360° Coverage : Amazon Valuations Remain Beyond Lofty

2 Updates
Amazon Valuations Remain Beyond Lofty

Amazon Valuations Remain Beyond Lofty

Feb 7 2014, 5:14pm CST | by

Amazon.com (AMZN) filed its annual Form 10-K last week. Our analysts have picked through the financial footnotes and fine print, and 2013 results reinforce my bearish thesis from May of 2013 that...

Filed under: news

 
 
 

36 weeks ago

Amazon Valuations Remain Beyond Lofty

Feb 7 2014, 5:14pm CST | by

Amazon.com (AMZN) filed its annual Form 10-K last week. Our analysts have picked through the financial footnotes and fine print, and 2013 results reinforce my bearish thesis from May of 2013 that AMZN’s valuation implies a more unrealistic level of growth and profitability than investors realize.

Profit (NOPAT) margins and return on invested capital (ROIC) have continued their downward trend. Revenue growth has slowed. The future cash flow expectations in the stock’s valuation look even more unlikely for the company to achieve.

Margins and ROIC in Decline

Last year was Amazon’s worst in over a decade in terms of NOPAT margin and ROIC. AMZN’s margins were a paltry 0.7% in 2013, down from 1% the year before, while ROIC shrunk from 6.4% in 2012 to 4.2% last year. Figure 1 shows the long-term trend in margins and ROIC.

Figure 1: NOPAT, NOPAT Margin, and ROIC

Sources:   New Constructs, LLC and company filings

GAAP net income says that AMZN swung from a loss in 2012 to a profit in 2013, but in fact the company’s NOPAT declined this past year. Our NOPAT metric strips away non-operating items to get at the cash generated by the company’s core operations.

Looking at NOPAT, we can see that AMZN’s profits have declined for three straight years. Even with double-digit revenue growth, the shrinking of AMZN’s margin has eaten away at profits. Reported earnings can be muddled or unclear, but NOPAT and ROIC tell a clear story of a company with declining profitability.

Slowing Revenue Growth

In addition to the profitability concerns, AMZN’s revenue growth appears to be decelerating. This could be an even bigger concern in the short-term as revenues, rather than profits, have been the driving force behind AMZN’s lofty valuation.

AMZN’s revenue grew by 22% in 2013, its lowest rate since 2001. Its revenue per employee declined by 8% to $635,000. While many companies would envy that figure, it’s the worst mark for Amazon in over a decade. At its peak profitability in 2009 and 2010, AMZN earned over $1 million in revenue per employee.

Everything we’re seeing from AMZN—the declining margin, slowing growth, and decreased efficiency—suggests that the company is really pushing to keep its revenue growth in-line with expectations.

One has to wonder how much longer AMZN can keep up 20+% revenue growth. As soon as AMZN’s revenue growth slows to a more modest rate, it will have to start being valued based on profits, and even the most ardent AMZN bulls know it doesn’t have a leg to stand on there.

Valuation Remains Inflated

I won’t spend too much time on this section, as it’s not exactly a secret that AMZN is expensive. However, it’s helpful to dig a little deeper and quantify just how much growth is baked into AMZN’s valuation./>/>

AMZN’s current valuation of ~$340/share implies that the company will grow NOPAT by 28% compounded annually for 18 years. The amount of growth would put Amazon’s NOPAT at $48 billion, which is 2 and a half times more than Wal-Mart’s NOPAT in 2013.I just don’t see that level of growth happening. To grow profits that much it would need to expand margins, but the steps it would have to take to do so (raising prices, cutting back on discretionary expenses like marketing) would in turn slow revenue growth.

Similar to my thesis with Apple (AAPL), Amazon cannot grow market share and raise prices at the same time. Something has to give. With margins near zero, I am not sure how much they have left to give on pricing and margins. And given the recent revenue growth rate decline, it is not clear how well their pricing strategy is working.

AMZN operates in a competitive landscape. It’s no longer the only name in online retail. Every brick and mortar store has an online store as well, and companies like Best Buy (BBY) that had been left for dead are making a renewed effort to compete with AMZN on price. AMZN’s scale and distribution network still give it an advantage over these competitors, but this advantage is clearly not significant enough to allow AMZN to expand its margins.

Retail is a low-margin business, especially when you go the low price route as AMZN has. The company clearly wants to expand beyond retail, but so far its ventures have just taken it into other competitive businesses. Its foray into online content creation with original programming on Amazon Prime puts it into competition with Netflix (NFLX) and Hulu, while Amazon Web Services competes with a wide variety of cloud platforms.

Amazon keeps searching for a way out, but it’s hard to see what strategic move it could make that would allow for the profit growth its valuation implies.

Sam McBride contributed to this report.

10 States Aiming To Tax Internet Sales

Source: Forbes Business

 
Update
2

7 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing the workforce of ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

8 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17" hit ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

China launches test return orbiter for lunar mission
Beijing, Oct 24 (IANS) China launched an unmanned spacecraft early Friday to test technologies to be used in the Chang'e-5, a future probe that will conduct the country's first moon mission and return to the Earth.
 
 
Mali confirms first Ebola case
Bamako, Oct 24 (IANS) The first case of Ebola virus was reported in western Mali town of Kayes, the country's health ministry has said.
 
 
Unesco chief condemns murder of Paraguayan journalists
Paris, Oct 24 (IANS/EFE) Unesco Director-General Irina Bokova Friday condemned the murder of Paraguayan journalist Pablo Medina Velazquez and his assistant Antonia Maribel Almada Chamorro, who were shot dead Oct 16 near Curuguaty in southeastern Paraguay.
 
 
Kidney stones may increase bone fracture risk
Washington, Oct 24 (IANS) People, especially women, who develop kidney stones may be at increased risk of experiencing bone fractures, finds a research.
 
 
 

Latest from the Network

Second MERS case reported in Qatar
Doha, Oct 23 (IANS) A 43-year-old man in Qatar has tested positive for Middle East Respiratory Syndrome (MERS) in the second confirmed case of the deadly virus in 10 days, media reported Thursday. The patient had...
Read more on Business Balla
 
Two people die in Pakistan bomb blast
Islamabad, Oct 23 (IANS) At least two people were killed and 12 others injured in an explosion that took place in Pakistan's Balochistan province Thursday, media reported. The bomb was planted on a motorcycle, Dawn...
Read more on Politics Balla
 
Trott extends contract with Warwickshire till 2017
London, Oct 23 (IANS) England batsman Jonathan Trott, whose mental issues led to his abrupt departure from last winter's Ashes tour, has confirmed his successful comeback to competitive cricket by signing a new three-...
Read more on Sport Balla
 
Srikanth, Kashyap big movers in BWF rankings
Kuala Lumpur, Oct 23 (IANS) Indian men shuttlers Kidambi Srikanth and Parupalli Kashyap jumped seven places each in the latest Badminton World Federation (BWF) rankings released Thursday while Olympic bronze medallist...
Read more on Sport Balla
 
Alvin Stardust dead
London, Oct 23 (IANS) English singer Alvin Stardust died after a short illness. He was 72. Stardust's manager confirmed the news about his demise Thursday, reports mirror.co.uk. He was recently diagnosed with...
Read more on Celebrity Balla
 
Indian man reunited with family after 40 years
Dubai, Oct 23 (IANS) An Indian man, who had disappeared from his hometown in Kerala nearly 40 years ago, has been found by his family at a hospital in Dubai in the UAE, a newspaper report said. Now in his 60s, Abdulla...
Read more on Politics Balla
 
Srikanth, Kashyap, Saina rise in world rankings
Kala Lumpur, Oct 23 (IANS) Indian men shuttlers Kidambi Srikanth and Parupalli Kashyap jumped seven places each in the latest released Badminton World Federation (BWF) rankings Thursday while Olympic bronze medallist...
Read more on Sport Balla
 
Flintoff signs for Big Bash side Brisbane Heat
Brisbane, Oct 23 (IANS) Former England captain and all-rounder Andrew Flintoff, who retired from international cricket in 2009, Wednesday confirmed that he will play for Brisbane Heat in the Big Bash League (BBL) this...
Read more on Sport Balla
 
OPEC daily basket price falls again
Vienna, Oct 23 (IANS/WAM) The basket of 12 crude oils of the Organization of Petroleum Exporting Countries (OPEC) closed at $81.94 a barrel Wednesday compared to $82.09 Tuesday, the OPEC Secretariat said. The new OPEC...
Read more on Business Balla
 
Lopez to sign multi-million dollar deal?
Los Angeles, Oct 23 (IANS) Singer-actress Jennifer Lopez is reportedly in the final stages of securing a multi-million dollar deal to perform in Las Vegas. The 45-year-old is being offered $350,000 per show at The...
Read more on Celebrity Balla