By Paul Larson (TMF Parlay)
June 23, 2000

Summary: Fools invested in controversial stocks such as Amazon.com need to expect some wild price swings as they take on greater risks in search of greater rewards. However, given the not-particularly-new observations of a few Wall Street suits, today's big drop off still seems a bit baffling.

Amazon.com got pummeled in trading today, down over 20% to a new 52-week low under $33. This also marks the lowest level the stock has seen since late 1998. The primary cause for the decline was comments made by a pair of Wall Street analysts.

One prominent analyst, Mary Meeker of Morgan Stanley Dean Witter, questioned whether or not the company would achieve her revenue estimates for the second and third quarters. Another analyst, Ravi Suria of Lehman Brothers, put out a downright bearish note to Lehman customers calling Amazon's credit worthiness "weak and deteriorating" among other not-so-nice things.

Nearly all of Amazon's $2.137 billion in debt is convertible debt. That is, the debt can be converted into Amazon common stock at various strike prices. The company has several different conversion prices, but the stock is now significantly below all of these conversion levels. If the bonds were due today, the company would have to repay them with cash. Luckily for Amazon, the earliest of these particular bonds do not mature until 2009.

The decreased stock price also reduces the value of the company's equity currency. If the company wanted to sell more stock to raise cash, current shareholders would see the value of their shares diluted much more than they would have a few short weeks ago. Moreover, attracting talented employees with stock options will be much harder if the stock continues to tank.

Not a whole lot has really changed with Amazon's core business over the past 24 hours. Amazon remains the clear leader in the online retailing space, and the rest of the company's business plan appears to be on-track. That is, other than the fact that the company's equity currency simply does not go as far as it once did.

What is quite amazing to watch today is how a handful of people voicing their opinions can greatly affect a large company's stock. None of these opinions, especially the bearish ones coming from Lehman Brothers, are terribly new or original. Many of the exact same thoughts have been printed in several financial rags (namely, Barron's) or even on the Fool's Amazon Discussion Board for many moons. Why investors decided to follow the cues of these few opinions today remains a bit of a mystery.

Your Turn:
Vote your opinion. Where do you think Amazon will be three years from now?

1. Six feet under. The stock will be worthless.
2. Skimping by on what little cash it has left.
3. Healthily operating, but generating only a small profit.
4. Dominating the online retail space, creating copious cash flow.

Next Steps:

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