Wednesday, October 7, 1998
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An Investment Opinion
by Dale Wettlaufer

Bookselling Landscape Shifts

It's been a while since we've talked about Amazon.com (Nasdaq: AMZN) in this column, but a development out of Germany and New York City has caught our attention. Barnes & Noble (NYSE: BKS) yesterday announced that it has sold a 50% equity stake in its barnesandnoble.com online bookseller to German media giant Bertelsmann. Bertelsmann is the largest publisher of books in the world as parent of Random House and Bantam Doubleday Dell, as well as numerous smaller publishing outfits. The company is also not just some Heinrich-come-lately in the online world, having a 45% interest in AOL Germany, a joint venture in AOL France, a stake in America Online (NYSE: AOL) itself, and numerous other online ventures. In other words, this changes the competitive landscape in the online bookselling world.

What does this mean for Amazon, which is down $15 5/16 to $93 this morning? Just because a publisher owns one of its larger competitors doesn't really do that much to or for Amazon, but if it's a deep-pocketed publisher that has experienced tons of success in the online world and isn't just making a half-hearted attempt at setting up a Web presence, then you've got to think a little harder about the potential consequences for Amazon.com. In a vacuum, Amazon.com would keep growing its mindshare and get to the point where its infrastructure costs and marketing costs are covered, and it is generating excess cash off a large capital base. All the while, its highly negative cash conversion cycle has allowed the company to do this without diluting existing investors in the company. All the other competitors would be generic compared to Amazon.com.

With a highly determined competitor in the game, this changes. It's not a vacuum as much today as it was yesterday. As a bonus, what if barnesandnoble.com can use Barnes & Noble's more than 1,000 stores (under various brands) as an added weapon? Same-day delivery of popular titles certainly doesn't hurt prospects. Also, what if Bertelsmann comes to realize how bad the economics of the publishing business are at present? The terms that publishers extend to retailers are ridiculous -- the incentive to move merchandise is not very strong for retailers. If you can't sell a book, you chuck it. That regime has given Amazon a competitive advantage in that the competition doesn't have the incentive to move inventory as quickly as possible. If the publishing leader makes changes to that model, then Amazon will be dealing with sharper competition. It won't hurt Amazon's competitors, it'll make them smarter. Different rules won't manifest themselves tomorrow. They'll show up years in the future -- in the out-years of the Amazon.com valuation model. And that will manifest itself in today's valuation of Amazon.com -- to its detriment, I believe.


Internet music retailer N2K Inc. (Nasdaq: NTKI) spun up $1 9/16 to $6 1/16 after The Wall Street Journal reported that the operator of online music store Music Boulevard will be acquired by rival CDnow Inc. (Nasdaq: CDNW). The Journal, quoting "people with knowledge of the talks," said the merger will be a stock swap, and the combined company will operate under the CDnow name.

AT&T (NYSE: T) picked up $15/16 to $57 15/16 as the nation's largest long-distance company has launched a new brand, Lucky Dog Telephone Co. This will permit AT&T to compete against "dial-around" phone carriers, such as rival MCI WorldCom's (Nasdaq: WCOM) Telecom USA, which have taken business from the telecommunications giant by encouraging customers to dial a special code (i.e. 10-10-321) to bypass their home carrier. Lucky Dog's code is 10-10-345. MCI WorldCom also rose $1 1/8 to $46 1/16.

Internet domain names registrar Network Solutions (Nasdaq: NSOL) gained $2 1/4 to $38 1/2 after announcing that the U.S. government has extended its contract as the exclusive wholesaler of .com, .net, and .org domain name registrations through September 2000. The company has agreed to work with the government to transition to a shared registration system beginning March 31 of next year and completing full implementation by June 1.

The nation's second-largest credit card issuer MBNA Corp. (NYSE: KRB) charged up $2 5/8 to $16 3/8 after reporting third quarter earnings of $0.27 a share, up from $0.21 a year ago and in line with analysts' estimates. Managed loans grew by $3.5 billion to $56.3 billion from the previous quarter.

Cellular phone and telecommunications equipment company Motorola (NYSE: MOT) rang up another $2 to $43 13/16 in the wake of reporting fiscal Q3 EPS of $0.07 before charges, down from the $0.51 earned last year but $0.06 above analysts' downwardly revised mean estimate.

Enterprise software company Oracle Corp. (Nasdaq: ORCL) regained $11/16 to $23 7/8 as the company called a Reuters report about potential price cuts "highly misleading" and said that there was no change in the market for database software. The company stressed that it has used the same wording it used to describe its business environment in its 10-Q for the past 11 years.

Electronic connectors maker AMP Inc. (NYSE: AMP) rallied $1 3/8 to $38 1/8 as its efforts to block an unsolicited takeover bid by AlliedSignal (NYSE: ALD) may be foiled now that the House in its home state of Pennsylvania passed conflicting amendments on corporate takeovers, supporting both companies' arguments. The ball is now in the Pennsylvania Senate's court. If the Senate makes any changes to the bill, it will go back to the House for reconsideration.

Stocks of Japanese companies traded higher this morning on the back of a 803.97 point, or 6.2%, surge in the Nikkei index on expectations that the government would approve guidelines for recapitalizing banks to help stimulate the country's troubled economy. Toyota Motor Corp. (Nasdaq: TOYOY) sped up $4 13/16 to $48 13/16, Bank of Tokyo-Mitsubishi (NYSE: MBK) added $7/8 to $7 5/8, Kyocera Corp. (NYSE: KYO) jumped $2 3/4 to $45 1/4, and Tokio Marine & Fire Insurance Co. (Nasdaq: TKIOY) was lifted $4 11/16 to $49 1/16.

BMC Software (Nasdaq: BMCS) ticked up $1 7/16 to $42 3/4 after A.G. Edwards raised its rating on the software developer to "buy" from "accumulate," based on its stock price. A.G. Edwards set a new price target of $58.


Chipmaker Advanced Micro Devices (NYSE: AMD) slipped 3/4 to $17 5/8 despite reporting a surprise $0.01 per share profit for fiscal Q3, ahead of the $0.11 per share loss expected by the Street. While folks normally prefer upside earnings surprises to the downside variety, investors may be reacting to a continued lack of visibility and accurate guidance from AMD. For more on the Q3 results, see this morning's Breakfast With the Fool.

Network security products maker Symantec Corp. (Nasdaq: SYMC) slid $1 to $9 9/16 after saying its fiscal Q2 earnings will be $0.18 per share (before charges), which is half of the Street's mean estimate of $0.36 per share. The company added that its revenues in the period would be roughly 10% shy of analysts' expectations. SG Cowen lowered its rating on the firm to "neutral" from "buy."

Internet sports media company SportsLine USA (Nasdaq: SPLN) was sacked for $5 3/16 to $11 3/16 after pre-announcing a fiscal Q3 loss of $0.41 per share, which the company says is in line with analysts' estimates. However, revenues will be lower than expected due to weak advertising revenues in the period. Separately, SportsLine said it has expanded its partnership with America Online (NYSE: AOL) through a new three-year agreement with the online services conglomerate.

Internet service provider MindSpring Enterprises (Nasdaq: MSPG) was bounced $4 to $29 1/2 after CFO Michael Misikoff said he will resign his post sometime later this year.

Cereals and Gatorade maker Quaker Oats Co. (NYSE: OAT) was toasted $3 7/16 to $57 11/16 after falling 5% yesterday following downgrades from Donaldson, Lufkin & Jenrette and Goldman Sachs. Today, The Wall Street Journal added fuel to the fire by giving the analysts at the two brokerages some ink in its "Heard on the Street" column.

Supermarket operator Winn-Dixie Stores (NYSE: WIN) surrendered $3 1/8 to $32 3/16 after announcing fiscal Q1 EPS of $0.10, down from the $0.32 earned a year ago and below the Street's mean estimate of $0.29. The company said it invested heavily in promotional activities during the quarter but failed to control costs.

Drugmaker Eli Lilly and Co. (NYSE: LLY) slipped $3 9/16 to $73 15/16 after the FDA denied the company's application to have its Zyprexa schizophrenia drug approved as an additional treatment for the disease state of bipolar disorder.

Oil and gas pipeline and drilling platform constructor Global Industries Ltd. (Nasdaq: GLBL) sank $1 9/16 to $7 9/16 after saying lower activity levels and recent storms in the Gulf of Mexico will result in fiscal Q2 EPS about 40% below the $0.21 earned last year. The First Call mean estimate had called for EPS of $0.21 in the period. The company added that its fiscal 1999 earnings will probably be "the same or slightly lower" compared to last year's $0.61 per share.

Solid waste removal company Waste Management (NYSE: WMI) was trashed for a $7 3/16 loss to $40 as Deutsche Bank Securities cut the firm's fiscal 1999 earnings estimate to $3.05 per share from $3.10 per share and trimmed its price target to $61 per share from $71 per share.

Canadian-based funeral home and cemeteries operator Loewen Group (NYSE: LWN) was buried $2 3/4 to $8 7/8 after saying its fiscal Q3 earnings will be "significantly below" the Street's mean estimate of $0.19 per share. The company offered no reason for the shortfall.

Mortgage real estate investment trust IndyMac Mortgage Holdings (NYSE: NDE) dropped another $7/8 to $9 1/8 after BT Alex. Brown and PaineWebber lowered their ratings on the company, which has seen its share price decline following the bankruptcy of fellow mortgage REIT Criimi Mae (NYSE: CMM) earlier this week.

Metal halide lighting products maker Advanced Lighting Technologies (Nasdaq: ADLT) was burned $1 1/32 to $6 after saying its fiscal Q1 EPS will be about 30% to 40% below the $0.17 earned last year, missing the Street's mean estimate of $0.22. Also, the company sees revenues declining to $50 million from $53 million in the previous quarter, as the current international economic environment and introduction costs for a new line of products take their toll.


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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
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last