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Amazon future questioned
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May 8, 2001: 12:29 p.m. ET
Analyst says biggest Web retailer losing customers nearly as fast as it gains them
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NEW YORK (CNNfn) - Amazon.com Inc. is losing customers nearly as fast as it's gaining them, meaning customers of the Internet's biggest retailer may not be as loyal as initially thought, according to one Wall Street analyst.
Prudential Securities analyst Mark Rowen reiterated his sell rating on the company, whose CEO Jeff Bezos said he anticipates the fourth quarter will be the company's first profitable one.
Rowen said in a research note late Monday he has "become increasingly concerned that Amazon's (AMZN: Research, Estimates) customer base is turning out to be far less loyal than once assumed, and as a result, may not be so 'valuable' after all."
Rowen said the company gained 3 million customers in the first quarter, ended in March, but lost 2.3 million active customers in the same period.
Additionally, he said the company had 15.9 million active customers at the end of the first quarter in 2000, and estimated that 50 percent have not returned to make another purchase in the subsequent 12 months.
The Seattle-based retailer's stock slumped more than 7 percent at midday before ending the day down 74 cents, or 4.4 percent, at $16.18.
Amazon spokesman Bill Curry said the company generally does not comment on analyst research reports, but said 78 percent of Amazon's customers in the first quarter came from repeat business and that 20 million customers have shopped on the site in the last year.
"We are focused right now on profitability. Our mantra was to get big fast, and we did get very big very fast," Curry said. "Our emphasis is to get an operating profit in the fourth quarter."
Although it is the Internet's biggest retailer, Amazon has yet to turn a profit, something Bezos said in January would change by the end of the year and reiterated last month, when Amazon reported a slightly narrower-than-expected first quarter loss.
Once one of the Internet's high fliers, Amazon's shares have plummeted more than 77 percent in the past year from a high of $68.62 last May as concerns have mounted about its cash-flow position and its ability to become profitable.
Bezos himself is being investigated by the U.S. Securities and Exchange Commission regarding personal stock sales he made of the company's shares shortly before a negative research report was issued about the company.
The Feb. 6 report from Lehman Bros. questioned Amazon's ability to continue operating through 2001.
The company has become a bellwether for the burst dot.com bubble in the last year, during which Internet retailers succumbed by the dozens to little or no profit. Those companies spent the bulk of revenue on marketing and acquisition costs, trying to establish a name for themselves.
Lately, dot.com merchants have decided that partnering with traditional "brick-and-mortar" retailers is the way to survive and become profitable. At the same time, traditional retailers have learned to leverage their own brands on the Internet and to profit online through the expertise of former "pure-play" retailers.
A sign of the changing attitudes in dot.com land came Monday from the online retailing trade group Shop.org, which announced a new slate of directors, all but one of whom works for a traditional retailer.
Though not a Shop.org member, Amazon.com has struck two notable deals with the online arms of store-based retailers Toys R Us Inc. (TOY: up $0.20 to $27.71, Research, Estimates) and Borders Group Inc. (BGP: down $0.09 to $19.08, Research, Estimates)
In both instances, Amazon takes care of the inventory management, order fulfillment and delivery while Toysrus.com and Borders.com handle the up-front marketing, sales and site content.
Amazon also has branched out into other areas such as consumer electronics.
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However, in his research note, Rowen said customer acquisition costs, which averaged $14 a customer over the last 12 months, continue to eat away from the $22 profit each customer produces. Though Amazon has managed to lower such costs through decreased spending on advertising, lowering them further would be "challenging," Rowen said.
As a result, Rowen estimates that Amazon would need to attract about 100 million active customers, five times its current base, each adding a lifetime value of $82 in order to improve its market value.
"In our opinion, such massive increases in active customers, coupled with massive increases in lifetime value, will be enormous challenges for a company with such high rates of customer defection," Rowen said. 
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