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Stock Analyst Update

Amazon's Outlook Raises Questions

E-tailer lays off 15% of staff as it gets serious about making money.

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What Happened?
Online retailer (AMZN) announced fourth-quarter results Tuesday that were slightly better than the guidance it gave three weeks ago, but lowered its sales forecasts for 2001. Total revenue for the quarter was $972 million, slightly above Wall Street's expectations and up 44% from a year ago. However, the company said it expects revenue in 2001 to be around $3.5 billion, well below the $4 billion figure it gave three months ago. Amazon's pro-forma net loss of $0.25 per share was a penny better than expectations. The company said it's laying off 15% of its workforce as part of a plan to become profitable on an operating basis by the end of 2001. Its U.S. book, music, and video business is already profitable, showing an operating margin of 7.6% this quarter. Overall, Amazon's operating losses as a percentage of sales have fallen from 26% a year ago to 6% this quarter.

What It Means for Investors
We think there's still far too much uncertainty regarding the size and potential profitability of Amazon's core market to recommend that investors buy the stock. This was yet another very mixed quarter for Amazon. Management seems committed to achieving overall operating profitability within the next year, and given the progress it's made over the past 12 months, we think that goal is achievable. And with more than $1 billion in cash and marketable securities on its balance sheet, Amazon isn't going to run out of money anytime soon.

However, in terms of growth, Amazon's future looks considerably murkier. Growth in the U.S. book, music, and video segment has slowed dramatically to just 11% year over year, down from 50% in the first quarter of 2000. That indicates to us that growth in Amazon's core business has hit a wall, and that most of the company's future growth will have to come from its international and early-stage segments. Both of these segments are still growing at triple-digit rates, but that will eventually slow; the hard part is predicting when. If the company's lowered 2001 revenue targets are any indication, then it may not grow to be as big as its boosters had hoped. Thus, while we're more confident than ever about Amazon's long-term survival, uncertainty about the eventual size of its market makes it a hard stock to value and a risky one to own.'s Premium subscribers can read the full Analyst Report on this stock. Or read Analyst Reports on 1,000 stocks and 2,000 funds, free for 30 days.

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