On-line retailer Amazon.com ($AMZN) closed yesterday at an all time high of US$135.91. $AMZN is up 218% in the last 12 months - better than Apple ($AAPL) at 122%, Google ($GOOG) at 88% or the broad NASDAQ at 41% [visual]. Time to have a look at a superstar performance.

Valuecruncher Interactive Analysts Report For Amazon ($AMZN)

We have the comparator group set as Wal-Mart ($WMT), Google ($GOOG), eBay ($EBAY) and Yahoo ($YHOO). You can change these peer companies on the site. For example you could add:

1. Overstocked.com ($OSTK) - Interactive Analyst Report For $OSTK
2. Barnes & Noble ($BKS) - Interactive Analyst Report For $BKS
3. Netflix ($NFLX) - Interactive Analyst Report For $NFLX

So what do we think?

Discounted Cash Flow Valuation

We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$99.04 for $AMZN - 27.1% below the current share price. Using a DCF calculation we see $AMZN overvalued. But how about $AMZN compared to a peer group?

Comparison Analysis

I kept the first three peer group companies as $WMT, $GOOG, $EBAY and changed $YHOO to $BKS.  I am going to look at two of the metrics we use at Valuecruncher - Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet - market capitalization doesn’t capture different capital structures when comparing companies.

EV/Revenue shows how a dollar or revenues is being valued by the market against the comparator set. On an EV/Revenue basis $AMZN is trading at 2.8x ($AMZN is being valued at 2.8x last year’s revenues). This compares to $WMT at 0.6x, $GOOG at 7.8x, $EBAY at 3.4x and $BKS at 0.2x. $AMZN’s profit margins (at the EBITDA line) were 6.2% of revenues last year.  A dollar of $AMZN revenues is being valued more than 4.5 times a dollar of $WMT revenues - despite that dollar of revenues producing less profit (on an EBITDA basis) than the $WMT revenues.  A dollar of $AMZN revenues is being valued just less (15%) than a dollar of $EBAY revenues - but $EBAY produces over five times the profit (on an EBITDA basis) on each dollar of revenues as $AMZN does ($AMZN EBITDA margin 6.2% vs 33.3% for $EBAY).  Wow - based on previous performance $AMZN is trading a a massive premium.

Now $AMZN does have a range of additional services like their AWS offering that big future growth are expected from. But that is some significant future growth that is being valued in.

EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $AMZN is trading at 47.0x ($AMZN is being valued at47.0x last year’s profit at the EBITDA line). A dollar of $AMZN EBITDA is worth more than double a dollar of $GOOG EBITDA ($GOOG has EBITDA margins of 37.3% vs $AMZN’s 6.2%).  $GOOG makes over 6 times the profit on each dollar of revenue that $AMZN does - but each dollar $AMZN’s profits are worth over double the comparable $GOOG profits.

This appears crazy.

Summary

Based on our DCF valuation - $AMZN looks significantly overvalued. Looking at some comparators - the market is valuing $AMZN very highly compared to some peers. We believe if you are investing in $AMZN at the current price - you are paying a full price which includes significant future growth.  We like $AMZN as a company - but not at these valuation levels.

Disclosure: no positions.

At Valuecruncher we have looked at Apple ($AAPL) twice over the last six-months. In June with the $AAPL share price at US$186.10 we produced a valuation of US$146.70. Then in September with the $AAPL share price at US$131.05 we had a valuation of US$163.98. We are now in early-December and $AAPL has continued to head south - with the market generally. $AAPL is now trading at US$94.00 - just over half the price we first looked at in June. We felt it was time to revisit the valuation of $AAPL from an intrinsic value perspective - and most importantly the assumptions that we are using. We have also completed some high-level comparator analysis looking at the current price of $AAPL against some broad peers using a range of metrics.

Valuecruncher valuation model of $AAPL with interactive assumptions

Valuecruncher produces a valuation of US$109.55 for $AAPL. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 16.5% above the current share price of US$94.00.

Assumptions

• Revenue: Reuters aggregates 29 analysts covering $AAPL and the mean estimate of 2009 revenues is US$40.6 billion. For our analysis we have used US$36.5 billion in 2009, US$43.5 billion in 2010 and US$49.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 19.0% to 2011. Reuters has $AAPL‘s EBITD margin at 20.8% last year and an average of 16.8% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$1.15 billion per annum moving forward.
• Discount Rate: 11.0%. In our June valuation we used a discount rate of 11.0% but dropped that to 10.0% in September. We believe 11.0% is a reasonable assumption in the current market conditions.
• Terminal Growth Rate: 4.0%. In our assumptions we have 2010/11 revenue growth at 12.6% - we have assumed that growth eventually slows to a 3.0% long-term stable growth rate.

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

Comparator Analysis

Comparator analysis (sometimes called comparison company analysis) is a relative valuation approach. At Valuecruncher we have previously looked at comparator analysis.  For $AAPL we looked at a range of broad peers.  We calculated enterprise values - market capitalisation plus net debt (long-term borrowings less cash).  Then we measured a range of metrics against the enterprise value for $AAPL and the peer set.

We have used the last financial year (LFY) as the base set of metrics.  Of the peer group $EBAY and $YHOO had rough LFY performance.  The other numbers are interesting.  The one that stands out a mile to us however is that $AAPL is currently trading at 7.0x last years free cash flow (FCF).  Remove the cash and you can have the business for 7.0x last years FCF - no growth assumed.  Wow - that looks cheap.

Using our valuation of US$109.55 that gives a EV/FCF multiple of 8.7x.  That is still pretty resonable compared to the peer set.

Play with our assumptions – what does your analysis say?

Disclosure: None

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