Even Amazon Bears Are Bullish

Did anyone see the Needham & Company research note on Amazon (AMZN)? The report entitled Amazon's Improbable Valuation starts with real promise:

We believe Amazon's current share price now implies a long-term revenue growth rate that will be increasingly difficult to achieve.

The rationale:

Our free-cash-flow valuation model assumes Amazon can grow revenue at a 25% annual rate for 10 years while maintaining a 4.5% operating margin. These assumptions translate into a price target of $120.

The Needham analysts "assume" Amazon is worth $120. At $130, it's fully valued and perhaps a tad overvalued. Their suggestion: HOLD onto it.

Whatever you do, don't SELL. After diligent study and number crunching, Needham alas can ONLY justify $120 a share for Amazon. Beyond that, it gets a little dicey. After all, their basic assumption is that Amazon will increase revenues by 25 percent for 10 years!!!

In the last 4 quarters, Amazon has reported $21.7 billion in sales. At this assumed growth rate Needham expects AMZN to generate over $200 billion in sales by 2018. Are you laughing yet?

According to Fortune Magazine's Global 2009 Global 500 rankings, only 10 firms generated over $200 billion in revenues. They were (drum roll please):

• Royal Dutch Shell (RDS.A)
• Exxon Mobil (XOM)
• Wal-Mart Stores (WMT)
• BP
• Chevron (CVX)
• Total (TOT)
• ConocoPhillips (COP)
  
• ING Group (ING)
• Sinopec (SHI)
  
• Toyota Motor (TM)

Have numbers lost all meaning? Is Amazon in this league? General Electric (GE) generated sales of $183 billion in 2009 (and ranked 12).

To its credit, Amazon did make the Fortune list, coming in at number 485. Ironically, value retailer TJX (TJ Maxx and Marshalls) was next with a similar level of sales. It made $881 million in profits vs. Amazon's $645 million. Oops.

Thanks to the magic of expected growth rates, TJX has a $16 billion market value vs. $57 billion for Amazon. Imagine an analyst trying to justify a similar market value on behalf of TJX!? They'd soon be looking for work.

We are to suspend disbelief in the case of Amazon. It's virtual... none of those pesky bricks with mortar. It is going to (and must) leapfrog out of the land of Whirlpool (WHR), (#488), into the world of Wal-Mart in 10 years. We are to HOLD the stock on the certain knowledge that this will happen. There is little downside, just the possibility of a limited upside. Pay $130 a share if you like, but Amazon MAY not generate MORE than the required $200 billion in sales.

The only doubt: whether or not growth rates will exceed 25%.

Here's how the report puts it:

it's the implications of a growth rate materially north of 25% that concern us. If Amazon were to grow 25% annually, for example, its revenue would increase over tenfold to $220 billion in 2018; the company would emerge as the second-largest retailer, trailing only Wal-Mart Stores (WMT)(not rated). We believe such an increase is a stretch but realistic given Amazon's competitive position in the world-wide retail industry.

"A stretch, but realistic"?

So a 10-year 25% growth rate is reasonable, but anything "materially north" of that becomes "a stretch". Yes, Amazon's valuation is "beginning to border on the improbable."

Sure, we understand.

Look, I love shopping at Amazon. Once could even say my love is "beginning to border on" an addiction. But come on. The 25% growth rate is absurd. Worse, it is already priced into Amazon's current market value.

Bezos and Friends MUST pull in $200 billion annually by 2018 to merely justify a $120 share price! And $131?

This analyst rates Amazon a SELL. Somebody has to do it.

Rather than just talk about it, I shorted Amazon shares yesterday. It is admittedly a small position. Never underestimate the irrationality of the markets.

Anything is possible when analysts use the "pick-a-number-any-number" valuation method.

Disclosure: The author is SHORT Amazon.

Comments

[ari5000]

Using a simple DCF calculator -- the highest value I can make it come up with is $78.

AMZN is a great company, like AAPL, but we all know a great company doesn't always mean a great stock price.

If the Fed were to raise interest rates .50 tomorrow, would AMZN bulls still be happy holding at 130? My guess that would "change everything" - but it really shouldn't. But obviously -- this is not about fair value or 'value' of anything anymore.

2009 Nov 19 08:33 AM

[rrtzmd]

...and similar remarks were made by others here on seekingalpha back in January when Amazon was around $40:

seekingalpha.com/artic...

seekingalpha.com/artic...

...their analyses don't look too awfully insightful right now...I wonder how yours will look in nine months...

2009 Nov 19 10:33 AM

[thrader]

..sorry (and nothing personal), but only donkeys would see value in amzn.

2009 Nov 19 11:07 AM

[The Lonely Value Investor]

Perhaps rrtzmd could tell us: At what price level would Amazon be overvalued?

I was buying eBay in January, so I did not buy Amazon. That said, I didn't write a bearish article about Amazon in January. I'm writing it now.

Oh, and my short position is working just fine so far ;-)

2009 Nov 19 11:55 AM

[Joyful Alternative]

Look at the latest page views and uniques charts on Amazon and eBay; then short eBay.

2009 Nov 19 01:19 PM

[H.J. Huneycutt]

I don't know that 25% revenue growth, in absence of competition, would be impossible for AMZN over the next decade. In fact, the comparison to TJ Maxx hammers home the point --- the Internet retail market still has a lot of growth left in it.

The bigger issue to me is that I question whether AMZN can maintain their stranglehold on Internet retail. AMZN is raking in the dough like no other company in the market place right now (with the possible exception of AAPL). Other companies tend to notice things like this and make decisions to get a piece of the pie.

There are two big players here that could give AMZN more competition: Target (TGT) and Wal-Mart (WMT). Both sell items over the Internet, but have never dedicated much resources or effort to those endeavors. What if Target or Wal-Mart decides to hire a team to develop an online retail website that is comparable to Amazon? AMZN will probably be able to survive given the moat they've already built, but it definitely might sap into that "25% growth in revenues".

At $128, AMZN is a tempting short, because it looks like there's a very high chance it's overvalued. All the same, it's tough to bet against a company as well run as AMZN. But I definitely would not buy in at this price and if I held AMZN stock, I'd be a seller at this point.

2009 Nov 19 02:10 PM

[The Lonely Value Investor]

The fact that TJX makes more money than Amazon illustrates that AMZN is far from competition free. Net margins of less than 4%? Companies that lack competitors make more than that!

2009 Nov 19 04:55 PM

[ari5000]

Let's all get together in nine months then when AMZN is back to $40.

Only down 2.30 today... shouldn't take long.

2009 Nov 19 08:26 PM

[The Lonely Value Investor]

<img class="authors_reply" src="static.seekingalpha.co...">

It's a date! Does RR think Amazon will triple again in 9 months? If it does, I'll admit the error of my ways.

Thou Shalt Not Say Amazon is Overvalued.

Funny, the last time Amazon was at these levels, it was 2000. That ended well, right?

2009 Nov 19 09:55 PM

[The Lonely Value Investor]

P.S. Giving Amazon the benefit of every doubt, I can't justify a value any higher than $80 a share. So Ari5000 and I are on the same page. Odd that its roughly the mid-point between $40 and $130.

AMZN will hit $40 before it hits $400.

2009 Nov 19 10:02 PM

[Run Rickey]

HJ:

Not sure if:

"What if Target or Wal-Mart decides to hire a team to develop an online retail website that is comparable to Amazon?"

makes sense. The Amazon Merchant program works as many retail merchants create a market for goods at competitive prices. Will merchants flow to a Wal-Mart/Target/Costco online platform and will the box stores allow the competition?

Barriers to entry: Amazon has great customer service and dispute resolution. Amazon Merchants have legacy merchant rankings that give consumers confidence to make purchases online.

But agree, if they keep minting money with strong cash flow someone's going to try to get a piece of the action.

2009 Nov 20 01:00 PM

[The Lonely Value Investor]

There is nothing Amazon does that can't be duplicated.

2009 Nov 20 01:14 PM

[bsharvy]

Sarcasm isn't a substitute for analysis.

2009 Nov 20 03:02 PM

[Hester]

Yes, that was what I was thinking. If Amazon is pulling in 200 billion plus in sales in 10 years, you can bet they will be getting at least a little more competition along the way. Those are huge numbers that will not be ignored from competitors. It may not be just Wal mart or Target. There will be plenty of companies, new and old, trying to get a slice of that pie. Amazon has a lot of brand name and goodwill, but that only goes so far when you got giants of retail breathing down your neck.

On Nov 19 02:10 PM H.J. Huneycutt wrote:

> I don't know that 25% revenue growth, in absence of competition,
> would be impossible for AMZN over the next decade. In fact, the comparison
> to TJ Maxx hammers home the point --- the Internet retail market
> still has a lot of growth left in it.
>
> The bigger issue to me is that I question whether AMZN can maintain
> their stranglehold on Internet retail. AMZN is raking in the dough
> like no other company in the market place right now (with the possible
> exception of AAPL). Other companies tend to notice things like this
> and make decisions to get a piece of the pie.
>
> There are two big players here that could give AMZN more competition:
> Target (TGT) and Wal-Mart (WMT). Both sell items over the Internet,
> but have never dedicated much resources or effort to those endeavors.
> What if Target or Wal-Mart decides to hire a team to develop an online
> retail website that is comparable to Amazon? AMZN will probably be
> able to survive given the moat they've already built, but it definitely
> might sap into that "25% growth in revenues".
>
> At $128, AMZN is a tempting short, because it looks like there's
> a very high chance it's overvalued. All the same, it's tough to bet
> against a company as well run as AMZN. But I definitely would not
> buy in at this price and if I held AMZN stock, I'd be a seller at
> this point.

2009 Nov 22 05:52 PM