Is Amazon.com (AMZN) really worth over US$70 a share?
At Valuecruncher we are keen watchers of Amazon.com (AMZN). As The Economist magazine pointed out last month – of the three pre-2000 internet giants (eBay and Yahoo are the others) it is AMZN that is currently thriving. We decided to put AMZN through the Valuecruncher on-line valuation tool.
Our assumptions of revenues for the next three years are US$19.5 billion in 2008 increasing to US$29.5 billion in 2010. We have projected EBITDA margins increasing from 7% in 2008 to 8% in 2010.
We have used a terminal growth rate of 5%. Our view is that AMZN’s growth beyond 2010 will slow – but there is a distance to go yet. Our numbers project 2009 to 2010 revenue growth of 23%. This assumption has a significant impact on the valuation. If you believe AMZN has better future prospects – this will positively impact the valuation.
We have used a WACC (discount rate) of 10.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate).
We used a terminal capital expenditure number of US$350 million. In our opinion capital expenditure should stabilize around this number.
Our analysis incorporates the cash and debt on the AMZN balance sheet – Valuecruncher calculates a net debt number.
Our analysis gives a valuation of US$59.00 which is 19.5% below the current share price of US$72.00.
Our valuation incorporates a projection of growth for AMZN in the future. We recognise that AMZN has a range of potentially valuable growth options (especially their Web Services platform). Currently it is very difficult to determine the precise value of these growth options – we have made a broad attempt with our growth projections. However, it appears that these options are being factored into the current share price at a level beyond what we are projecting.
Based on our analysis, AMZN shares look expensive. Play with our assumptions – what does your analysis say?