Amazon.com in Year 2000"

On June 22, 2000, Ravi Suria, a credit analyst at Lehman Brothers, issued a report sounding an alarm about the convertible debt of Amazon.com. When he looked at the companys financials, he saw a weak balance sheet, poor working capital management, and massive negative operating cash flow. He regarded the debt as extremely weak and deteriorating and strongly advised investors to avoid it.

Amazon.com was, he noted, the pioneering and best-established brand among Internet retailers. Nevertheless, he was convinced that the company was going to run out of cash in less than a year because of its poor operating performance, reflecting basic weaknesses in its business model. Amazon, he said, had really evolved from a virtual retailer to something more like a real world retailer, and was encountering the same kinds of cash flow problems and problems related to management of working capital that had spelled disaster for many retailers in the past. In February 1999 the company had issued $1.25 billion in convertible debt. A year later, it completed a second offering of convertible debt, this time for $680 million. As Suria saw things, however, the company was burning cash up fast, and if it was not able to start generating positive free cash flows soon, it would be in dire straits. The party is over, he said, and the February round of financing seems to have been the last call.1

In response to Surias report, the price of Amazons convertible debt dropped 15%, and its stock price dropped 19%, in one day after the report became public.

What are the key criticisms of Ravi Suria? Do you agree with Ravi Surias criticisms of the firms performance?