Amazon's Rational Price

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About: Amazon.com, Inc. (AMZN)
by: Oleh Kombaiev

Summary

Amazon’s current revenue growth rate deserves a larger capitalization.

Both the current EBITDA growth rate and its absolute size describe Amazon’s current capitalization level as undervalued.

It probably will not last long….

According to Amazon’s (AMZN) latest quarterly results, its TTM revenue growth rates have not shown acceleration for the first time in the last five quarters, and at first glance it seems unsatisfactory. But analysis of longer-term TTM revenue growth rates proves the opposite. Thus, the CAGR of Amazon’s revenue over the two-year period in the last quarter was 31.39%, the highest starting from 2011. And the CAGR over the three-year period reached 29.99% ‒ a record level starting from September 2013:

Amazon ttm revenue

Speaking of the CAGR of Amazon’s TTM revenue over the three-year period, I can note that over the last four years this indicator has been in a stable relationship with the EV/revenue multiple. And within the bounds of this relationship, the current multiple value is clearly undervalued:

Amazon (NASDAQ:<a href=

In other words, Amazon’s current revenue growth rate deserves a larger capitalization.

Let’s analyze a little more thoroughly how Amazon’s revenue affects its capitalization.

Over the last 10 years, Amazon’s capitalization has been in a qualitative (R2=0.92) linear relationship with its revenue:

Amazon (<a href=

As you can see, this relationship identifies Amazon’s current capitalization as balanced.

But in this connection it's hardly appropriate to compare Amazon’s current revenue and, for example, the one that was in 2012, so long as the level of gross margin has increased significantly since then:

Chart AMZN Gross Profit Margin (TTM) data by YCharts

Therefore, let’s consider the same pattern, but only over a period of the last five years:

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And within this pattern, Amazon’s current capitalization already is 10% below the balanced level.

So, in terms of the long-term impact of Amazon’s revenue parameters on its capitalization, Amazon’s current price is obviously below its rational level.

Now let’s look at EBITDA.

In the last quarter EBITDA rose by 83.5% YoY, and this is the best result of its growth starting from 2016. The CAGR over the two-year period was 48.29% ‒ a record level starting from Q1 2017. Acceleration is obvious here, but it's not the most important thing.

When we consider the data of the last 15 years, only a very weak relationship between Amazon’s EBITDA growth rate and the EV/EBITDA multiple is revealed. Nevertheless, the TTM EBITDA annual growth rate in the last quarter was the eighth best result for this period. At the same time, the current EV/EBITDA multiple is below the median:

Amazon (<a href=

This clearly speaks in favor of Amazon’s undervaluation in terms of EBITDA growth.

Let's go on.

Similar to the revenue, the absolute size of Amazon’s EBITDA and capitalization are in a strong (R2>0.9) linear relationship. It's characteristic that when we consider this relationship over a period of the last five years, the company’s current capitalization is identified as undervalued:

Amazon (<a href=

A similar undervaluation of Amazon’s capitalization is revealed when we consider the same pattern over a period of the last 10 years:

Amazon (<a href=

So, I have to repeat the same conclusion I made for the revenue for EBITDA as well ‒ both the current EBITDA growth rate and its absolute size describe Amazon’s current capitalization level as undervalued.

As a conclusion...

I believe that the company’s stock price always reflects the current and expected growth rate of this company. Moreover, the expected growth rate always results from the current one. By the way, this is, in my opinion, the main problem Apple (NASDAQ:AAPL) faces. But Amazon is one of the few large companies whose revenue and EBITDA continue not just growing, but accelerating. And in this connection, as I have shown, the rational size of its capitalization is unambiguously above the current level, which probably will not last long.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.