By Fedor Sannikov
Amazon (AMZN) share prices have grown by over 40% since the beginning of the year. The company's capitalization is more than $110B with $377M in earnings for the last 12 months. This means that the capitalization to earnings ratio is approximately 300. Is the price of the company fundamentally justified?
First of all, let's discuss the market where Amazon is operating. By 2013, the e-commerce market will have exceeded 1T Euro or about $1.25T USD. I deliberately mentioned the first figure in Euro due to the fact that as of today the European e-commerce market is the largest in volume (not the North American). In 2011, the European e-commerce market was $307B, while the North American was $297B. The difference is not significant however; Europe remains the leader according to the forecasts. Further on, China will become the leader due to rapid growth of the middle class and internet penetration.
In other words, today the global e-commerce market has exceeded $1T USD. Regarding the USA, where Amazon headquarters is located, in 2012 12% sales growth compared to 2011 is expected. The estimated market volume is $226B USD.
What are the e-commerce market forecasts? According to Goldman Sachs forecasts, the global average on-line commerce market growth is estimated at 19.4% until the end of 2013. The U.S. market grows slower than the global average. Goldman forecasts 12.4% for the American market. The market is more mature here.
China should be mentioned separately, where the e-commerce growth rates approximate three-digit figures. According to Barclays' forecast, in the next three years the Chinese market will triple to $430B USD by 2015, thus exceeding the American market by 20%. According to Cisco data, Great Britain, France, Japan and South Korea will represent 30% of the global e-commerce market by 2015.
What is special about this market and who does it profit? In regards to countries, the population increase, the middle class development, the internet penetration have decisive impact on the market growth in regions.
It is not easy for companies to master local markets due to the population's special features. For instance, in the emerging Asia, where packages cannot be left by the door due to the climate conditions or density of population, the delivery within specific time, in the evening, when the consumer is at home is crucial. The smaller the territory of the country the faster delivery is demanded by the consumers.
In Japan as well as in other densely populated countries, shopping for groceries on-line is becoming more popular. Today, about 30% of the Japanese buy groceries through internet stores. The service is mostly popular with the retirees.
What can we say about Amazon and why is it so popular that it costs over $100B? Jeffrey Bezos founded Amazon in 1994 and remains the company's CEO and Chairman of the Board. Amazon survived the 2000 bubble, being one of the few technological companies of that time successfully operating today.
Amazon 2011 revenue was $48B and about $63B is expected in 2012. The sales growth rates exceed the industry growth rates, though its global market share is approximately 5% and 15% in the U.S. Amazon average sales rate was 34.1% and the earnings growth was 7% in the past 4 years. The low earnings growth rate was caused by its decrease in 2011 due to leading fulfillment costs growth, marketing and technological expenses. If we do not take into account 2011, then the average earnings growth rate has been almost 34% for the previous three years.
In spite of the global recession 2008-2010, Amazon reported double-digit performance growth rates. According to Zacks, the forecast earnings per share growth rate will be 28% in the next 5 years. The company is practically debt-free and possesses cash equal to 28% of the total assets which is a very strong argument for financial analysts.
We cannot but mention Kindle Fire popularity which remains the most sold product since its launch in 2011. It is a mini tablet computer with numerous functions which are also offered by iPad, its direct competitor.
The company's major markets include the U.S., Canada, China, Japan, France, Germany, Italy, Spain and the Great Britain. About 55% of Amazon sales are realized on the North American market, while the rest are international.
There are over 180 million active buyers' accounts and over 2 million active sellers' accounts. As I have already mentioned, Amazon does not only sell its own products. About 40% of the company's sales items are third-party sales that use Amazon services.
Which are the most rapidly developing segments that impact the company's growth? The three main consumer groups include on-line buyers (the main source of income), Amazon on-line sellers (the company collects fee from the latter) and web-site developers offering technological infrastructure via Amazon services (for instance, collecting payments from clients through Amazon payment processing system).
Almost 60% of Amazon sales are electronics and general merchandise. This sector is rapidly developing on international markets with 54% in average growth rates for the past three years. Amazon is actively constructing the so-called fulfillment centers around the globe where the orders from the stores are being processed. The key role in the competitive struggle will be the efficiency and the delivery costs.
Media segment represents about 37% of sales and includes the sale of books, music, video, etc. For the last 3 years its average growth rate has been 17%. Therefore, Amazon is no longer a book or a music store, but a kind of on-line supermarket for clothes, commodities, gardening, and kids.
How is the current Amazon price justified? The company's sales growth is expected to drop to an average of 25% in the third trimester compared to the average growth of 34% in 4 years. Amazon is slowing down. The expected sales growth is 30.5% and 28.4% in 2012 and 2013, accordingly. The company does not pay a dividend which means that the current "conservative yield" is 0.33% which is 5 times lower than the return on the 10-year U.S. bonds.
Today, the market estimates are based on the expectations of return on Amazon investments into infrastructure around the globe. So far it has negatively affected the earnings, but the participants expect the decrease in investments level, cash flow growth and triple-digit growth rates in 2013. The bad news is that investors' patience usually tends to end.
Other bad news are that with such earnings growth rates, AMZN capitalization to earnings ratio will be 85 in 2013, while the industry average is 28. Even with the current optimistic forecast earnings and cash flow growth, according to our estimates, the intrinsic value of share does not exceed $180 while its current price is $250. The conclusions are up to you.
Disclaimer: This article contains the opinions of the author but not necessarily the opinions of Oxenuk Management, LLC. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Note: Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.