Value per customer? The Amazon Story
By Mark Veverka
Excuse us for being "misinformed." We don't mean to pick
on Donaldson Lufkin & Jenrette's Jamie Kiggen. In fact, we would be honored
if the sell-side Internet analyst simply returned our calls and faxes to set us
straight. Otherwise, we can only conclude that his latest research note on Amazon.com defies his
own logic even more than his previous efforts. In a conference call to clients
earlier this month, Kiggen referred to the humble musings in our June 5 column
as "misinformed press attention."
Based on detailed analysis provided by Eric Von der Porten, a San
Francisco Bay Area hedge-fund manager, we essentially had contended that
Kiggen's self-touted model for Amazon didn't support his conclusions that
customer value was rising. Kiggen uses his model to support a $140-a-share
price target for Amazon. The shares were trading last week in the mid-40s.
On June 7, Kiggen issued an updated research note that slapped an
even higher price tag on an Amazon customer, increasing it from $1,905 per
customer in February to $2,400.
But the key growth metrics in Kiggen's model-such as revenues per
customer and gross margins -- are declining. And costs are generally rising.
"How on earth can Kiggen claim that lifetime customer value
is rising when nearly every input into his model has declined precipitously?
I'd be embarrassed to try to defend a 25% increase in customer value when my
figures show a two-thirds decline in profitability," Von der Porten
observes.
According to Kiggen's revised model, which assumes that Amazon
never loses a customer and each one of them buys ever more stuff, it would
still take about 30 years for investors to recoup the initial $2,400 price per
customer. Says Von der Porten: "It's preposterous." What's more,
Kiggen claims that Amazon's company-provided "active" customer metric
"accounts for customer attrition." (Attrition rate is one of the
cornerstones to lifetime customer value analysis).
"It is not clear how he reached this conclusion, but he is
blatantly and embarrassingly wrong on this critical point," Von der Porten
attests in his research report, which has been provided to Kiggen. "It's
not my goal in life to flog DLJ, much less Amazon. But looking at this type of
work makes me wonder if there are any standards anymore. Do sell-side analysts
have to answer to anyone, or can they write whatever they want, regardless of
any connection to reality or logic?" Von der Porten asks. Unfortunately,
he seems to have answered his own question.
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