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.

This week Starbuck’s (SBUX) announced it was closing 500 US locations and cutting 7% of its workforce. At Valuecruncher we decided to have a look at some projected financial numbers to analyse what this means for the slower brewing coffee giant utilising our on-line valuation tool.

This is the quantitative take on Starbucks – for a qualitative take; Portfolio magazine profiles Starbucks CEO Howard Schultz in this month’s issue.

SBUX Valuation

Starbucks grew revenues from US$5.3 billion in 2004 to US$9.4 billion in 2007 – a 21% compound annual growth rate. Our assumptions of revenues for the next three years are US$10.5 billion in 2008 growing to US$12.5 billion in 2010 – a 9% compound annual growth rate. We have projected EBITDA margins to be flat at 10%. We have used a terminal growth rate of 4.5%. We calculated this terminal growth rate based on year three growth of 8.7% dropping to a 4% stable growth rate by year 10. We used a terminal capital expenditure number of US$800 million. We have used a WACC (discount rate) of 10%.

Valuecruncher Valuation SBUX

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

Our analysis gives a valuation of US$15.07 which is 4.3% below the current share price of US$15.74.

Based on our analysis the current valuation looks slightly overvalued. 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.

Forget being identified as a company with a share price at a 52-week low – this week General Motors (GM) were identified as a company with a share price at a 53-year low. Goldman Sachs issued a “Sell” rating expressing concerns about the broad auto sector and suggesting GM may need to raise capital. The broad auto sector issues can be summarised by this quote from a CIBC economic report on oil prices – “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.” Any forecast growth for GM isn’t coming from the US market.

GM Valuation

GM’s revenues decreased from US$195.3 billion in 2004 to US$181.1 billion in 2007 – a (2.5%) compound annual growth rate. Our assumptions of revenues for the next three years are US$173.75 billion in 2008 growing to US$190.25 billion in 2010 – a 4.6% compound annual growth rate (2008-10). We have projected EBITDA margins of 4.5% in 2008 then a flat 5.5% moving forward. We have used a terminal growth rate of 3%. We calculated this terminal growth rate based on year three growth of 3.5% dropping to a 3% stable growth rate by year 10. Our view is that this growth is coming from outside the US market – GM has approximately 60% of sales from international (i.e. non-US) markets. We used a terminal capital expenditure number of US$8.5 billion. We have used a WACC (discount rate) of 9.5%.

Valuecruncher Valuation GM

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

Our analysis gives a valuation of US$10.49 which is 9.2% below the current share price of US$11.55.

GM presents an illustration of the sensitivity of key inputs for a discounted cash flow (DCF) model like we use here at Valuecruncher. There are a range of key assumptions where small changes can make significant changes to the valuation. The most significant of these in our model is the EBITDA margin in 2010. If GM can get the EBITDA margin to 6.0% in 2010 (we are projecting 5.5%) then, with all other assumptions constant, we produce a valuation of $26.03 (125% above the current share price). However if we reduce the EBITDA margin to 5.0% in 2010 we place a zero valuation on the GM shares. This doesn’t make the analysis less valuable – it simply illustrates the areas where there are opportunities and risks associated with the on-going GM financial performance.

Based on our analysis the current valuation looks slightly overvalued – but very sensitive to the assumptions identified (especially EBITDA margins). If GM can beat the numbers identified then there is potentially significant upside – if they can’t then the future could look bleak. 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.

This week Oracle announced better than expected financial results but gave a conservative outlook moving forward. We decided to have a look at some projected financial numbers using our on-line valuation tool.

ORCL Valuation

Oracle grew revenues from US$11.8 billion in 2005 to US$22.4 billion in 2008 – a 24% compound annual growth rate. Our assumptions of revenues for the next three years are US$25.75 billion in 2009 growing to US$31.5 billion in 2011 – a 12% compound annual growth rate. We have projected EBITDA margins to be flat at 40%. We have used a terminal growth rate of 4%. We calculated this terminal growth rate based on year three growth of 8.6% dropping to a 3% stable growth rate by year 10. We used a terminal capital expenditure number of US$600 million. We have used a WACC (discount rate) of 10.5%.

Valuecruncher Valuation ORCL

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

Our analysis gives a valuation of US$24.14 which is 12.7% above the current share price of US$21.42.

Based on our analysis the current valuation looks slightly undervalued. 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.

We are revisiting a prior piece of analysis we completed on Google (GOOG). It has been a popular piece of analysis and we wanted to update the analysis using our on-line valuation tool.

GOOG Valuation

Google grew revenues from US$3.2 billion in 2004 to US$16.6 billion in 2007 – a huge 73% compound annual growth rate. Our assumptions of revenues for the next three years are US$22.5 billion in 2008 growing to US$34.5 billion in 2010 – a 27% compound annual growth rate. Year-on-year revenue increases have slowed from 92.5% in 2005 to 56.5% in 2007. We are projecting revenue growth to continue to slow – 35.6% in 2008, 26.7% in 2009 and 21.0% in 2010.

We have projected EBITDA margins at a flat 40%.

We have used a terminal growth rate of 6.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 21% dropping to 18.5% in 2011 and then to a 5% stable growth rate over the next ten years.

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 think this WACC of 10.5% is reasonable but recognise that the actual number could be as low as 10% or as high as 12-12.5%.

We used a terminal capital expenditure number of US$4.25 billion.

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

Our analysis gives a valuation of US$481.94 which is 11.1% below the current share price of US$542.30.  Our valuation is based on the current share price - it isn’t a target price for the future.

Valuecruncher Valuation GOOG – Base Case

We then created three separate scenarios:

1. Growth – where Google’s current dominance of on-line search and advertising is enhanced and revenues grow faster than anticipated in the base case. This scenario holds all the inputs from the base case constant except that we have increased the terminal growth to 7.0% – based on 2011 growth of 20% decreasing to 5% over ten years – and lifted EBITDA margins to 42.5%. This scenario has a valuation of US$590.39 per share. This is 8.9% above the current share price and 22.5% above our base case valuation.

Valuecruncher Valuation GOOG – Growth

2. Disruption – where Google’s current market dominance is reduced by changes in the competitive landscape. This scenario holds all the inputs from the base case constant except that we have decreased the terminal growth to 5.5% – based on 2011 growth of 15% decreasing to 4% over ten years – and dropped EBITDA margins to 37.5%. This scenario has a valuation of US$363.22 per share. This is 33.0% below the current share price and 24.6% below our base case valuation.

Valuecruncher Valuation GOOG – Disruption

3. Black Swan – where Google’s internal activities create a new growth business similar in value to Salesforce.com. The new business grows from US$250 million in revenues in 2009 to US$1.5 billion in 2012 and from $250m in losses to 50% EBIT margins in the same period. To reflect this we have increased 2009 revenues by US$250 million and 2010 revenues by US$500 million. We have reduced the 2009 EBITDA to 39%. We have also lifted the terminal growth to 6.65%. This scenario has a valuation of US$507.85 per share. This is 6.4% below the current share price and 5.4% above our base case valuation. Google creating a new business of the value of Salesforce.com adds just under US$26 to our base case share price.

Valuecruncher Valuation GOOG – Black Swan

Valuecruncher greatly respects Google’s current market dominance in search and on-line advertising. However – we can see both a situation where Google maintains this dominance and more advertising spend moves from traditional media to on-line and conversely one where new methods of discovery on-line disrupt Google’s current dominant position. We do not have a perspective on which of those might occur – but it is worth considering the impact of both scenarios from a valuation perspective. These are scenarios 1 and 2.

Our third scenario looks at the valuation impact if one of the internal Google R&D activities produces a material new business unit (say US$1.5 billion of revenues by 2012 at 50% EBIT margins). The value of this new business unit is ~US$8.1 billion in the valuation – comparable to the current enterprise value of a Salesforce.com.

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.

Shares of 3M have dropped 7.8% for the quarter through June 23 – with the S&P500 down only 0.4%. We thought it was time to have an objective look at 3M using the interactive Valuecruncher valuation tool.

3M Valuation

3M grew revenues from US$16.3 billion in 2002 to US$24.5 billion in 2007 – 8.4% compound annual growth rate. Our assumptions of revenues for the next three years are US$26.5 billion in 2008 growing to US$29.5 billion in 2010 – 6.4% compound annual growth rate. We have projected EBITDA margins remaining flat at 26.5%.

We have used a terminal growth rate of 2.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 5% dropping to a 2% stable growth rate over the next ten years.

We have used a WACC (discount rate) of 9%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). We think this WACC of 9% is reasonable but recognise that the actual number could be as low as 7.5-8.0% or as high as 10%.

We used a terminal capital expenditure number of US$1.5 billion.

Valuecruncher Valuation 3M

Our analysis incorporates the cash and debt on the 3M balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$85.16 which is 16.7% above the current share price of US$72.96

Based on our analysis, 3M shares look cheap. 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.

With GE’s share price hitting a five-year low and analyst coverage turning negative. We thought it was time to have an objective look at the GE numbers using the interactive Valuecruncher valuation tool.

GE Valuation

GE grew revenues from US$134.3 billion in 2004 to US$172.7 billion in 2007 – 8.75% compound annual growth rate. Our assumptions of revenues for the next three years are US$187.5 billion in 2008 growing to US$206.5 billion in 2010 – 6.1% compound annual growth rate. We have projected EBITDA margins increasing from 23.5% in 2008 to 24.5% in 2010.

We have used a terminal growth rate of 2.5%. We calculated this terminal growth rate based on year three growth (2009 to 2010) of 5% dropping to a 2% stable growth rate over the next ten years.

We have used a WACC (discount rate) of 6.5%. The WACC (discount rate) has a material impact on a discounted cash flow valuation (as does the terminal growth rate). We think this WACC of 6.5% is reasonable but recognise that the actual number could be as low as 5.5% or as high as 7.5-8%.

We used a terminal capital expenditure number of US$4.0 billion.

Valuecruncher Valuation GE

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

Our analysis gives a valuation of US$36.16 which is 32.1% above the current share price of US$27.38.

Based on our analysis, GE shares look cheap. 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.

Today we look at the valuation of a traditional media company – in this case Time Warner. Traditional media may be an outdated description of a company that includes the AOL operating division and the recently acquired social network Bebo within their ranks. But maybe digital assets are now simply part of traditional media. Time Warner’s other operating divisions include: Cable, Filmed Entertainment, Networks and Publishing.

TWX Valuation

Time Warner grew revenues from US$39.5 billion in 2003 to US$46.5 billion in 2007 – a 4% compound annual growth rate. Our assumptions of revenues for the next three years are US$48.0 billion in 2008 growing to US$52.0 billion in 2010. We have projected EBITDA margins increasing from 22% in 2008 to 25% in 2010. We have used a terminal growth rate of 2%. We calculated this terminal growth rate based on year three growth of 4% dropping to a 2% stable growth rate by year 10. We used a terminal capital expenditure number of US$4.5 billion. We have used a WACC (discount rate) of 8.5%.

Valuecruncher Valuation TWX

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

Our analysis gives a valuation of US$15.08 which is very close to the current share price of US$15.19.

Based on our analysis the current valuation looks about right. Play with our assumptions - what does your analysis say?

Over at Clusterstock Henry Blodget thinks that eBay looks cheap. We thought that we would take the opportunity to have a look at eBay using the Valuecruncher interactive tool to analyse the company.

EBAY Valuation

Our assumptions are revenues of US$9.0 billion in 2008 growing to US$11.5 billion in 2010. We have used a flat EBITDA margin of 37.5% from 2008. We have used a terminal growth rate of 4.8%. We calculated this terminal growth rate based on year three growth of 12.2% dropping to a 4% stable growth rate by year 10. We used a terminal capital expenditure number of US$800 million. We have used a WACC (discount rate) of 11.5%.

Valuecruncher Valuation EBAY

Our analysis incorporates the cash on the eBay balance sheet – Valuecruncher calculates a net debt number. Our analysis also incorporates Skype within the current eBay structure. It is possible that eBay will decide to sell the Skype business (Yahoo, Google and Microsoft have been suggested as possible acquirers). There may be a higher value owner of Skype than eBay – but until that situation is clarified we have kept Skype where it is.

Our analysis gives a valuation of US$28.13 which is less than 1% below the current share price of US28.38. We don’t agree with Henry Blodget that EBAY looks cheap. Based on our analysis the current valuation looks about right. Play with our assumptions - what does your analysis say?

With the WWDC set for June 9-13and the current AAPL share price of $186.10 - we are being asked about whether we see a $200 share price for AAPL in the near term. Now the AAPL share price may reach $200 in the near future – there are a lot of Apple fans out there. Our concern is what business fundamentals would be required to make this $200 appear a reasonable price?

At Valuecruncher we decided to have a look at the underlying financial performance of AAPL required to get to a $200 share price using our models. We have used the Valuecruncher interactive tool for analysing the company. That means that anyone can follow the links below and amend our valuations. We started by creating a base case valuation of AAPL – using assumptions we believe are reasonable.

AAPL Base Case

Our assumptions are revenues of US$32.8 billion in 2008 growing to US$48.0 billion in 2010. We have used a flat EBITDA margin of 21% from 2008. We have used a terminal growth rate of 5.75%. We calculated that using a present value calculation with the growth rate dropping from 17.5% in 2011 to 3.5% in 2015 (the current projected growth from 2009 to 2010 is 18-20%). We used a terminal capital expenditure number of US$900 million. We have used a WACC (discount rate) of 11.0%.

Valuecruncher Base Case Valuation AAPL

Our analysis gives a share price of $146.70 which is approximately 21% below the current share price of $186.10.

AAPL At $200

To move the valuation we looked at three key levers:

1. The discount rate (or weighted average cost of capital – WACC). This is a measure of the variability (both up and down) of the cash flows generated by AAPL. The more variable the cash flows the higher the discount rate. Because we are trying to get the valuation to $200 we looked at lowering the discount rate from our base case 11.0%. If we lower the base case discount rate to 10.0% (keeping all the other assumptions constant) we increase our valuation to $175.53 (a 20% increase – but still below the current share price).

2. The terminal growth (the rate of growth into the future beyond our three-year forecast period). At Valuecruncher we use a present value calculation to determine this growth rate (the present value of five years of cash flows beyond our three years of forecasts and an economy wide terminal rate – 3.5%). In our base case the 2009 to 2010 growth rate is expected to be 18-20% - based on analyst estimates. We used a 17.5% growth rate in 2011 dropping to a terminal rate of 3.5% from 2015. In this case we used a 25% growth rate in 2011 (this is above current 2009/10 forecasts of 18-20%) dropping to a terminal rate of 3.5% in 2015 – this gives a terminal growth rate of 6.25% compared to 5.75% in the base case. If we increase the terminal growth rate to 6.25% (keeping all the other assumptions constant) we increase our valuation to $159.11 (an 8% increase).

3. The terminal capital expenditure (CAPEX). This is the investment in plant, equipment and technology needed to maintain and grow the cash produced by the business expressed in revenues and profits. In our base case we used a US$900 million terminal CAPEX number. If we reduce this by US$100 million we increase our valuation to $148.49 (a 1% increase).

However if we adjust all three of these levers at the same time – discount rate to 10%, terminal growth to 6.25% and terminal CAPEX to US$800 million (while keeping all the other base case assumptions constant) – we do get close to $200 a share. The combination of those adjustments to our base case valuation is shown in the link below to a new valuation created using the Valuecruncher valuation tool. The result is a valuation of $197.63 – this is 35% above our base case valuation and 6% above the current share price.

Valuecruncher Adjusted Valuation AAPL

Our view is that this adjusted valuation appears optimistic. Play with our assumptions - what does your analysis say?