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Stock Analyst Update

Amazon May Finally Be Getting Its Act Together

E-tailing giant gains momentum, but still has to execute over holidays.

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What Happened?
Online retail giant Amazon.com (AMZN) reported a third-quarter pro-forma net loss of $0.25 per share Tuesday, ahead of the First Call estimate of a $0.33 loss. Revenue of $638 million was substantially above estimates of $600 million, and the company projected fourth-quarter revenue to be around $1 billion. Amazon has $900 million in cash, essentially flat from last quarter, and said it expects to generate positive cash flow for the last three quarters of 2001. Amazon's U.S. book/music/video division has become solidly profitable, with most of the company's losses now coming from overseas.

What It Means for Investors
We think these results are encouraging for the short term, even though Amazon still has a lot of work to do before it becomes profitable. After two quarters of stagnation, Amazon finally seems to be making good on its promise to pare losses. Operating loss as a percentage of revenue improved to 11% this quarter from 15% last quarter, and the company expects that figure to be below 5% for 2001. Amazon also decreased inventories to their lowest level of the past year. Further reducing inventory has become one of CEO Jeff Bezos' top priorities, and he stressed during Tuesday's conference call that he's actively working on the problem.

All eyes will be on Amazon in the fourth quarter, as it tries to satisfy holiday shoppers while continuing to reduce losses. Although the company's long-term viability is still far from guaranteed, Tuesday's results suggest that the worst of its troubles are over. If it manages to meet its ambitious goals for the fourth quarter, Amazon will have gotten over a major hurdle on its path to profitability and will start to look much more attractive to potential investors, in our opinion.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.