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Amazon: A Growth or Value Stock?

June 24, 2014 | About:

1. The Company

Amazon (AMZN) 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   2,339,395 28,825,745 2,407,345 51,291,918 2,407,470
               
  Jeffrey P. Bezos/Chief Executive Officer   1,781,840 1,681,840 1,681,840 1,681,840 1,681,840
               
  Thomas J. Szkutak/Senior Vice President and Chief Financial Officer   163,200 6,628,500 163,200 8,451,369 163,200
               
  Diego Piacentini/Senior Vice President, International Consumer Business   230,905 6,696,205 230,905 11,819,223 230,905
               
  Jeffrey A. Wilke/Senior Vice President, Consumer Business   163,450 7,190,700 168,200 17,727,806 168,325
               
  Andrew Jassy/Senior Vice President, Web Services   - 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
Cash and Short Term Investments 12447 11448 9576 8762
Cash 2707 - - -
Cash & Equivalents 5951 8084 5269 3777
Short Term Investments 3789 3364 4307 4985
Total Receivables, Net 4767 3817 2571 1587
Accounts Receivables - Trade, Net 4767 3817 2571 1587
Total Inventory 7411 6031 4992 3202
Prepaid Expenses - - - -
Other Current Assets, Total - - 351 196
Total Assets 40159 32555 25278 18797
Property/Plant/Equipment, Total - Net 10949 7060 4417 2414
Property/Plant/Equipment, Total - Gross 14809 9582 5786 3256
Accumulated Depreciation, Total -3860 -2522 -1369 -842
Goodwill, Net 2655 2552 1955 1349
Intangibles, Net 645 725 647 563
Long Term Investments - - - -
Note Receivable - Long Term - - - -
Other Long Term Assets, Total 1285 922 769 724
Other Assets, Total - - - -
Total Current Liabilities 22980 19002 14896 10372
Accounts Payable 15133 13318 11145 8051
Payable/Accrued - - - -
Accrued Expenses 5288 3792 3751 1860
Notes Payable/Short Term Debt - - - -
Current Port. of LT Debt/Capital Leases - - - -
Other Current liabilities, Total 2559 1892 - 461
Total Liabilities 30413 24363 17521 11933
Total Long Term Debt 5181 3830 1415 641
Long Term Debt 3191 3084 255 184
Capital Lease Obligations 1990 746 1160 457
Total Debt 5181 3830 1415 641
Deferred Income Tax - - - -
Minority Interest - - - -
Other Liabilities, Total 2252 1531 1210 920
Total Equity 9746 8192 7757 6864
Redeemable Preferred Stock, Total - - - -
Preferred Stock - Non Redeemable, Net - - - -
Common Stock, Total 5 5 5 5
Additional Paid-In Capital 9573 8347 6990 6325
Retained Earnings (Accumulated Deficit) 2190 1916 1955 1324
Treasury Stock - Common -1837 -1837 -877 -600
ESOP Debt Guarantee - - - -
Unrealized Gain (Loss) - - 10 13
Other Equity, Total -185 -239 -326 -203
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
Depreciation/Depletion 3253 2159 1083 568
Amortization - - - -
Deferred Taxes -156 -265 136 4
Non-Cash Items 1337 802 589 190
Cash Receipts - - - -
Cash Payments - - - -
Cash Taxes Paid 169 112 33 75
Cash Interest Paid 97 31 14 11
Changes in Working Capital 767 1523 1464 1581
Cash From Investing Activities -4276 -3595 -1930 -3360
Capital Expenditures -3444 -3785 -1811 -979
Other Investing Cash Flow Items, Total -832 190 -119 -2381
Cash From Financing Activities -539 2259 -482 181
Financing Cash Flow Items 78 429 62 259
Total Cash Dividends Paid - - - -
Issuance (Retirement) of Stock, Net - -960 -277 -
Issuance (Retirement) of Debt, Net -617 2790 -267 -78
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.

About the author:


Rating: 2.7/5 (3 votes)

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Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 months ago

AMZN: Growth or Value?

Neither.

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