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Did anyone notice that Lehman initiated coverage of Amazon last month with a buy rating and a price target of $80? Now, a bond rating and an equity valuation are different animals to be sure. But even among the general Amazon insanity it seems odd for the same firm to believe that a company is "extremely likely" to run out of cash within eight months but contemporaneously sees its present value of future cash flow at around $28 billion.

Though there are plenty of reasons to shy away from Amazon's convertibles, I found the Lehman report oddly reminiscent of a Blodgett sock puppett special.

From 1997 to the latest quarter, Lehman said, had received $2.8 billion in funding and netted revenues of $2.9 billion. That's ``a whopping $0.95 for every dollar of merchandise sold,' it said.

That's just silly. $1.25 billion of that financing came in the doors just a few months ago and hasn't even had time to beat Warren Jensen in foosball, let alone be used as a denominator in measuring ROA or ROIC.

For ``to continue its operations and grow,' Lehman said, the company must either generate sufficient operating cash flow or keep raising capital until that cash flow turns positive.

Good point. Thank god for MBA programs.

It added, though, that in a best-case scenario the company will run out of cash in the next four quarters ``unless it manages to pull another financing rabbit out of its rather magical hat.'

This is what I have a real problem with. Best case scenario? So the Utopian, rose-colored vision of the future has Amazon bankrupt in three quarters if the capital markets lose Jeff's phone number? Explain that to me. And don't say "Well, Amazon burned $320 million from operation in Q1 and spent another $26 million in cap ex, so another three quarters or so and you can wrap it up." We talking about the best case scenario of a going concern, here, not what my banker says when I want a loan or what Barron's does when it evaluates cash burn rates.

Extrapolating from last quarter is particularly unfair, as it likely marks the beginning of black sheep Q1s, where all the others quarters generate, rather than burn, cash flow from working capital. The impact is not insignificant. Over $190 million of the operational cash flow expenditure was due to money being tied up in working capital last quarter. But over time - as in over four quarters - Amazon is likely to achieve the marked opposite; it will generate signicant cash flows from working capital. And that's in spite of Amazon's failure to maintain its previous working capital sleekness that I've talked about before. Here's a comparison of Amazon's cash conversion cycle and several other retailers with varying scales and economics models.

Company 1999 1998 1997

AMZN (44.0) (42.1) (39.3)
DELL (13.8) (9.7) (6.3) (48.9) (277.3)
Borders 84.1 87.1 94.9
BNBN 0.5
Land's End 53.3 67.7 63.0
WMT 22.6 27.6 34.1

Even with Amazon's recent working capital hiccups (CCC just > -30 in last two quarters after adding back inventory write downs), it has exhibited a business model that generates rather than uses cash through working capital in a manner superior to some of the best asset movers in the world.

In fact, instead of losing $190 million into working capital over each of the next three quarters, it's safe to say that Amazon will likely generate inflow during that time, since it will ostensibly bring in more revenues over the next four quarters as it did the last. In fact, the fourth quarter pop could well generate enough float to make the business cash flow positive for the year, assuming several other things go right (which, in a rose colored scenario, they would). Without the working capital outflow, last quarter looked more like $150 million in cash outflow, and that's excluding cash received from options exercised (likely a downtrending phenomenon, in the foreseable future). And that's with an even, rather than positive cash flow from working capital changes.

Although I found Amazon's $34 billion market capitalization dramatically optimistic, I find it highly unlikely this company will run out of cash in the most optimistic eight to ten month future, even without a substantial upturn in its economic performance.

PS: From now on I'll just say rule of thumb.

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