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How Insane Is ZU's Valuation (A Different Perspective) ?

|Includes:Zulily, Inc. (ZU)

Last Week $ZU Announced a total of 3.2m Active Customers in 2013 and Average Revenue per Active Customer of approximately $220.

The following Table presents a $ZU valuation based on:

-28% Gross Margins

-20% Operating Expenses

-15% Tax Rate

- 7 year Model

- Discount rate of 12.50% and Terminal Growth rate of 8%

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(Yellow) If Over the next 7 years ZU does not experience growth in Active Customers and no Growth in Average Revenue per Active Customer, then today's ZU's Fair Value is $5.06 per Share.

If Over the next 7 years ZU does experience a 600% growth in Active Customers (to 21m) and a 50% Growth in Average Revenue per Active Customer (to $320), then today's ZU's Fair Value is $43.21 per Share.

To justify the current Market Valuation ($68 PPS), ZU should experience a 1000% growth in Active Customers (to 33m) and a 50% Growth in Average Revenue per Active Customer (to $320).

These Expectations make no Sense to me! For sure, I would not like to be a buyer at $70 ... for the long term

Update: Since some investors use EV/ Foward SALES to value e-retail companies ... let's have a look at how this multiple would/should affect ZU's valuation:

Currently ZU is trading at a EV ($8.04b) / Forward Sales (1.125b) of 7.14.

This is simply insane: Let's compare it ... to ... AMZN!

--> Since February 2009, AMZN never traded at a EV/Forward Sales multiple > 7.09! (EV Sales of >11)

--> Since August 2000, AMZN never traded at a EV/Forward Sales multiple > 4! (EV Sales never >5)

--> AMZN EV/Forward Sales multiple has been on average 1.7169 over the past 14 years (Median Being 1.4613) (EV/Sales Average = 2.5487 | Median = 2.0817)

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Let's look at how AMZN revenue Evolved over Time:

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In the Spring of 2000, AMZN Revenue was $1.6b ... (probably similar to the Revenue of ZU in 2 years from now).

If you assume that over the next 5 years ZU revenue is set to growth at the same rate AMZN Revenue grew over the period 2000-2005 (33.9% year over year growth rate) --> You can expect ZU to generate $3.76b in revenue ... by 2019

and you apply the AMZN average/median EV/Sales Multiple ... you will end up with a ZU EV of $9.70b / $7.82b. (-->Mcap of $9.35b / $7.47b).

This would result in a Fair Value today of approximately $5.18b / $4.14b

---> if you assume a 5% yearly dilution of the Shares basis ... then, the Current Fair Value of ZU's Shares is approximately $31.97 / $25.55

(you could do the same analysis with the EV/1YF Sales multiple ... and get similar results)

At Current Prices ... Market is Expecting ZU to be a better Growth story than AMZN!!!!

btw, do not forget .. than SINCE THE TECH BUBBLE UNTIL 2007, AMZN never had a Mcap > THAN $22b ... and that in 2007 AMZN was already Generating $12b in revenue

You want another great example on how highly overvalued ZU is? ... You should look at VIPS valuation (another over-hyped flash sales stock).

Right Now, VIPS is trading at a EV/1YF Sales multiple of 2.541! It was trading at an EV/1YF Sales lower than 1 ... just 7 months AGO (this show your that the entire trendy e-retailers sector is in an overvaluation bubble ... when you see such a multiple expansion across the board)

---> ZU management estimates 2014 Revenue to his $1.05b - $1.15b

---> if you apply the VIPS EV/1YF Sales Multiple ... you would get a ZU EV of 2.794b

----> Right now ... VIPS should be trading at $16 per Share!

I am not claiming to give you the exact ZU valuation ... No one can do that ...

However ... it can be shown how highly overvalued ZU is:

1. Even if you assume an AMZN-like growth ... ZU is 50% overvalued

2. If you Compare ZU to the other Competitor (NYSE:VIPS) operating exactly in the same Market ... then .. ZU is more than 80% overvalued!

---> BTW ... VIPS has then Entire China Market ... and not just the U.S. moms niche Market. ... LoL ... --> and As you probably know .. I am not a big VIPS fan!

Disclosure: I am short ZU.

Stocks: ZU