At-Cost Strategy Shakes Up Amazon.com's StockShares of Internet book and music retailer Amazon.com Inc. went on a wild ride last month, buffeted by concerns about pricing pressure after online computer retailer Onsale Inc. said it would begin selling its wares at the wholesale price.
Seattle-based Amazon's stock started the month in its usual fashion -- rising meteorically. The shares -- which traded for as little as 9 1/4 within the last 52 weeks -- hit a high of 199 1/8 early in January. But mounting investor fears about pricing sent the company into a precipitous slide beginning on Jan. 11, and the stock hit lows below 100.
Onsale, Menlo Park, CA, in January began selling new personal computers and accessories at wholesale as part of its new atCost venture. The company hopes to profit through transaction fees, shipping charges, ad sales, manufacturers' co-op advertising funds, rebates and warranties [see, "Onsale Hopes for Gain," DM News, Jan. 25.]. Previously, the company's business came mostly from auctioning refurbished computer equipment and electronics.
Though Onsale and Amazon do not compete, CIBC Oppenheimer Internet analyst Henry M. Blodget fueled market fears Jan. 20 when he cautioned investors to limit their Amazon stake.
"We believe that increasing buzz about this strategy could cause weakness in Amazon.com's stock, even if it does not actually impact the company's fundamentals. We would therefore be cautious about adding new money to the stock in the near term and would still consider taking some profits from the recent run-up," Blodget said.
He added that Onsale is wise to build its brand and customer base with its at-cost approach, particularly as long as "the market seems willing to fund any Internet business opportunity at any price," thereby financing the companies at a near-zero cost of capital. However, he questioned the company's ability to generate profits in the long term, and said the leading commerce sites -- with the exception of www.amazon.com -- do not have enough traffic to offset their costs through advertising revenue.
Besides price, Blodget pointed to selection, ease of use, reliability, customer service and speed of delivery for Amazon's popularity, and he added that because of its high volume, Amazon is more likely to withstand a price war than any other Internet retailer. Nonetheless, he predicted a slump in the shares.
"The most prevalent investor concern about Amazon.com … is that it operates in a brutally competitive, low-margin, commodity business, and we believe … that a proliferation of the at-cost strategy could scare the bejesus out of investors," Blodget said.
Ironically, another Internet retailer, Buy.com, already began touting the at-cost strategy months ago. And unlike Onsale, Buy.com competes with Amazon by selling books, music and videos.
Industry watchers have cited Onsale's new business model as another sign that PC makers are abandoning their traditional sales channels in favor of Internet sales. Compaq Computer Corp. is among the bigger names that have begun selling PCs online, mimicking Dell Computer Corp., whose direct model has contributed to explosive revenue growth in recent years.