Cash burn is no longer in style, and there has been a massive financing drought for those companies failing to find the path to profitability. While the Internet's largest retailer appears to be on the right track, another major online merchant looks like it is quickly headed toward the dot-com graveyard.
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The dot-com graveyard is a place no investor wants to see his investment headed. However, that's exactly where many online companies have gone. Headstones include Pets.com, Streamline, Living.com, Mortgage.com, and Priceline's (Nasdaq: PCLN) Webhouse gas and groceries service; all have abruptly ceased operations and closed shop over the past several months. The list of dead or dying Internet-focused companies is long and growing. The issue of survivability is a very salient one for those investing in the online space. Wall Street is now rightfully demanding that companies show a significant chance of profitability before throwing any more capital their way. Companies that operate where cash burn is an open-ended situation are finding this financing drought especially difficult. In the most recent Motley Fool Research Internet Report -- Online Merchants, we took an in-depth look at how four of the largest online merchants are doing and their prognosis for survival in 2001. As well as examining the industry as a whole, we looked at the positioning and cash flow trends at Amazon.com (Nasdaq: AMZN), BarnesandNoble.com (Nasdaq: BNBN), buy.com (Nasdaq: BUYX), and eToys (Nasdaq: ETYS). By far, the company with the best positioning and cash flow picture in the group was Amazon. While Amazon is still unprofitable, the company is making some great strides toward increasing its efficiency and it's well along the path to profitability. Check out these figures:Amazon.com
($ in millions) Q1 2000 Q2 2000 Q3 2000
Revenue 573.9 577.9 637.9
Gross Profit 128.1 136.1 167.3
Adjusted Net Income* (121.5) (115.7) (77.1)
Operational Cash Flow (320.5) (70.2) (3.7)
Gross Margin 22.3% 23.5% 26.2%
Adjusted Operating Margin* (17.3%) (15.5%) (10.7%)
Adjusted Net Margin* (21.2%) (20.0%) (12.1%)
* Adjustments exclude intangibles, stock-based compensation, merger,
acquisition, and investment-related costs.
Clearly, if these trends continue, Amazon will not only be around next Christmas, but for many holidays to come. The company's gross margins are on the way up, and its operating losses as a percentage of sales continue to shrink as the fixed overhead costs are spread over a larger and larger sales base. Perhaps more importantly, the company's operating cash flow is on the verge of turning positive, and positive cash flow is often a preamble to real profitability.
Amazon's guidance for the current quarter and all of 2001 is also encouraging. The company said it should be strongly cash flow positive for the current quarter as well as for the last three quarters of 2001. The company expects to end the fourth quarter with over $1 billion in cash and equivalents and should end the first quarter with roughly $700 million in cash.
The end of the first quarter is a key point for Amazon's cash balance. The company looks to be "off to the races" from that point forward, with the cash coming in from operations exceeding that being burned. That means Amazon should not need any further financing to stay in business through next year's holidays.And then there's eToys
On the other end of the spectrum we find eToys (Nasdaq: ETYS). Like Amazon and the rest of the pure-play online merchants, eToys is in the red. However, eToys is nowhere near being profitable and is burning cash at an amazing clip.
eToys ($ in millions) Calendar Quarter Q1 2000 Q2 2000 Q3 2000 Revenue 23.0 24.9 26.0 Gross Profit 4.7 5.4 5.8 Adjusted Net Income* (36.6) (45.4) (41.8) Operational Cash Flow (79.5) (37.4) (35.0) Gross Margin 20.5% 21.9% 22.5% Adjusted Operating Margin* (158.1%) (177.7%) (155.5%) Adjusted Net Margin* (159.2%) (182.4%) (160.8%) * Adjustments exclude intangibles, stock-based compensation, merger, acquisition, and investment-related costs.While some trends, such as gross margin and operating cash flow, are in the right direction, the magnitude of eToys' losses relative to its sales has to throw up a major red flag. The company is essentially spending three dollars for every dollar in revenue it brings in. Obviously, this is not a sustainable situation. The effect of these losses on eToys' balance sheet has been painfully clear:
eToys ($ in millions) Calendar Quarter Q4 1999 Q1 2000 Q2 2000 Q3 2000 Cash & Equivalents 219.9 139.6 162.1 111.4 Long-Term Debt 157.7 160.5 236.6 231.2 Net 62.2 (20.9) (74.5) (119.8)
Assuming that eToys continues to burn cash at a similar rate and is not able to secure any further financing, it appears the company will run out of cash sometime next spring. That means there is a good chance that this will be the last holiday season for one of the Internet's largest toy stores.
Even if eToys does manage to secure more financing sometime in 2001 (with Intel (Nasdaq: INTC) as a major shareholder, this is within the realm of possibilities), it looks like it will only delay the inevitable. That is, unless the company takes some extremely drastic measures to increase profitability. Personally, I don't see how eToys will be able to repair its business model in such a short period of time. If the company were able to do the miraculous and extensively chop costs, it would severely damage its long-term positioning. At this point, I just don't think that eToys is a viable business.
Last Friday's news that eToys was looking at "strategic alternatives" and was planning on laying off a large number of employees come January proves that the grim prognosis we made in the latest Internet Report and again here is on target. Holiday sales have been soft at the online toy store, and the company is only expecting sales of $120 to $130 million in the fourth calendar quarter, about half of previous estimates. I'll make a bold prediction here -- eToys will be out of business by Easter, if not sooner.
A quote I love to use says, "If you don't change your direction, you will end where you are headed." This is especially relevant to both Amazon and eToys investors today. Both are in the red, but one appears to be headed toward profitability while the other is headed toward the dot-com graveyard.
Related Links:
Assessing Internet Stocks in 2001
Amazon Achieves Milestones
Time Running Out for E-Tailers
Blue Christmas for eToys
More Stock Research:
Motley Fool Research Internet Report -- Online Merchants
Motley Fool Research -- Amazon
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