Dead or Alive?

In a world of grays, there's nothing so reassuringly black-and-white as a balance sheet. Or so it was until dot-coms, negative P/E ratios, and wildly fluctuating stock prices hit Wall Street. That's why the dot-com industry and the financiers who back it were unnerved when Ravi Suria, an otherwise low-key convertible bonds analyst at Lehman Brothers, got tough on Amazon.com.

Suria issued his first scathing report on Amazon in June 2000, but in February 2001 he went a step further. He dusted off a traditional accounting framework called SAS-59, developed by the Financial Accounting Standards Board to evaluate whether a company is a going concern or heading south. The result? Suria concluded Amazon would be out of cash and forced into debt restructuring as early as next month.

Amazon spokesman Bill Curry promptly called the report hogwash and labeled Suria silly. But Amazon's biggest booster, Merrill Lynch analyst Henry Blodget, took the report seriously enough to counterattack Suria's position in a report of his own. The juxtaposition of their opinions offers a revealing look at how subjective dot-com analysis has become.

Suria zeroed in on a metric that Amazon had been hyping—its $1.1 billion in cash and marketable securities for the fourth quarter of 2000. "As opposed to just the stated cash on the balance sheet, working capital (current assets minus current liabilities) is the key relevant liquidity measure when evaluating a company's survivability," he wrote. Suria says Amazon's working capital will go negative by September, which he says will cause its vendors and creditors to squeeze the company for tighter terms, or pull out. Blodget counters, "We agree that Amazon's working capital will turn negative this year. We just don't think this is a problem."

Blodget argues that Amazon's "negative operating cycle"—consumers pay Amazon before Amazon pays its vendors—insulates it from a working capital crunch, but Suria negates such wiggle room when he writes that Amazon won't be able to raise bailout funds because of a low bond rating. Interestingly, what the two men project for the fourth quarter of 2001 is very close for sales and working capital. They disagree only in interpreting the outcome.

Regardless of their position on Amazon, however, analysts so far have not rushed to SAS-59 or its emphasis on working capital as a measure of survivability. The week after Suria's report, Prudential Securities downgraded its recommendation from "hold" to "sell," citing not liquidity woes but "anemic growth." Boosters like Morgan Stanley Dean Witter's Mary Meeker remained undeterred, pumping the stock with a "market outperform" rating and predicting that Amazon will be "cash flow positive from operations for the remainder of the year."

The Battle over Amazon.com

How do the same hard numbers generate wildly different expectations? Two analysts present their divergent reports on the Net's biggest bellwether.

Indicator Ravi Suria Lehman Brothers* Henry Blodget Merrill Lynch* Key Phrase Creditor squeeze Negative operating cycle Financial Benchmark ($38) ($26) Net Sales $1,275 $1,362 Inventory as a Percentage of Sales 25% 19% Cash and Marketable Securities $125.2 $853 Cash and Cash Equivalents ($152.9) $575 Total Assets $609.7 $2,019 Total Liabilities $648 $1,226 Outlook Chapter 11 and restructuring Steady as she goes

*Q4 2001 projections, in millions of dollars. Source: Lehman Brothers Convertible Research; Merrill Lynch Internet Research

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Ziff Davis Smart Business.