Amazon’s Woes Send Stock Price Down 20%

Amazon.com Inc. shares fell 20% on Wednesday, a day after the biggest Internet retailer disappointed Wall Street by reducing its fourth-quarter sales estimate.

Standard & Poor’s added to the pain by changing its outlook on Amazon from “stable” to “negative.”

“There are plenty of areas for concern, and the market is focused on them,” said Safa Rashtchy, a U.S. Bancorp Piper Jaffray analyst.

On Tuesday, Amazon reported that its third-quarter sales rose only 0.2%, matching analysts’ minimal expectations.

So in the area where Amazon is profitable--its book, music and video division--it has stopped growing. In the areas where Amazon is growing--electronics and international sales--it is nowhere near profitable.

Put these together, add an onerous $2 billion of debt, top it off with an ongoing recession, and Wall Street sees the picture of a company that is--at best--struggling.

One of the few remaining Amazon bulls, Rashtchy concedes that “this is still a company that has tremendous challenges. But I think we are beginning to see a turnaround.”

It’s true that fears of outright bankruptcy for Amazon have diminished thanks to a $100-million investment this summer by AOL Time Warner Inc. and aggressive cost-cutting. But most analysts are more skeptical than Rashtchy, if not outright disgruntled.

Merrill Lynch’s Henry Blodget, noting he had reduced his sales projections for Amazon at least once every quarter for the last two years, did it again. The analyst sliced his Amazon revenue estimate for 2002 from $3.5 billion to $3.2 billion, meaning he now expects the company to grow only 6% next year.

And maybe it won’t even do that well. “It remains difficult to have much confidence in any future revenue forecast, let alone an optimistic one,” Blodget told his clients with a certain weariness. “We see no reason why this reduction will necessarily be the last.”

It was just under three years ago that Blodget became famous literally overnight by touting Amazon as the stock of a lifetime. As if in confirmation, the company’s shares promptly doubled. Enthusiasts envisioned that much of retailing would shift to the Internet, and that Amazon was going to be the leading Internet retailer.

Since those heady bubble days, the shares have fallen about 90%. On Wednesday, Blodget downgraded Amazon from “accumulate” to “neutral.” Amazon closed Wednesday at $7.64 on Nasdaq, down $1.91.

Amazon has never turned a profit since going public. On Tuesday, the company posted a $169-million loss for the third quarter, an improvement from a shortfall of $241 million a year earlier.

In the days leading up to this week’s earnings report, Amazon nearly doubled on speculation that fears of terrorism would keep people away from the mall and in front of their computers.

“Consumers will cut back on trips to see relatives but will still want to spread some holiday cheer,” Forrester Research said. “How? By substituting the convenience and safety of shopping online for traveling.”

If so, they’re not going to be spreading that cheer at Amazon. The Seattle company now says its all-important fourth-quarter sales might only equal last year’s $972 million, and at best will be up 10%. Earlier, the company had projected sales to grow 10% to 20%.

“The answer to the question of whether e-tailing will benefit from a post-Sept. 11 desire to shop at home is a definite no,” said analyst Faye Landes of Sanford Bernstein Associates.

Landes pointed to other worrisome signs for Amazon, including the fact that sales in the company’s core books, music and video division fell 12% from the third quarter of last year.

Meanwhile, Amazon’s electronics division, which is much newer and thus presumably still was on its growth spurt, increased only half as much as in this year’s second quarter.

“The company, in our opinion, is in the unfortunate position of having its businesses reach maturity very quickly,” Landes said. “It is as if Amazon is a retailer that opens all its stores at once, rather than over a course of several decades.”

In announcing its lowered Amazon outlook, Standard & Poor’s said its ratings for the retailer could be cut again “if significant revenue growth is not evidenced in the near term or if the company does not generate a profit in the fourth quarter on a pro forma basis.”

Amazon executives repeated this week that the company will achieve pro-forma profitability this quarter. While this is a very low bar--it excludes, for instance, Amazon’s interest payments--it’s been a long time coming.