Appraising Amazon.com (AMZN)

 

Amazon.com, as everyone probably knows, is a large online retailer.  It primarily sells books (4.7M titles), music and videos, all of which account for about 75% of its total sales according to Wikinvest.com.  AMZN also owns 46% of Drugstore.com.

 

The Kindle, an electronic book reader, is AMZN’s main effort to profit from digital media.  It costs $359 new, bestsellers cost $10 each, and shipping is free. <grin> Over 200,000 titles are currently available and you can read the first chapters for free.  Surprisingly, it is sold out for the 2008 Christmas season and buyers can expect a 11-13 week wait.

 

Wikinvest also details many other drivers of Amazon’s future growth:

 

- 30% of the items sold on Amazon are sold by third-parties for which Amazon receives a commission;

 

Amazon Prime, where customers pay $79 annually to get unlimited express shipping for most products sold directly by the company;

 

- Apparel & Shoes, Home & Kitchen, and Baby Shoes are new Product lines that began in Q2 2007;

 

- Fulfillment by Amazon, where the company sells its fulfillment and customer service capabilities to other sellers;

 

- Value Line lists 8 other web sites that Amazon has acquired, including one of my favorites, the Internet Movie Database (IMDb.com) which provides free encyclopedic info on almost all movies and TV shows, and where Amazon makes it easy to buy those videos.

 

Here is a comparison of four SSGs, 2 of which are mine (one with Hemscott data and the other with S&P data, but with the same judgments).  I conclude that Amazon.com is impossible to intelligently apparaise with a SSG.  In other words, I wouldn’t rely on the SSG to buy or not buy this stock, especially in these turbulant markets.

 

Amazon.com (AMZN)	DougG	Take Stock	Armin-1	Armin-2
Date	11-6-08	same	same	same
Data	Hemscott	Hemscott	Hemscott	S&P
Price	$47.22	$51.98	$47.22	same
52 week High & Low Price	$97.40 & $43.31	n/a	$97.40 & $43.31	same
Project Gwth From	Last Quarter	Last Annual	Last Quarter	same
Sales Growth	14.00%	20.00%	15.00%	same
EPS Growth	14.00%	-08.20%	15.00%	same
High PE	28.0	30.00	37.0	same
High EPS	$2.81	$0.73	$2.78	$2.94
High Price	$78.70	$21.90 73% below VL’s low end	$108.80	$102.90
Value Line Estimated High Price = $80-125 @ $87.25 on 8/22/08
Low PE	20.0	15.1	19.0	same
Low EPS	$1.46	$1.05	$1.46	$1.38
Low Price	$29.20	$15.86	$27.70	$26.20
Upside- Downside	1.7	impossible to calculate	3.2	2.6
Total Return	10.8%	-15.9%	18.2%	16.9%
SSG Buy Under	$39.13	$10.95	$47.98	$45.38
RV/PRV (outliers out)	76.5/67.2 (3 yrs out)	n/a	76.4/66.5 (3 yrs out)	53.1/46.3 (1 out)
RV/PRV (no outliers)	23.1/20.3	n/a	23.1/20.1	29.0/25.2
Quality	Not Rated	TS = 2.6, un-acceptable	Not Rated	S&P = B-
PTPM – 5 yr ave	04.1% trend even	same trend n/a	4.1% trend even	03.9% trend up
ROE – 5 yr ave End Equity	42.9% trend down	n/a	42.9% trend down	63.6% trend down
ROE – 5 yr ave Start Equity	36.8% trend up	Missing	36.8% trend up	95.2% trend up
Debt to Equity – 5 yr ave	-0- trend even	n/a	198.6% trend down	341.6% trend down

 

Discussion

 

(1) Amazon.com is impossible to SSG intelligently:

 

- AMZN’s historic growth and PEs have been so erratic that future trends are way unpredictable.  AMZN had negative EPS for the five years 1998-2002 and a major dip in 2006.  My estimates for the next 5 years were largely guesswork.

 

- To stay close to VL’s estimated High Price, I had to guess that future growth would be 15.00%, some 10.00% below the average of the 6 analysts, AND that AMZN’s 5 year average High and Low PEs would drop by some 56%.  WOW!!

 

(2) EPS growth:

 

- When I did my SSG on 11-6-08, the six analysts I always check were estimating long-term EPS growth at an annual average of 25.5% with Value Line high at 29.00% and S&P low at 23.50%. Reuters via Morningstar was 24.30%, FactSet CallStreet via CNN Money was 25.00%, First Call via Yahoo Finance was 25.18%, and Zacks was 26.00%.

 

- FactSet CallStreet’s 25.00% estimate was from 7 analysts who ranged from a high of 44.00% to a low of 18.00%.  In addition to First Call’s 5 year estimate of 25.18%, it also made an EPS estimate of 27.70% for this year and 14.00% for next year.

 

(3) Industry Comparisons:

 

- ANZN is in the Catalog and Mail Order Industry according to Hemscott data at the Stock Central website.  The company’s Pre-Tax Profit Margin was worse than its Industry average (3.1% vs 5.9%) while its Return on Equity was much better (71.5% vs 13.5%).  Moreover, the company ranks 10^th out of 45 companies in terms of PTPM (EBay was 1^st at 30.9%) and was first in terms of ROE.

 

- At the Better Investing website, AMZN is placed in the Electronic Shopping Industry according to S&P data.  The ranking and number of companies in each industry are not provided.  Amazon was better than its Industry average in terms of PTPM (3.93% vs 2.75%) and much better in terms of ROE (63.61% vs 30.90%)

 

(4) Take Stock is nuts (again)!

 

- TS estimated -8.2% EPS growth for the next 5 years (that’s negative 8.2%).  And, its Forecast High Price of $21.90 was 73% BELOW the low end of VL’s estimated High Price and, can you believe it, 58% BELOW Amazon’s current price.

 

Armin

 

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