Doubts surface about Amazon

In the lobby of Amazon.com's headquarters in Seattle, there's a commemorative announcement of the retailer's $1.25 billion bond issue, billing it as ''the largest convertible debt offering in history.''

Not every company would make sure that the first thing every visitor sees is a declaration that this is an empire built on borrowed money, but Amazon has always had that sort of in-your-face confidence. It was going to take over the world, selling all things to all people all the time.

For a time, that arrogance was on a fast track to reality. By last December, less than five years after former Wall Street executive Jeff Bezos launched his Web site, he was Time magazine's ''Person of the Year.'' Bezos was widely viewed as someone who would ultimately be recognized, as one analyst told Time, as the developer of ''one of the smartest strategies in business history.''

Six months later, that halo is gone. Amazon stock has fallen by more than two-thirds, and some observers even question whether it will survive without a shotgun marriage to a deep-pockets partner. It's not a profitable company, won't be one any time soon and has $72 in debt for every active customer.

''Amazon is looking more and more like other concept stocks such as Boston Chicken, Discovery Zone and Planet Hollywood-all of which took on a lot of debt and ultimately had to file for bankruptcy,'' said hedge-fund manager Eric Von der Porten, a longtime bear on the retailer.

''Just as e-tailing is supposed to be a world-changing development, 'home meal replacement' was supposed to make Boston Chicken wildly successful and unique play centers were supposed to give Discovery Zone a profitable and defensible franchise,'' he added.

These are tough days for e-commerce, which not long ago was being touted as the greatest boon to retailing since the invention of paper money. The list of e-commerce companies getting whacked is growing, including PlanetRx.com (major layoffs), Petstore.com (sold in a fire sale to Pets.com), Boo.com (closed), Reel.com (shut down by its owner) and a host of lesser-knowns meeting even more ignominious fates.

It's easy to get the idea from all of this gloom that buying things on the Internet is a fad like Pet Rocks or Cabbage Patch dolls. That obviously isn't true. The Gartner Group, in fact, released a report Tuesday saying the North American Internet retailing market is on a pace to surpass $29.3 billion this year, up 75 percent over 1999.

Amazon has 17 million customers in 160 countries, selling them not only books and music but also everything from screwdrivers to salad spinners. It is the one true Internet brand, better at customer service than just about anyone else.

Still, the naysayers are convinced Amazon's fundamental business model is flawed. Its critics watched in disbelief and even anger as the stock zoomed from a split-adjusted $1.50 a share at its May 1997 public offering to $113 last December. The chorus has now expanded, and the finger-pointing has begun.

''The Amazon game was one of raising money, spending it on advertising, selling junk bonds and spreading the good cheer on Wall Street,'' Joan Lappin, president of the money-management firm Gramercy Capital, wrote in a new appraisal. ''No analyst wanted to tell the truth because their firm would lose out on the prospect of vast underwriting fees.''

Adding to the doubts about Amazon is some evidence that Internet companies, once thought to be leaner, faster and smarter than their bulkier off-line brethren, are actually in a weaker position.

A survey by Andersen Consulting found that 43 percent of Internet users were uncomfortable buying gifts from Internet-only companies, expressing concerns about product quality and making exchanges. These users would rather purchase from the Web site of a retailer they know off-line.

Meanwhile, according to a study by McKinsey & Co. and Salomon Smith Barney, hurdles of brand, margins and distribution make it unlikely that many pure online companies will ever be profitable. The Net, in other words, may work best as a channel for an off-line company (Barnes & Noble) rather than as a pure play (Amazon).

Gartner Group analyst Robert Labatt equates the current situation to that of the automotive industry in the 1920s, when there were hundreds of carmakers. The foreground then was that most of them were struggling and failing, but the backdrop was that soon everyone would have a car, and that the vehicles would change nearly everything about America.

''The truth of the matter is that we made a big assumption when we started these Internet companies: that we were going to get it right the first time,'' Labatt said. ''I don't think that's a correct assumption.''

Even Bezos concedes that this territory is unknown, and maybe even unknowable. ''We were hoping to build a small, profitable company, and, of course, what we've done is build a large, unprofitable company,'' he said in a recent interview.

The view that Amazon is not getting it right the first time received a major boost last week, when Lehman Brothers bond analyst Ravi Suria issued a devastating report. Amazon, he said, has a ''weak balance sheet, poor working capital management, and massive negative operating cash flow -- the financial characteristics that have driven innumerable retailers to disaster throughout history.''

In Suria's ''best-case scenario,'' the $1 billion Amazon has left from its bond offerings will last only through the first quarter of next year. ''The party is over,'' he concluded. Amazon denounced the report as ''hogwash,'' but the stock quickly fell 20 percent.

If the market's faith in Amazon has been shaken, Wall Street analysts generally remain believers. Thirteen analysts surveyed rate it a strong buy, 11 a moderate buy. Seven call it a hold, which is as close as most analysts get to saying ''sell.''

In January, when the stock had already fallen by half from its pre-Christmas high, Steve Weinstein of Pacific Crest Securities said, ''There's no chance that this is the end of premium valuations for Internet stocks like Amazon.'' This week, with the stock worth half what it was when he made that statement, he reaffirmed his ''strong faith'' in the company. He dismissed the Lehman report as ''looking backwards, not forwards.''