When will Amazon make a profit?

Still in the red, but losses per share are falling

Amazon has been hit by a string of bad news in recent weeks. But that is not new: Times have been tough for months.

Rumours that the online shop was about to go under sent its shares falling again this week; the stock fell 13% on the last day of February.

Jeff Bezos insists he is making tough business decisions

Two weeks earlier, the investment bank Lehman Brothers estimated that Amazon was running out of cash and warned against buying the company's bonds.

And two weeks prior to that, Amazon cut 1,300 jobs, despite reporting a substantial sales rise.

Rising sales are matched by cutbacks, new deals are combined with cash flow problems, and this high profile business is stubbornly staying in the red.

Amazon's denials

Such contradicting profiles of the business have long been used to describe the online giant, despite its repeated denials.

No, it insists, the company is not suffering a credit squeeze, nor is it suffering a cash flow problem, and far from going bust: Amazon will make a profit in 2001.

That is what its executives say.

But their predictions are limited to "pro-forma operating profitability" which the company hopes will be reached by the end of 2001.

That is; not real profits, but profits minus some potential losses once investments or employee stock options are taken into account.

Increasing job losses

In early 2000, Amazon announced 150 job cuts and revealed losses of $185m, despite a 150% increase in pre-Christmas sales in 1999.

And things did not get much better during the following months. In the year 2000, investors did not see profits, but losses of more than $90m (£60m).

In January this year, Amazon said 1,300 jobs will go, less than a month after the company once again reported record sales during the last few months of the year.

"I think the lay-offs are just symptomatic of the fact that they are not growing as fast as they thought they would," said Ragen MacKenzie analyst Allyson Rodgers.

High expectations

The pace of growth has slowed for most online businesses, but not as fast as the slowdown in expectations.

It may seem incredible, but analysts appear to be disappointed with Amazon's 44% growth in sales during the last three months of 2000 to just less than $1bn.

Even though the figure was actually higher than recent predictions made by both Wall Street analysts and Amazon itself.

The company also slashed its losses per share by more than half, from 55 to 25 cents and if this trend continues, Amazon may well end up in the black despite sceptics' concerns.

Profit target

Amazon's need to reach profitability, however, has forced it to cut back on its ambitions.

Steve Frazier says Amazon's international expansion continues

Some of its product lines have not taken off and have been abolished.

Amazon's online partner, the home furnishing firm living.com. went bust in 2000.

And the car seller greenlight.com has been forced to scale down its business.

Steve Frazier, the managing director of Amazon UK, acknowledged that the roll-out of some product lines will be slower than planned.

But he insisted the company's expansion will continue - both in the United States, Europe and Japan.

As part of these strategies, the company will offer a new service that will allow music downloads of free songs from hundreds of independent artists.

The service will differ from the free file-swapping facilitated by Napster in that it will be closely linked to Amazon's CD sales.

Cash pile

During last year's dot.com crash, some industry analysts had predicted that Amazon could run out of money before turning a profit.

The firm denied it then, and it denies it even more strongly now - despite Lehman Brothers' assertions that Amazon's cash reserves at less than $400m last month.

Amazon's cash plan for 2001 is clear, the company insists.

Paying for Christmas stock will bring down the cash pile from $1.1bn at the end of 2000 to about $650m in March.

During the rest of the year it is expected to build up to about $900m.

'First mover, good mover'

Amazon has been one of the pioneers of the e-commerce world, and fans of the firm have said that this "first mover" advantage will be one of the biggest strengths in the online marketplace.

Mr Frazier acknowledges that this has helped the company, especially in some of its international markets - Germany and Britain - where it set up shop more than two years ago.

The firm's founder Jeff Bezos has maintained that its core bookselling operation moved into profit last year.

But its overall performance has remained loss making as it invests in new areas and products as part of its 'land grab' strategy.

The strategy is to secure a large slab of the global etail market as it evolves.

The idea is that this large share of the market can then be converted into profits in years to come.

This principle lay behind the high spending of numerous consumer dot.com businesses which have now run out of money.

Unlike them, Amazon has the advantage of being the world's best known pure internet etailer, as well as being one that has built up a cash pile.

Amazon must avoid what the online toy shop etoys recently did.

It closed down its rapidly growing, but loss-making European operations in a desperate attempt to conserve cash.

Amazon has instead announced clear strategies and predictions for its cash reserve management to allay fears that a cash-flow problem could bring it to its knees.

But those fears will only be calmed once it turns its competitive advantages, its strong market presence, its established brand name and its huge customer numbers into hard profit.