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

 
 
 

32 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

3 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

3 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 traged ...
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

One dead after drinking contaminated water in Bangladesh
Dhaka, Sep 21 (IANS) A female worker died and scores of others fell sick after drinking water at their factory in Bangladesh Saturday.
 
 
UN sets up mission to combat Ebola
United Nations, Sep 20 (IANS) UN Secretary-General Ban Ki-moon has announced to have established a UN mission to combat Ebola with the advance teams to be deployed to West Africa by Monday.
 
 
Chinese may need 98,000 new pilots in 20 years
Beijing, Sep 20 (IANS) China will need 98,000 more pilots and 101,000 maintenance technicians in the next 20 years, according to latest estimates of Boeing.
 
 
Medvedev slams EU sanctions against Russian banks
Moscow, Sep 20 (IANS) Russian Prime Minister Dmitry Medvedev Saturday criticised the European Union (EU) over its ban on Russian banks, warning that the 28-member bloc will pay the price.
 
 
 

Latest from the Network

CAF bans Algeria's JSK from continental competitions
Algiers, Sep 21 (IANS) The Confederation of African Football (CAF) banned Algeria's JS Kabylie from continental competitions for two years, the Algerian Professional Football League (LFP) said on its official website...
Read more on Sport Balla
 
US Senate wants Modi visit called US-India Partnership Day
Washington, Sep 21 (IANS) The US Senate has passed with a unanimous vote a resolution designating Sep 30, when Indian Prime Minister Narendra Modi visits the White House, as US-India Partnership Day. Introduced by...
Read more on Politics Balla
 
Mel B's sex obsession drives people away
Los Angeles, Sep 21 (IANS) Former Spice girl Mel B's sex obsession is reportedly driving her friends and family away. Mel B is said to have clashed with people closest to her due to her sometimes "raunchy"...
Read more on Celebrity Balla
 
What Nicki Minaj prefers over partying?
Los Angeles, Sep 21 (IANS) Singer Nicki Minaj prefers staying at home and cooking rather than going out to clubs and parties. The "Super Bass" singer has spoken about her low-key lifestyle to Dazed and Confused...
Read more on Celebrity Balla
 
English Premier League standings
London, Sep 21 (IANS) Following are the English Premier League standings after the matches Saturday (tabulated under matches played, won, drawn, lost, goals for, goals against, points), according to Xinhua. 1. Chelsea...
Read more on Sport Balla
 
Chris Martin 'in love' with Lawrence
Los Angeles, Sep 21 (IANS) Coldplay frontman Chris Martin has reportedly "in love" with "Hunger Games" actress Jennifer Lawrence. The singer is said to have started dating Lawrence in August and the pair has become...
Read more on Celebrity Balla
 
Asian Games: Jitu Rai leads India to team bronze
Incheon, Sep 21 (IANS) A day after winning the gold medal in the 50 metre event, Jitu Rai Sunday led India's 10 metre air pistol team to win a bronze medal in the 17th Asian Games and also hunting for his second...
Read more on Sport Balla
 
Jesy Nelson dating Jake Roche?
London, Sep 21 (IANS) Jesy Nelson, member of the Little Mix band, is reportedly dating Rixton band singer Jake Roche. According to a report in The Sun newspaper, the couple has decided to make their whirlwind romance...
Read more on Celebrity Balla
 
Simon Cowell against celeb reality shows
London, Sep 21 (IANS) TV personality Simon Cowell can't stand celebrity-based reality shows like "Strictly Come Dancing", "Celebrity Big Brother" and "I'm a Celebrity...Get Me Out of Here!". He has said he would never...
Read more on Celebrity Balla
 
Asian Games: Indian men's team win bronze in 10m air pistol
Incheon, Sep 21 (IANS) The Indian men's team comprising Jitu Rai, Samresh Jung and Prakash Nanjappa, won the bronze in the men's 10 metre air pistol event in the 17th Asian Games at the Ongnyeon International Shooting...
Read more on Sport Balla