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Remember the days when (Nasdaq: AMZN) could announce that it was opening a new store -- let's say Lawn & Patio, just to be perverse -- and the stock would rocket up another 15%? Well, in case you hadn't noticed, those days are no more. Amazon reported selected holiday season data on Monday. The stock received a 15% bump immediately following the report, but then slid right back down, opening Tuesday below Monday's close.

We can attribute the retreat partly to a parade of bearish analyst comments. UBS Warburg analyst Sara Farley maintained a "hold" rating, but said slowing revenue growth boded badly for the future. Three other analysts downgraded the stock, and there was price-target cutting all around.

Amazon reported quarterly revenue for the holiday season in excess of $960 million, which is on the low end of projections. Paul Larson, who covers Amazon for Motley Fool Research, had hoped to see $1.2 billion. While not outstanding, Amazon's sales weren't too bad for a year in which most retailers, from Wal-Mart (NYSE: WMT) to Barnes & Noble (NYSE: BKS) to Sears (NYSE: S), have fallen short of revenue expectations.

In my opinion, these analysts didn't give enough attention to Amazon's cash situation, which looked pretty good. It indicates that Amazon can probably make it to profitability on its current cash, without having to rely again on shrinking capital markets. I'd say that's pretty significant. I'd like to think that it led directly to the gains Amazon made by the end of trading yesterday.

The analysts' reaction is understandable, though. Most agree that Amazon has won the e-tailing war. No one talks about low barriers to entry in the business anymore. Specialty e-tailers like CDNow and eToys (Nasdaq: ETYS) are falling like French barricades. Wall Street and its media are drunk with ridicule for e-tailers. Now people wonder, as they often do after a bloody conflict, why anyone wanted to win this war in the first place.

That's where revenue growth comes in. Only with high revenue growth can Amazon reach worthwhile profitability anytime soon. The short-term picture is a little more complicated. Let's step back and break down all the numbers.

Slowing revenue growth
Slowing revenue growth has worried Amazon investors for some time, and this quarter didn't assuage those fears. Here are the annual revenue growth figures by quarter for the last two years:

      Q1   Q2  Q3  Q4
1999 236% 171 132 167
2000 95% 84 79 42

It's true that those growth figures build on incrementally larger bases, but 42% sales growth in Q4 is disappointing nevertheless, especially in the big holiday quarter. The truly worrisome part is that models for Amazon's profitability count on growth remaining strong. Estimates look for Amazon to increase sales 47% in 2001 and 57% in 2002. That task looks more and more daunting as time passes.

Operating margins
On the other hand, not all in Amazon's announcement was bad. Gross margins fell short of expectations, but at 21.9% they were better than last December's 13%. Operating losses of less than 7% were the best Amazon has realized in its history. It's only a little better than Q4 1998, though, so one could argue that Amazon has only gained back the ground it lost. (World War I comes to mind...) In the meantime, however, it did win the e-tailing war.

The balance sheet
Amazon's balance sheet -- the few things we know about it -- also improved noticeably. Amazon ended the quarter with $175 million in inventory, 21% lower than year-ago levels. Much of that benefit comes from the fact that Amazon no longer carries toys in its inventory. That responsibility belongs to Toys "R" Us (NYSE: TOY). Amazon took a $40 million inventory hit last year, primarily because of excess toy and electronics inventory. That's why the Toys "R" Us deal was a good one.

Amazon's inventory management seems to have improved in other areas as well. Even discounting last year's charge, inventory fell on an absolute basis, despite the 40% increase in sales. That's darn good. It's one of the reasons that Amazon still has $1.1 billion in cash and marketable securities (though Lehman Brothers analyst Ravi Suria questions the legitimacy of that total).

Cash: the crux of the matter
Ah, the cash. This is what it all comes down to. I've noted before that Amazon will find it very difficult to raise cash in the near future, so it had better demonstrate profitability potential before it runs out of the cash it has now. How it handles that cash is the key to making it last.

James Grant at recently wrote a generally good article about the poor quality of sell-side analysts. In it, however, he criticizes Amazon for extending its days payables outstanding. Grant says that an analyst for "discovered" that Amazon has taken longer to pay its bills over the last two years. "Bulls will commend the company on imaginative cash management. Bears will accuse it of financial engineering," Grant says.

I should hope that even bears recognize the importance of working capital management. To apply the term "financial engineering" to it assigns an unnecessarily negative connotation to something that every business on earth does. Legg Mason analyst Randy Befumo, in a guest article on, noted the importance of Amazon's working capital management. Befumo pointed out, "Amazon, since inception (despite significant operating losses of $791 million), has a cumulative operating cash flow loss of $61 million [as of Q2 2000].... What this means is that working capital and other operating items have contributed $731 million to the company since inception."

Accounts payable will undoubtedly be high this quarter. Combined with low inventory levels, operating cash flow should look pretty sweet when Q4 numbers come out. The big cash drain will come when those payables (and a big interest payment on its bonds) come due in Q1 2001. Amazon looks ready to handle it.

Amazon's working capital management will continue to determine its success. That's in the game plan -- in fact, it's most of the game plan. That's why Monday's report was good news -- marginally good, conditionally good -- for Amazon shareholders. If there is a path to profitability for Amazon, Amazon is on it, at least for another quarter. Amazon will live to fight another day.

Now the question becomes: Will winning the early e-tailing battle and staying solvent -- fighting the war -- eventually lead to decent profits? What rewards await this victor?

--Brian Lund, who's registered on the Amazon Wish List under the name TMF Tardior.