more about the merger.

Healthcare products maker Johnson & Johnson (NYSE JNJ) fell $1 1/16 to $72 5/8 after Prudential Securities lowered its rating on the company to "hold" from "buy."

San Francisco-based investment bank Hambrecht & Quist (NYSE: HQ) yo-yoed down $1 1/8 to $36 5/8 amid speculation over whether the company will be acquired by a larger entity such as Credit Suisse First Boston or Deutsche Bank Securities.

Product design software developer Structural Dynamics Research Corp. (Nasdaq: SDRC) plunged $4 3/8 to $17 after warning it expects second quarter earnings will be less than analysts' expectations. The company said earnings will be roughly $0.14 per average common share. Analysts had predicted EPS of $0.35. The company said it is now "more cautious" in its business outlook for the rest of the year.

Consumer and commercial finance company ContiFinancial Corp. (NYSE: CFN) sank $6 3/8 to $18 7/8 after announcing it expects Q1 EPS of around $0.13, compared with last year's $0.59 and the analysts' mean estimate of $0.60.

Lubricant producer WD-40 Co. (Nasdaq: WDFC) dropped $1 9/16 to $26 5/16 after reporting after last Thursday's close Q3 earnings of $0.26 a share, down from $0.33 in the year-ago period. The analysts' mean estimate was $0.37, according to First Call.

Power company Illinova Corp. (NYSE: ILN) lost $2 1/4 to $28 1/8 on news it expects a significant loss for the first half of the year and "little in the way of earnings for 1998," Reuters reported. The company attributed the loss to higher purchase prices for replacement power and greater than previously projected spending for recovery efforts at its Clinton nuclear power station.

Nam Tai Electronics (Nasdaq: NTAIF), whose China-based manufacturing operations serve original equipment manufacturers, shed $2 to $12 3/4 after announcing that it expects that the worse-than-expected "Asian Flu" will negatively impact the company's business. The company is anticipating a 15% to 25% drop in revenues for the year compared with previously expected double-digit growth. Nam Tai also announced it has doubled the number of shares it plans to buy back to 2 million shares.

Japanese electronics giant Hitachi Ltd. (NYSE: HIT) was hit for a loss of $2 7/8 to $63 13/16 after Standard & Poor's lowered the long-term ratings of the company to double-"A" from triple-"A" and removed the ratings from CreditWatch, where they had been placed on June 15.


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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last