February 1, 2000 12:50 PM PST
Are Amazon deals the remedy for post-holiday blues?
Amazon agreed today to buy an 18 percent stake in home furnishing e-tailer Living.com, the latest in a string of marketing and investment deals made by the online retail juggernaut. As part of the deal, Living.com will pay Amazon $145 million over the next five years for a permanent "tab," or store location, on Amazon's Web site.
The agreement follows several recent deals made by the Seattle-based company, each following a similar pattern aimed at boosting Amazon's sagging profit margins, the bottom line--and its stock price, Bear Stearns financial analyst Scott Ehrens wrote in a report today.
Despite announcing that its fourth-quarter sales were up 250 percent from last year, Amazon's stock has dropped about 40 percent from its 52-week high set last December.
"On a cosmetic level, this is exactly what the market wants to see from Amazon," Ehrens wrote. "Although we have questions about the quality of these deals, the new agreements could be the remedy for Amazon's post-Christmas blues."
Other dot-com companies in deals with Amazon include:
But is this a path to profitability for the online retailer?
Some market analysts think it is. Because the marketing deals have none of the costs associated with selling books or music--Amazon won't have to hold inventory or pay for shipping--they should be highly profitable. Merrill Lynch financial analyst Henry Blodget, for instance, estimated that Amazon's profit margins will be about 80 percent on the marketing deals.
Profit margin is the difference between the amount Amazon charges customers for its books, music and toys and the amount Amazon pays for those products. In contrast to the marketing deals, Amazon's other businesses operate on roughly 20 percent profit margins.
"We need to get more guidance from management on the exact financial impact of these deals, but a quick calculation suggests that Amazon could be profitable by 2001," Blodget wrote.
In addition to the low-cost revenue, at least some of Amazon's deals involve investments in pre-IPO companies. Amazon could see huge investment gains from deals with Pets.com and HomeGrocer, which have already filed to go public.
Amazon might sell some of its stakes in those companies as they go public to help it reach profitability, Argus Research analyst Alan Mak said. But the market will primarily focus on whether the company's operations themselves make money, Mak said.
"The way that Wall Street will value Amazon won't be based on its equity stakes in other companies," Mak said. "It will be based on its continuing operations and its operating profits."
Analysts expect Amazon to post a fourth-quarter loss of 48 cents a share tomorrow, according to First Call/Thomson Financial, compared with 7 cents per share during the same period in 1998. Through the third quarter of last year, Amazon had lost about $560 million since it began doing business in 1994.
Last week, in its largest layoff ever, Amazon fired some 150 workers, about 2 percent of its work force.