1. The Company
Amazon (AMZN, Financial) has been at various times a growth investor stock and a value investor stock. Charlies Munger recently said that Amazon's disruptive business model is likely to change America. He is right in that Amazon a disruptive business model, it's probably the most disruptive business since Standard & Oil. Now Amazon has received the Fire phone which is the first 3D phone to be made and only time will tell how the phone will do against Samsung and Apple.
1.2 Company History
Amazon was founded in Seattle, Washington in 1994 by Jeff Bezos to sell books online. He believed that online commerce was the future and that there is a a large world wide demand for literature. The company's online bookstore was a massive success, that had rapid growth and a massive competitive advantage to the brick and motors who can only offer about 200,000 titles, while Amazon can offer an unlimited virtual warehouse of book titles. The company's initial business plan was unusual, it did not expect to make a profit for four years to five years. Amazon's unconventional business model caused shareholders and investors who didn't like the slow growth for Amazon to reach profitability. The company finally made a profit in the fourth quarter of 2001 of $5 million, while the company now receives revenues of $1 billion. Today Amazon sells a wide range of products on its site from books to fresh food. Amazon manufacturers and sells E-Readers and Kindles to the general public. The company's Kindle tablets held, at the end of 2013, a market share of 9.4%.
2. Business Overview
The company is the largest online retailer in the world and continues to expand its business from books to now cell phones. Amazon now sells DVDs, VHS, CDs, video, and MP3, downloads/streaming, software, video games, electronics, apparels, and the company also produces comsumer electronics notably the Fire phone, Amazon Kindle e-book, reader, and the Kindle Fire tablet computer. The company is also a major proivider of cloud computing services.
2.2 Subsidiares:
- A9.com - A company that is focus on researching and building innovated technology
- Lab126 - Developers of consumer electronics like the Kindle
- Endless Shoe - E-commerce site for shoes
- Brillance Audio - Largest independent audiobook producer in the United States
Amazon owns over 40 subsidiares including Zappos, Diapers.com, Kiva Systems, Goodread, and IMDb.
2.3 Management Compensation
| Key Executive Compensation | Â | 2,339,395 | 28,825,745 | 2,407,345 | 51,291,918 | 2,407,470 |
| Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Jeffrey P. Bezos/Chief Executive Officer | Â | 1,781,840 | 1,681,840 | 1,681,840 | 1,681,840 | 1,681,840 |
| Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Thomas J. Szkutak/Senior Vice President and Chief Financial Officer | Â | 163,200 | 6,628,500 | 163,200 | 8,451,369 | 163,200 |
| Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Diego Piacentini/Senior Vice President, International Consumer Business | Â | 230,905 | 6,696,205 | 230,905 | 11,819,223 | 230,905 |
| Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Jeffrey A. Wilke/Senior Vice President, Consumer Business | Â | 163,450 | 7,190,700 | 168,200 | 17,727,806 | 168,325 |
| Â | Â | Â | Â | Â | Â | Â | Â |
| Â | Andrew Jassy/Senior Vice President, Web Services | Â | - | 6,628,500 | 163,200 | 11,611,680 | 163,200 |
3. Finances
Balance Sheet
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Current Assets | 24625 | 21296 | 17490 | 13747 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | 40159 | 32555 | 25278 | 18797 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Current Liabilities | 22980 | 19002 | 14896 | 10372 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities | 30413 | 24363 | 17521 | 11933 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Total Equity | 9746 | 8192 | 7757 | 6864 | |||||||||||||||||||||||||||||||||||||||||||||
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| Total Liabilities & Shareholders' Equity | 40159 | 32555 | 25278 | 18797 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Common Shares Outstanding | 459 | 454 | 455 | 451 | |||||||||||||||||||||||||||||||||||||||||||||
| Total Preferred Shares Outstanding | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Cash Flow Statements
| 2013 31/12 | 2012 31/12 | 2011 31/12 | 2010 31/12 | ||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Period Length: | 12 Months | 12 Months | 12 Months | 12 Months | |||||||||||||||||||||||||||||||||||||||||||||
| Net Income/Starting Line | 274 | -39 | 631 | 1152 | |||||||||||||||||||||||||||||||||||||||||||||
| Cash From Operating Activities | 5475 | 4180 | 3903 | 3495 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash From Investing Activities | -4276 | -3595 | -1930 | -3360 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash From Financing Activities | -539 | 2259 | -482 | 181 | |||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Effects | -86 | -29 | 1 | 17 | |||||||||||||||||||||||||||||||||||||||||||||
| Net Change in Cash | 574 | 2815 | 1492 | 333 | |||||||||||||||||||||||||||||||||||||||||||||
Amazon revenues increased 22% to $74.45 billion and net income totaled $274 million vs a loss of $39 million in 2013. North America revenues increased 28% to $44.52 billion and international segment increased 14% to $29 billion for 2013. Online sales increased 28% to $44.52 billion in 2013. Amazon sells at 628x its earnings of $0.60 per share. This shows that Amazon is overvalued and sells at a earning multiple that is over 500 times that of the NASDAQ which sells at $21.42. If Amazon sold at the same multiple as the NASDAQ it would sell at only $13 per share. People are willing to buy Amazon to 512x its earnings, means people believe that Amazon will grow into this valuation.
4. Valuation
Valuation Ratio
| Price to Earnings (P/E) | 628.62 |
| Earnings Per Share (EPS) | $0.60 |
| Next Years (EPS) | $0.66 |
| Sales Per Share | $162.11 |
| Book Value Per Share | $21.22 |
| Growth Rate | 10.69% |
| Price to Book (P/B) | 17.67 |
| EV/EBITDA | 46.82 |
Amazon Revenues per Employees
- 2013: $593,600
- 2012: $839,000
- 2011: $855, 463
- 2010: $1,014,955
- 2009: $1,008,601
- 2008: $925,894
- 2007: $872,647
- 2006: $770,576
- 2005: $707,500
- 2004: $769,000
- 2003: $674,872
- 2002: $524,400
- 2001: $400,256
- 2000: $306,889
- 1999: $215,789
- 1998: $290,476
- 1997: $241,042
- 18 year Average: $611,720
Average 5-Year Growth Rates
| Revenues Growth Rate | 31.39% |
| Operating Income Growth Rate | 17.85% |
| Net Income Growth Rate | 31.71% |
| Free Cash Flow Growth Rate | 17.75% |
| Capex Growth Rate | 61% |
| Earnings Growth Rate | 32% |
Amazon has average revenues per employee of $611,720 and has sales per share of $162.11. Based on Amazon sales per share its only sell for about 2x its sales while the industry average is 4.46x. If Amazon sold at 2.5x to 3x its sales per share then its would sale for about $405.27 to $486.33. Traditional valuation method are not the best way to way Amazon since its doesn't take into account it market share, its sales per employees, its sales per share, or its reinvestment of its earnings and free cash flow to gain market share. Earnings and cash flow aren't as good as they would be if Jeff Bezos wasn't reinvesting earnings and cash flow back into the business to grow its future earnings and cash flow. The question you should ask is what are you willing to pay to for a company like Amazon.
5. Risk
The only real risk is that you will overpay for Amazon stock and underperform the market or worse the stock will crash. The potential for permanent loss of capital is there and will be there, but you have to look at Amazon business and ask yourself do I want to know a piece of this business and then what price you are willing to pay. You have to decide how high the potential for permanent loss of capital and how to limited it when or if you buy.
