On-line retailer Amazon.com (NASDAQ:AMZN) closed Monday at an all time high of US$135.91. $AMZN is up 218% in the last 12 months - better than Apple (NASDAQ:AAPL) at 122%, Google (NASDAQ:GOOG) at 88% or the broad NASDAQ at 41% [visual]. It's time to have a look at a superstar performance.
- Overstocked.com ($OSTK) - Interactive Analyst Report for $OSTK
- Barnes & Noble ($BKS) - Interactive Analyst Report for $BKS
- Netflix ($NFLX) - Interactive Analyst Report for $NFLX
So what do we think?
Discounted Cash Flow Valuation
We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$99.04 for $AMZN - 27.1% below the current share price. Using a DCF calculation we see $AMZN overvalued. But how about $AMZN compared to a peer group?
I kept the first three peer group companies as $WMT, $GOOG, $EBAY and changed $YHOO to $BKS. I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.
EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AMZN is trading at 2.8x ($AMZN is being valued at 2.8x last year’s revenues). This compares to $WMT at 0.6x, $GOOG at 7.8x, $EBAY at 3.4x and $BKS at 0.2x. $AMZN’s profit margins (at the EBITDA line) were 6.2% of revenues last year. A dollar of $AMZN revenues is being valued more than 4.5 times a dollar of $WMT revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the $WMT revenues. A dollar of $AMZN revenues is being valued just less (15%) than a dollar of $EBAY revenues - but $EBAY produces over five times the profit (on an EBITDA basis) on each dollar of revenues as $AMZN does ($AMZN EBITDA margin 6.2% vs 33.3% for $EBAY). Wow - based on previous performance $AMZN is trading a a massive premium.
Now $AMZN does have a range of additional services like their AWS offering that big future growth are expected from. But that is some significant future growth that is being valued in.
EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AMZN is trading at 47.0x ($AMZN is being valued at47.0x last year’s profit at the EBITDA line). A dollar of $AMZN EBITDA is worth more than double a dollar of $GOOG EBITDA ($GOOG has EBITDA margins of 37.3% vs $AMZN’s 6.2%). $GOOG makes over 6 times the profit on each dollar of revenue that $AMZN does - but each dollar $AMZN’s profits are worth over double the comparable $GOOG profits.
This appears crazy.
Based on our DCF valuation - $AMZN looks significantly overvalued. Looking at some comparators - the market is valuing $AMZN very highly compared to some peers. We believe if you are investing in $AMZN at the current price - you are paying a full price which includes significant future growth. We like $AMZN as a company - but not at these valuation levels.
Disclosure: No positions in the stocks mentioned