Running The Numbers: Amazon Looks Expensive

As recently as August 11, 2008 Amazon (AMZN) was trading at $88.09.  With AMZN now trading around the $70 mark – does this represent a good opportunity to buy?  We decided to look at the underlying numbers for AMZN, using the Valuecruncher on-line valuation model to see what we think about the current share price.

Valuecruncher produces a valuation of $62.65 for AMZN.  This is a current valuation, not a target price, and is 10% below the current share price of $69.96.

Assumptions

Our assumptions are revenues of $19.5 billion in 2008 growing to $30.5 billion in 2010. We have used an EBITDA margin of 7% in 2008 increasing to 8% in 2010. We used a terminal growth rate of 5%, a terminal capital expenditure number of $375 million, and a WACC (discount rate) of 10.5%.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

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

Based on our analysis, the current share price looks expensive.  We recognize that AMZN has a range of potentially valuable growth options (especially its Web Services platform). Currently, it is very difficult to determine a value of these growth options – we have made a broad attempt with our growth projections and terminal growth rate. However, it appears that these options are being valued into the current share price at a level beyond what we are projecting.  Play with our assumptions – what does your analysis say?

Disclosure: None.

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Comments

[CF:]

And where do we think Amazon is going to add 11 billion dollars (56%!) in new business in the next 2 years from?

2008 Sep 26 02:05 PM

[Valuecruncher:]

$AMZN grew revenues from $6.9bn in 2004 to $14.8bn in 2007 - a 29% CAGR in that period. Our analysis has the same growth moving forward - growth in the core business and other opportunities (i.e. Web Services). $30.5bn in 2010 is a 28% CAGR from 2007 to 2010.

Our analysis suggests $AMZN is overvalued at current share prices. Even with significant revenue growth projections and a 5% terminal growth rate. Even assuming these growth rates are achieved - the stock looks expensive.

2008 Sep 27 01:32 AM

[Andrew Krainin:]

So you used Amazon's revenue CAGR for the last three years, 28%, to project forward two more years to 2010, then slashed that to a 5% terminal growth rate from 2010 to the end of time, comparable to the growth rate of a large industrial company.

I wonder why your valuation came out below the market value?

2008 Sep 27 02:09 AM

[Valuecruncher:]

@ Andrew Krainin

I would dispute that 5% terminal growth is comparable to a large industrial.

You would expect an approximate 3% long-term growth rate for an economy like the US. Above that starts to become a material number in a DCF calculation.

blog.valuecruncher.com.../

2008 Sep 27 05:30 AM