When bears are feeding, volatile tech stocks like Amazon.Com (NASDAQ:AMZN) get hammered hardest.
They get called names, like "cult stock." They fall through all sorts of resistance. And holders start asking hard questions, like what is this business really worth?
As trading opened Tuesday, Amazon had a market cap of about $215 billion, against revenue of $107 billion. That's less than two times sales, still high for a retailer but ridiculously low for a tech company.
In 2015, Amazon said it had $8 billion in revenue from Amazon Web Services (AWS), which dominates the leading edge of enterprise computing, and on which it had an operating profit margin of 28% last year. I would compare that part of the business with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), where $66 billion in revenue supports a market cap that began the day at $460 billion. (Google's money comes almost entirely from ads, not service revenue.)
Another $5 billion came in from Amazon Prime subscriptions, which has built a business similar to Netflix (NASDAQ:NFLX), with $1.8 billion in revenue during 2015 and a market cap of $33 billion.
The rest of the business is a lot like Costco (NASDAQ:COST), whose market cap of $65 billion supports about $116 billion in 2015 revenue. (If you want another comparison, Federal Express (NYSE:FDX) currently has a market cap of $35 billion against $47 billion in trailing-year revenue.) Figure $94 billion in Costco-like revenue, with $3 billion of Prime subscriptions going to shipping, $2 billion to the media product.
This delivers what should be the rock-bottom, absolutely lowest valuation for Amazon, assuming no growth in 2016. Multiply the cloud revenue by 7, the media revenue by 16 and the product revenue by about .5. That comes to 56 + 48 + 48, or $152 billion. The absolute lowest possible value of Amazon stock, based on the value of competitors, is another 40% down from here. We're back to that $300 figure we were at a year ago.
Remember, however. This is the minimum I think this company can be worth. It says nothing about what Amazon may do this year, and the company has just $10 billion in debt on its $65.5 billion in assets. That's a stronger balance sheet, believe it or not, than Microsoft (NASDAQ:MSFT).
You can argue that, if Amazon goes down to $300, it means the whole market is deteriorating further and the valuation comparisons with Netflix, Costco and Google will weaken, that the price/sales value of Amazon would have to be adjusted down once again. But I consider this a worst-case scenario, a stress test if you will, concerning the company. Assume it doesn't grow, value it just based on what it did last year, and this is the number I get.
For 2016, I fully expect Amazon sales to expand further. I'm expecting $12 billion in cloud revenue, and I'm expecting it to pass Costco in total revenue, while pressing Netflix hard. That's why I still like the company at its present valuation, and consider it a bargain at that price.
Feel free to disagree, but I like my position, and as the market knife continues to fall it's a better proposition than Wal-Mart (NYSE:WMT), which I advised to buy at $60 last month and is now at $65.
When the bears go back to their dens, I'm selling my Wal-Mart and buying more Amazon.
Disclosure: I am/we are long AMZN, GOOGL, AAPL, WMT, MSFT, COST.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.