Is Amazon.com Really Worth Over $70 a Share?

At Valuecruncher we are keen watchers of Amazon.com (AMZN). As The Economist magazine pointed out last month – of the three pre-2000 internet giants (eBay (EBAY) and Yahoo (YHOO) are the others) it is AMZN that is currently thriving. We decided to put AMZN through the Valuecruncher on-line valuation tool.

AMZN Valuation

Our assumptions of revenues for the next three years are $19.5 billion in 2008 increasing to $29.5 billion in 2010. We have projected EBITDA margins increasing from 7% in 2008 to 8% in 2010.

We have used a terminal growth rate of 5%, since it is our view that AMZN’s growth beyond 2010 will slow. However, there is still a long way to go before reaching that point. Our numbers project 2009 to 2010 revenue growth of 23%. This assumption has a significant impact on the valuation. If you believe AMZN has better future prospects, then this will positively impact the valuation.

We have used a WACC (discount rate) of 10.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate).

We used a terminal capital expenditure number of $350 million. In our opinion capital expenditure should stabilize around this number.

AMZN Valuation

Our analysis incorporates the cash and debt on the AMZN balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $59.00 which is 19.5% below the current share price of $72.00.

Our valuation incorporates a projection of growth for AMZN in the future. We recognize that AMZN has a range of potentially valuable growth options (especially its Web Services platform). Currently it is very difficult to determine the precise value of these growth options – we have made a broad attempt with our growth projections. However, it appears that these options are being factored into the current share price at a level beyond what we are projecting.

Based on our analysis, AMZN shares look expensive. Play with our assumptions - what does your analysis say?

Disclosure: None

Comments

[David Tsao]

What did you guys set your your SG&A, and COGS as a percentage of top line revenues? My assumptions back in Janurary were slightly different, and I came up with a $60/share valuation. My assumptions gave AMZN every benefit of the doubt, and put set them up under very optimistic scenarios. Almost half of their revenues come from outside the US. 6 months ago, I thought their overseas operations would be somewhat immune to the credit crisis unfolding here. It's a different story now.

Although they see high margin channels through 3rd party sellers, AMZN has extremely tight margins for the overall business. With such tight margins and rising input costs, companies that operate on tight margins are going to feel it. I'm not sure what type of agreement Amazon has with UPS or USPS, but at some point Amazon is going to eat rising costs of shipping, or pass it on to the customer.

Either option isn't great. Customers for the most part, associate AMZN with low cost or free shipping.

There are too many other factors to outline here. I'm not sure what Citi (Mark Mahaney) and Goldman see that I don't with their bullish calls on Amazon.

And please, let's not have another analyst try to compare the Kindle to the iPod.

Two different customer segments, two different purposes.

[Logan]

Ahhh...AMZN is getting killed right now, bought it on 6/17 when this site hyped it and it's been down 20%+ since...realize that's short term, but what gives?

[collinjogger]

If Kindle is marketed rapidly and aggressively to capture its full potential from all forms of print media and related contracts with
content sources, and if the device, itself, is constantly improved
and upgraded with bluetooth interface to various smart phones
without morphing into yet another laptop there would be every
reason for ever higher valuation on AMZN. The outcome rests on the shoulders of AMZN management.