What is Amazon.com?
• Part discount mass merchandise retailer (like Walmart)
• “Earth’s Biggest Selection”
• Part Internet titan/information broker (like Google)
• “Other customers who bought…”
• Part innovative hardware designer (like Apple)
• Kindle family of products
Why those comparisons matter
• Amazon.com is still rapidly growing
• In its most recent quarter, Amazon’s revenue was nearly 23%
higher than the same period last year
• Its net profit was anemic in that same quarter -- a mere 0.5% of
revenue, because of its focus on growth
• At some point, Amazon.com’s growth will slow
• As growth slows, profitability will become more important
• At a larger size, Amazon.com will better be able to leverage its
scale to operate more efficiently
• Walmart, Google, and Apple are best in class companies, which
makes their results a decent aspirational target for Amazon.com
What Walmart, Google, and Apple deliver now
Selected Past 12 Month Financial Data:
What if Amazon.com…
• Spent the next 5 years innovating and growing bigger
and more efficient
• Drone delivery and robots in the warehouses
• New services for Prime
• Better, faster Kindles
• Cloud computing
• Fresh groceries
• Then, started leveraging its scale
• Walmart-like margins on merchandise
• Google-like margins on services
• Apple-like margins on hardware
What could happen if all goes well…
• 5 Years from now, Amazon.com could
• Have twice the revenue it currently does
• Have a business that is
• 60% Walmart-like in retail (3.4% margins)
• 20% Google-like in Internet/information (20.9% margins)
• 20% Apple-like in hardware (21.4% margins)
• Still have some room to grow, just not as fast
• That future Amazon.com could look something like this:
Valuing that potential future Amazon.com…
• 15% profit growth for 5 years
• 7.5% profit growth for 5 years after that
• 3% profit growth “in perpetuity” after that
• An investor requires 12% returns for this risk
In that world, 5 years from now, Amazon.com could be
worth around $276.3 billion in market value
Getting there from here (if all goes well)…
• Start with that $276.3 billion in potential future value
• Discount it by the same 12% required return rate for 5
years to represent today’s dollars
• Assume negligible profits between now and then as
Amazon.com continues to invest in its growth
The result: a company that today could be worth around
$156.8 billion, despite very low current profits.
Is that realistic?
• As of Thursday, May 22, 2014, Amazon.com’s market
capitalization was $140.3 billion
• This what-if estimate pegged Amazon.com’s potential
current value around $156.8 billion
• The numbers are reasonably close to each other
Conclusion: If that’s not the future scenario the market is
assuming with Amazon.com, the market is at least projecting
a future that is somewhere near the same ballpark.
Will that future come true?
In reality, nobody can tell you with certainty what the future
will bring for Amazon.com -- or any company, for that matter.
The benefit of this type of exercise is to help you think about
“what needs to be true” in the future for a company to be
worth what the market thinks it’s worth today.
As a potential investor, your job is to consider whether the
market’s view of the future is too rosy, too pessimistic, or just
about right -- and then, invest (or not) accordingly.
What do I think?
Personally, I do not currently own shares of Amazon.com.
I believe a future somewhere near the one in that scenario is
possible, but not even close to a sure thing.
I’d rather watch Amazon.com from the sidelines while the
future plays itself out a little more.
At some point, either:
• Amazon.com’s profits will catch up with the market’s expectations or
• the market’s expectations will sink to match Amazon.com’s profits.
I’ll likely revisit the decision to sit on the sideline around that
time, whenever that may be.