How to Value Amazon?

It's starting to feel all 1999 again...once we begin to hear the most cited example of why stocks are cheap that we heard a decade ago i.e. well if Amazon.com (AMZN) is worth 65x earnings surely ABC is worth 50x, we know Ben Bernanke has bested his predecessor at equity bubble creation.

The problem with valuing Amazon is there is no real competitor - while still growing faster than its brick and mortar peers in retail (hence hard to compare to), it has very little in common (in my opinion) to Ebay (EBAY). Everyone else online in retail is more of a niche play versus Amazon's broad portfolio. As we said Friday - great, innovative company ... but at what cost?

Via CBSMarketwatch:

• Wall Street has long had concerns about Amazon.com Inc.'s market valuation, which has typically traded at a fat premium to other retail companies, and even above many of its pricier Internet peers.
• However, many brokers were still in support of the stock Friday as the shares surged more than 26% to set a new all-time high -- on a split-adjusted basis -- of $118.40. At least four brokers upgraded their ratings to buy following the company's strong third-quarter results, in which earnings jumped 69% on strong sales across all product lines.
• Even more analysts boosted their price targets on the stock -- lifting Wall Street's median price target for the shares from $100 to $125.
• "We recognize that the stock is far from cheap, but believe that it deserves to trade at a premium given its earnings growth, the possibility that earnings could further accelerate, and the fact that it's taking significant share," Dan Geiman of McAdams Wright Ragen wrote in a report. Geiman upgraded the stock to a buy rating and raised his price target from $81 to $130 -- which is 53 times his estimated earnings for the company in 2010.
• Imran Khan of J.P. Morgan & Chase boosted his own price target from $108 to $150, which is currently the highest on Wall Street for Amazon. In a note to clients, he cited Amazon's strong gain in free cash flow -- which jumped 98% to $1.9 billion in the third quarter -- and his belief that the company will continue to take share of the growing e-commerce market. "Given the rapid revenue growth and superior industry position, we believe the stock has capacity to see further multiple expansion," he wrote. (I assume to 80x forward?)

• At its current levels, Amazon trades at 56 times estimated earnings for the next four quarters. Its closest rival -- online merchant eBay carries a price-to-earnings ratio of only 14.6, based on its current share price.
• Traditional retail giants Wal-Mart Stores Inc. and Target Corp. also trade with P/E ratios in the 13-15 range.
• Amazon's valuation is well above that of even big Internet players. Google Inc. (GOOG) which reported nearly $6 billion in revenue for the third quarter and generated more than $2.5 billion in free cash flow, trades at only 22 times estimated earnings -- despite a stock price above $550.
• While Amazon is often compared to other retailers, the company also has a growing business in digital media, selling music, movies and video games for download. In addition, the company says its Kindle e-book reader is now the most popular product on its site, for which it sells electronic versions of books, newspapers and magazines.

• Colin Gillis of Brigantine Advisors is one of the few analysts who is bearish on the stock. He lifted his price target to $90 from $83 but kept his sell rating, noting worries about competition. "As a discounter, Amazon is pressured to provide low prices -- hurting its ability to deliver margin expansion," Gillis wrote. "We note that the Wal-mart CEO recently commented 'If there is going to be a 'Wal-Mart of the Web' it is going to be walmart.com.'"

No position

Comments

[logicalthought:]

AMZN has continued to amaze me in that it has nothing truly proprietary (not even the Kindle) and is essentially just an extremely well-designed web site backed by fulfillment warehouses. In theory, one could replicate the entire company (currently valued at around $50 billion) for, say, $3 billion, consisting of $1 billion to replicate the web site and warehouses and $2 billion for an absolutely ubiquitous ad campaign to build instant name recognition. Requiring, then, a return on just $3 billion of invested capital (vs. AMZN's $50 billion valuation), one could then theoretically underprice AMZN on just about everything, and therefore massively steal its market share. I don't understand why no one has ever done this, so meanwhile, lol, I continue to shop at Amazon.

Oct 26 07:36 AM

[rrtzmd:]

...maybe a better question would regard how to value other retailers...anymore, I basically do ALL of my shopping at Amazon...it has been YEARS since I've shopped at a brick and mortar retailer such as Sears or Best Buy...I simply don't need them...how long will it take for that opinion to spread throughout the population...

Oct 26 09:34 AM

[Harry Tuttle:]

I wouldn't know how to value amazon. However, the valuations offered by Wall St. are not worth the electrons they use in cyberspace. Up when the market goes up, down when the market goes down. They only know one metric: momentum. How else can anyone justify "we recognize it is not cheap but buy it anyway?"

The secret is simple, the analysts do not risk THEIR money buying amazon.

Oct 26 09:48 AM

[Thomas J. G...:]

Good article. I see msft and intc with true monopolies in their segment (and I don't imply the got that position in a nefarious way) with stocks that have made no serious move in the last five years. And amazon with no monopoly pricing power is a stock darling. As far as I'm concerned the only explanation is the momo day traders and fad favoring money managers have latched on. It's a short but telling when to step in is extremely difficult.

Oct 26 11:59 AM

[Patricia013:]

I have no idea how to value Amazon. I only know that I've been buying there steadily for the past two years and only go to Ebay on the rare occasion when I can't find it on Amazon. I know Ebay is trying to emulate Amazon...which is good business FOR Amazon because Ebay is so badly run and mismanaged that it almost chases customers to Amazon ;-)

Oct 26 12:21 PM

[wobatus:]

I don't think you could replicate and top Amazon for $3 billion. I don't pretend to know why its valuation is so high and going higher, other than it is a short-killing machine and they are definitely some of the buyers these days. A lot of the float is locked up in friendly hands.

That said, someone else here mentioned they don't buy bricks and mortar any more and just on-line. I don't go that far and do plenty of shopping at stores (mostly via the mrs.). However, every xmas, I do almost all that shopping at Amazon. Cheap and easy, they have all my relatives' and friends' addresses, know what I have bought them before, etc. A lot of last minute birthday gifts too.

One stop shopping. It's easy.


On Oct 26 07:36 AM logicalthought wrote:

> AMZN has continued to amaze me in that it has nothing truly proprietary
> (not even the Kindle) and is essentially just an extremely well-designed
> web site backed by fulfillment warehouses. In theory, one could replicate
> the entire company (currently valued at around $50 billion) for,
> say, $3 billion, consisting of $1 billion to replicate the web site
> and warehouses and $2 billion for an absolutely ubiquitous ad campaign
> to build instant name recognition. Requiring, then, a return on just
> $3 billion of invested capital (vs. AMZN's $50 billion valuation),
> one could then theoretically underprice AMZN on just about everything,
> and therefore massively steal its market share. I don't understand
> why no one has ever done this, so meanwhile, lol, I continue to shop
> at Amazon.

Oct 26 12:31 PM

[igggy:]

I actually worked for Amazon as a software developer. Their website platform is not perfect but it's years ahead of many competitors. Another company might be able to replicate their platform and site features with one billion dollars but that would be the price tag every year for 10 years or so and by then Amazon's website will have improved too.
I imagine it's nice for Amazon's customers to have a single place to track their purchases (books, CDs, etc). That adds to Amazon's moat too.
Having said that, Amazon has too big a market cap to deserve such a high PE multiple.

Oct 26 01:12 PM

[dj10:]

Good point, but you omit the value of brand which conists of more than a one billion dollar ad campaign, but the value of a growing repeat customer base.

Caveat: Short AMZN as of close of Friday.


On Oct 26 07:36 AM logicalthought wrote:

> AMZN has continued to amaze me in that it has nothing truly proprietary
> (not even the Kindle) and is essentially just an extremely well-designed
> web site backed by fulfillment warehouses. In theory, one could replicate
> the entire company (currently valued at around $50 billion) for,
> say, $3 billion, consisting of $1 billion to replicate the web site
> and warehouses and $2 billion for an absolutely ubiquitous ad campaign
> to build instant name recognition. Requiring, then, a return on just
> $3 billion of invested capital (vs. AMZN's $50 billion valuation),
> one could then theoretically underprice AMZN on just about everything,
> and therefore massively steal its market share. I don't understand
> why no one has ever done this, so meanwhile, lol, I continue to shop
> at Amazon.

Oct 26 01:37 PM

[Jason Tillberg:]

I used the same logic for First Solar when FSLR was 300 + in May of 2008.

.. I guess what's desperately missing is human capital.

On Oct 26 07:36 AM logicalthought wrote:

> AMZN has continued to amaze me in that it has nothing truly proprietary
> (not even the Kindle) and is essentially just an extremely well-designed
> web site backed by fulfillment warehouses. In theory, one could replicate
> the entire company (currently valued at around $50 billion) for,
> say, $3 billion, consisting of $1 billion to replicate the web site
> and warehouses and $2 billion for an absolutely ubiquitous ad campaign
> to build instant name recognition. Requiring, then, a return on just
> $3 billion of invested capital (vs. AMZN's $50 billion valuation),
> one could then theoretically underprice AMZN on just about everything,
> and therefore massively steal its market share. I don't understand
> why no one has ever done this, so meanwhile, lol, I continue to shop
> at Amazon.

Oct 26 04:19 PM

[logicalthought:]

I actually said a "$2 billion" ad campaign (not $1 billion), that would be enough to put your message in front of everyone in the country a vast number of times. The message would be very simple: "We sell EVERYTHING 10% cheaper than Amazon, and we have all the same return policies, etc." I don't see how that very quickly wouldn't steal a vast amount of AMZN's market share. And as for the guy who said you could probably replicate their web site for $1 billion, but then would have to spend $1 billion a year to maintain it, I say "No, way." Even $100 million a year would probably buy you 2000 full-time programmers... Do you mean to tell me that AMZN employs more than 2000 people who do nothing but web site design? Besides, if AMZN is also spending $1 billion on web site maintenance and making money, this (theoretical) company should be able to do the same thing, and remember, the invested capital involved in this company is vastly less, which should provide a lot more pricing flexibility.


On Oct 26 01:37 PM dj10 wrote:

> Good point, but you omit the value of brand which conists of more
> than a one billion dollar ad campaign, but the value of a growing
> repeat customer base.
>
> Caveat: Short AMZN as of close of Friday.

Oct 26 04:22 PM

[2contango:]

Amazon's primary competitive advantage is that is doesn't charge sales tax. If it becomes too successful, tax-charging competitors like WalMart and local businesses will press legislators to even the playing field by enacting some type of online sales tax. Cash-strapped governments won't be too hard to convince.

Oct 26 07:26 PM

[Tom B:]

Salient point, but I can't see Red State Walmart-ians lobbying for NEW TAXES; I mean those guys are basically Government-haters.


On Oct 26 07:26 PM 2contango wrote:

> Amazon's primary competitive advantage is that is doesn't charge
> sales tax. If it becomes too successful, tax-charging competitors
> like WalMart and local businesses will press legislators to even
> the playing field by enacting some type of online sales tax. Cash-strapped
> governments won't be too hard to convince.

Oct 26 09:32 PM

[Tom B:]

AMZN presents a very convenient, easy buying "portal" for all kinds of stuff. I love the company. I hate the stock-- 78 P/E-- NO thank you! And they should drop the Kindle. I like the idea of E-books, but their device is pretty lame compared to the competition-- and overpriced.

Oct 26 09:35 PM

[Wade Slome:]

I wrote on AMZN a few weeks ago:

seekingalpha.com/artic...

-Ws

Oct 27 12:08 AM