How to Think About Valuing
Amazon.com’s Stock
What is Amazon.com?
• Part discount mass merchandise retailer (like Walmart)
• “Earth’s Biggest Selection”
• Part Internet...
Why those comparisons matter
• Amazon.com is still rapidly growing
• In its most recent quarter, Amazon’s revenue was near...
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 ...
What could happen if all goes well…
• 5 Years from now, Amazon.com could
• Have twice the revenue it currently does
• Have...
Valuing that potential future Amazon.com…
Start here:
And assume:
• 15% profit growth for 5 years
• 7.5% profit growth for...
Getting there from here (if all goes well)…
• Start with that $276.3 billion in potential future value
• Discount it by th...
Is that realistic?
• As of Thursday, May 22, 2014, Amazon.com’s market
capitalization was $140.3 billion
• This what-if es...
Will that future come true?
In reality, nobody can tell you with certainty what the future
will bring for Amazon.com -- or...
What do I think?
Personally, I do not currently own shares of Amazon.com.
I believe a future somewhere near the one in tha...
Your Credit Card May
Soon Be Worthless
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How to Think About Valuing Amazon.com's Stock

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  • How to Think About Valuing Amazon.com's Stock

    1. 1. How to Think About Valuing Amazon.com’s Stock
    2. 2. 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
    3. 3. 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
    4. 4. What Walmart, Google, and Apple deliver now Selected Past 12 Month Financial Data:
    5. 5. 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
    6. 6. 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:
    7. 7. Valuing that potential future Amazon.com… Start here: And assume: • 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
    8. 8. 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.
    9. 9. 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.
    10. 10. 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.
    11. 11. 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.
    12. 12. Your Credit Card May Soon Be Worthless

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