Amazon Stock Is Soaring, but It’s a Jungle Out There

Shares of online book retailer Amazon.com Inc., one of the darling stocks of the Internet investment world, surged again Friday after President Clinton endorsed a moratorium on levying new taxes on Internet commerce--and even mentioned Amazon by name.

But analysts warned that the competition to sell books in cyberspace, which already has spawned substantial price-cutting, will grow more ferocious in the coming months. That could crimp the growth of 2 1/2-year-old Amazon, which now has a stock market value exceeding $1.8 billion even though it has yet to earn a nickel of profit.

“The competition will be formidable,” said John Lyons, analyst at the investment firm ABN AMRO in New York.

Although Amazon is believed to have between 65% and 80% of the online book market today, Barnes & Noble Inc. has been ramping up its rival online service, and Borders Group Inc.--which also owns the Waldenbooks chain--plans to launch its cyberspace service this year.

“The two most established [book] retailers in the country are ready to go head to head” with Amazon, which already has sold books to more than 1 million customers, Lyons said.

Seattle-based Amazon said it’s ready. “We take our competition extremely seriously . . . and expect them to be aggressive,” said Russell Grandinetti, Amazon’s investor relations manager.

Amazon’s investors seemed to ignore the threat, however. Amazon’s stock--having already more than tripled in price since it went public only 10 months ago--stunned Wall Street by soaring another 17% in just two days of trading Thursday and Friday.

The stock rose $4.25 a share Friday, to $77 on the Nasdaq market, after surging $6.88 a share on Thursday.

Amazon, which boasts having 2.5 million titles available and being “the Earth’s biggest bookstore,” reported sales last year of $148 million, a ninefold jump from the prior year. The company also lost $27.6 million in 1997 and has not yet predicted when it will turn profitable.

To be sure, many other Internet-retail stocks got a lift after Clinton told a technology conference in San Francisco that he backs a bill to freeze new taxes on goods sold over the Internet. The stocks of Barnes & Noble and Borders were among them, and both are also trading at 52-week highs.

But some observers asserted that Amazon’s shares also are rising in response to a “short squeeze” in the stock.

Short-sellers bet that a stock’s price will fall. They borrow the shares from their brokers, sell the stock and then wait to buy it back later at a lower price. Then they return the shares and pocket the difference.

But when the stock keeps rising instead, many short-sellers rush into the market to buy back the shares and stem their losses. Thus the short-sellers’ buying pushes the stock’s price higher still.

“This is clearly a short squeeze,” said Michael Murphy, publisher of the Overpriced Stock Service newsletter in Half Moon Bay, Calif.

If a squeeze exists, it’s being exacerbated by Amazon’s relatively small “float”--that is, the number of shares in public hands. Yet there is also confusion as to exactly how many shares are involved.

Amazon sold a minority stake of 3 million shares when it went public last May. Subsequent selling by its original stockholders has increased that number, but Grandinetti said Amazon itself doesn’t know the total number now outstanding.

Various analysts have put it at between 3.5 million and 10 million.

Yet the Nasdaq stock market, in its most recent monthly figures on the short-selling of Nasdaq stocks, said that a whopping 3.2 million Amazon shares had been sold short and not yet repurchased by short-sellers as of two weeks ago.

Grandinetti said Amazon acknowledges that the short position in the stock “is substantial” but declined further comment.

Even excluding the short-sellers, analysts say there are far more investors who want the stock than there are shares available.

Mary Meeker, an analyst at Morgan Stanley, Dean Witter Inc., noted recently that there is “a significant imbalance between supply and demand, and this has been a key factor in boosting the share price.”

Despite the growing competition, Amazon will continue to prosper, said analyst Christopher Feiss of the investment firm BT Alex Brown Inc., which helped underwrite Amazon’s public offering.

“Over the next six months, I see no reason why Amazon’s market share is going to deteriorate markedly,” he said. “After that, I do anticipate its share is going to go down.” But because the online-book market will keep growing sharply, “you will still have a company that’s tripling and quadrupling in size over that period,” Feiss said.

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Upward Flow

Amazon.com’s stock price has more than tripled since it went public 10 months ago. Monthly closes and most recent:

Friday: $77

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Source: Bloomberg News