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 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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