As recently as 11 August 2008 $AMZN was trading at US$88.09.  With $AMZN now trading around the US$70 mark – does this represent a good opportunity to buy?  We decided to look at the underlying numbers for $AMZN using the Valuecruncher on-line valuation model to see what we think about the current share price.

Valuecruncher valuation model of $AMZN with interactive assumptions

Valuecruncher produces a valuation of US$62.65 for $AMZN.  This is a current valuation not a target price.  This valuation is 10% below the current share price of US$69.96.

Assumptions

Our assumptions are revenues of US$19.5 billion in 2008 growing to US$30.5 billion in 2010. We have used an EBITDA margin of 7% in 2008 increasing to 8% in 2010. We used a terminal growth rate of 5%. We used a terminal capital expenditure number of US$375 million. We have used a WACC (discount rate) of 10.5%.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Our analysis incorporates the cash and debt on the $AMZN balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis the current share price looks expensive.  We recognise that $AMZN has a range of potentially valuable growth options (especially their Web Services platform). Currently it is very difficult to determine a value of these growth options – we have made a broad attempt with our growth projections and terminal growth rate. However, it appears that these options are being valued into the current share price at a level beyond what we are projecting.  Play with our assumptions – what does your analysis say?

Disclosure: None.

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

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.

AMZN Valuation

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.

AMZN Valuation

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?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.

Eight months ago Valuecruncher asked “What’s driving Amazon’s stock price?”, at the time the company was trading at a share price $72 and a forecast EV/EBIT multiple of 50. We valued the company at $59 with a sensitivity range of $53 to $65. As Amazon’s strong 1st quarter performance continued through 2007 the stock price climbed to over $100. In line with the wider market volatility Amazon has plunged from $97 in the New Year to $64.47 at the market close on February 29.

Incorporating the latest consensus analysts estimates Valuecruncher estimates Amazon’s value at $60.83 with a sensitivity range of $56.41 to $65.46. The Valuecruncher mid-point valuation represents a forecast EV/EBIT multiple of 25.3 compared to the 26.9 implied by the current price. This valuation is based on revenues and EBIT growing to $28.9 billion and $1.64 billion by 2010 respectively. These are aggressive growth forecasts that assume the current top line growth will continue and Amazon can achieve it’s elusive margin expansion. Valuation Summary.

Amazon’s core online retail business can be expected to continue to grow driven by an increasing number of online transactions and the introduction of new product lines. Offerings including WebStore, Associates and the Amazon recommendation engine contribute to Amazon being a platform for e-commerce rather than just a destination. This platform will allow Amazon to facilitate and monetise the expected growth e-commerce beyond the core Amazon.com property. As Amazon’s role as a platform continues to evolve it will increasingly be in competition with Google. The Associates program offers an alternative to Google’s Adsense and Amazon’s recommendation engine has the potential to offer an alternative to Google’s search functionality.

Although Amazon have done an outstanding job building their core business to where it is today the future of Amazon may be determined by the potential of the Web Services platform they are establishing. It is difficult to quantify the size of the opportunity and nearly impossible to place a value on Amazon Web Services today but this option has significant upside potential.

It is difficult to identify a direct comparable for Amazon. Evaluating the multiples of other leading technology stocks add’s a degree of context to Amazon’s forecast EV/EBIT multiple of 26.9. Google and eBay have forecast EV/EBIT multiples of 16.7 and 11.1 respectively. While all three of these companies have unique risk and growth profiles these multiples highlight the growth being factored into Amazon’s stock price.

Despite Amazon’s recent decline in stock price and the aggressive growth forecast (particularly at the EBIT line) the current share price is at the top of the Valuecruncher valuation range. The current valuation multiple is significantly higher than other leading technology companies highlighting the market’s strong growth expectations for Amazon. A significant unknown is the potential value of Amazon’s Web Services offering. Based on our analysis Amazon appears reasonably priced with the level of upside a function of the potential of Amazon’s growth options.

Since the end of January the Amazon.com Inc (Amazon) share price has nearly doubled, closing at 72.29 on 6 June 2007. This dramatic increase followed the release of Amazon’s first quarter result in late April in which Amazon announced $3.02 billion of revenue for the quarter, a 32% increase on the first quarter of 2006. Amazon also announced an increase in their second quarter guidance and full year expectations forecasting net sales of $13.4 to $14 billion for 2007 and operating income growing by up to 52% to $593 million.

Valuecruncher DCF Valuation 

Valuecruncher places a mid-point DCF valuation of $58.88 per share with a sensitivity range of $53.56 to $64.49 per share on Amazon based on consensus estimates and Valuecruncher’s own analysis. The DCF mid-point assumes revenues growing to $20.9 billion and EBIT reaching $1 billion in 2009, these are aggressive forecasts. These growth forecasts incorporate Amazon’s potential to diversify into other online retail product lines and the DRM-free music sales opportunity. Although Amazon has been able to consistently produce strong revenue growth it has struggled to improve its profitability margins (EBIT margin of 3.5% in 2006), these forecasts represent an increase in Amazon’s EBIT margin to approximately 5% by 2009. Valuecruncher assumes a long-term growth rate of 5% and uses a cost of capital of 8%. This relatively low cost of capital reflects the dominant position Amazon currently holds in its core markets and product lines and success it has had expanding outside of North America. Despite these aggressive growth, profitability and cost of capital assumptions the Valuecruncher valuation is still significantly lower than the current market price.

Amazon’s Growth Options

Amazon has a number of operations outside of it’s core online retail business including www.a9.com an e-commerce focused search technology, www.alexa.com the traffic ranking site and www.imdb.com the internet movie database. It is impossible to value these and the other growth options Amazon has explicitly due to the lack of information available but it is difficult to imagine these options account for the approximately $5.5 billion difference between the Valuecruncher mid-point valuation and the current market valuation.

Comparable Company Analysis

It is difficult to identify a pure comparable company to Amazon so Valuecruncher has compared the forecast EV/EBIT multiple of Amazon of 50.3 with a number of high profile listed companies. eBay, Google and Microsoft have forecast EV/EBIT multiples of 16.5, 25.9 and 13.4 respectively. Admittedly these companies have a range of growth opportunities and have varying levels of risk but it puts into perspective the amount of growth the market appears to be pricing into the current Amazon share price. To take the comparison to the next level eBay whose core business is online auctions had EBIT of $1.4 billion in 2006 (over 3.5x Amazon) and has a number of growth opportunities is being valued at only 1.4x Amazon based on the latest share prices.

Amazon has exhibited strong growth over the last two quarters and the market has responded positively to the latest quarterly result and revised guidance but based on Valuecruncher’s analysis the stock appears over-priced. Even considering growth options potentially not captured in the DCF valuation it is still difficult to reconcile the current market price with our analysis. The current forecast EV/EBIT multiple of 50.3 suggest the market is over-valuing the growth potential of Amazon.

Valuecruncher Valuation Report - Amazon