June 24, 2000

<h1>Two Analysts Talk, and the Shares of Amazon.com Take a Plunge
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By GRETCHEN MORGENSON

Shares of Amazon.com, the Internet industry's bellwether stock, plummeted 19 percent in heavy trading yesterday as investors grew nervous about the company's financial health and its prospects for profitability. Other Internet companies were sucked into the downdraft; shares of eBay fell 7.4 percent and America Online lost 5.3 percent of its value.

Yesterday's decline in Amazon shares appeared to be a reaction to comments issued by two research analysts at influential Wall Street firms. Ravi Suria, a credit analyst at Lehman Brothers, wrote a report on Amazon's $2 billion in bonds issued during the last few years, calling into question the company's financial strength and ability to generate cash to repay bondholders. For Amazon to be a successful business, Mr. Suria wrote,"it must be able to generate the cash operating profile of a successful retailer.

"It is essentially this yardstick that we use to analyze the company," he wrote,"and as the rest of this report shows, we find it woefully lacking." Amazon's bonds fell 10 percent on the day.

Shares of Amazon fell $8.125, to $33.875. The stock is down 55 percent so far this year. The company has never posted a profit.

Mr. Suria said he had written the report after scrutinizing the company's first-quarter results, made public last month."What we think truly pushed a weak credit off the cliff was the inept working capital management during the last holiday season," he said.

Because the company does not generate positive cash flow on each piece of merchandise that it sells, Mr. Suria added, Amazon has had to rely on obliging investors to finance its operations. But as Internet companies have begun to fail,"the market has become a lot more selective," he said.

Bill Curry, the company's spokesman, called Mr. Suria's report"hogwash." But he declined to identify specific facts in the report the company disputed. According to someone close to the company, Mr. Suria's report was made available to Amazon yesterday.

Adding to the turmoil yesterday were mixed messages to investors from Mary Meeker, the influential Internet analyst at Morgan Stanley Dean Witter, the firm that has managed both of Amazon.com's recent bond offerings. As recently as June 2, Ms. Meeker was positive on Amazon. But a message to Morgan Stanley's salespeople yesterday morning summarizing Ms. Meeker's views on Amazon, began this way:"Mary believes there will be no upside to her June and September revenue estimates and there could be some modest downside."

In a later communiqué dictated by Ms. Meeker, there was no mention of a"modest downside." A Morgan Stanley spokesman could not explain the discrepancy between the two messages. Ms. Meeker was traveling and could not be reached.

Neither analyst's report was based on new information about Amazon's business. Mr. Curry said the company never discussed its operations between quarterly earnings conference calls with analysts. The next such call, which will detail company results for the June quarter, is scheduled for July 26. Amazon's stumble did not shake the faith of one big investor. Managers of Legg Mason mutual funds in Baltimore were buying shares of the company's stock and bonds as they fell yesterday, said Lisa O. Rapuano, director of research at the firm.

The company's popular Value Trust fund started the day with about 2.8 percent of its assets, or about $375 million, in Amazon's stock. By the end of the day, those shares were worth about $300 million, but the fund's manager, Bill Miller, was buying more. Mr. Miller, whose fund has outperformed the overall stock market for nine consecutive years, has been saying that Amazon's stock price could go to $90 or higher, and yesterday, Ms. Rapuano was not backing away from that view. She described the reports that produced the sell-off as"baffling."

"It's evident that nobody likes e-commerce right now," she said. "On the other hand, it's evident that if Amazon doesn't work, then nothing's going to work in e-commerce. You don't have 20 million customers on something that isn't real."

Investors obviously agree that Amazon, the company, is real. As long as its profits remain virtual, however, investors are likely to be skittish.



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