After reporting earnings Thursday, Amazon.com Inc. (AMZN, Financial) closed with a market capitalization just under $500 billion, which upon further review makes Facebook (FB, Financial) seem cheap at approximately the same value.
Yes, the company’s product and service lineup is awesome. From its Prime membership to Echo/Alexa to Amazon Web Services (AWS), it has built up a sizable group of businesses under the everything store. The company’s fulfillment is legendary with same-day delivery worldwide. Now it will own a chain of grocery stores to help further its goals.
In this latest financial performance update, company sales improved 25% year over year to $37.96 billion (versus $37.18 billion) while profit took a hit, coming in at 40 cents per share (versus $1.42 expected) thanks to continued spending on video, fulfillment centers and international expansion. Its AWS business saw revenue increase to $4.1 billion as it guided for even higher revenue in the next quarter – $39.25 billion to $41.75 billion. It’s anyone’s guess where the bottom line will fall.
For a company that is as inconsistent as Amazon, Wall Street continues to pay a really high price for the stock. Morningstar has a fair value estimate of $1,200 on the stock along with a “Wide” moat grade. While it may be true that Amazon has created the most disruptive force in retail since Walmart (WMT, Financial), that doesn’t mean it should trade at 70 times forward earnings estimates. More importantly, estimates for its earnings are hit or miss anyway. Valueline puts the earnings predictability at 5 out of 100.
Don’t forget, Amazon is still a retailer, using technology to drive better customer experience and more buying, but it’s just a retailer. It may be leading the game for now, but so did Walmart for a while. The game changes, which is why the company has had to make investments in other products, like the failure with Kindle phone (remember that?) or even the Kindle tablet. If Apple (AAPL, Financial), the company with arguably the widest and deepest moat, traded for the same valuation, its stock would be traded in the $1,000 range with a market cap of $5.2 trillion.
This isn’t to knock Amazon’s business, which continues to delight customers; 63 million (52%) of its shoppers are Prime members, and 70% are estimated to be upper-income American homes. The financial performance has been more than stellar. Since 2008, it's seen a 10x rise in revenue, close to a 20x rise in book value and a 9x rise in free cash flow, but the company’s also spending a lot more. Over the last five years, it's spent over $23 billion on CapEx while net income was less than $3 billion.
Are you liquid for $500 billion? You could buy out the leading companies in the entire discount variety store segment and have plenty of money left over to buy out the remaining grocery store leaders, too. Buy all the companies below and you still have roughly $50 billion left to spend on building the next great startup or buy FedEx (FDX)and save on shipping.
Discount store leadership
- Costco (COST, Financial) for 67 billion.
- Dollar General (DG, Financial) for 20 billion.
- Dollar Tree (DLTR, Financial) for 17 billion.
- Target (TGT, Financial) for 31 billion.
- Walmart for 241 billion.
Grocery store leadership
- Kroger (KR, Financial) 21 billion.
- Publix (PUSH, Financial) 16 billion (privately held).
- Tesco (TSCO, Financial) 14 billion (traded on the London Stock Exchange).
- Whole Foods (WFM, Financial) 13.5 billion (Amazon is acquiring).
- Distribuicao (CBD) 6.1 billion.
- Casey’s (CASY) 4.1 billion.
- Sprouts (SFM) 3.3 billion.
Don’t get me wrong; I love Amazon. Don’t shop the Web site much but use AWS for multiple Web sites and think there’s a lot of value in what it's doing overall with Echo/Alexa and its network of resellers. Jeff, keep it up! When you stop and actually think about the price investors are willing to pay for the stock, it’s absolutely ridiculous that Amazon is trading at this level. The problem is I don’t think any of them are going to come to their senses anytime soon.
Even assuming that the earnings estimates are correct and Amazon will earn north of $15 per share in 2018, putting a price multiple more in line with Walmart or Target would be silly talk, dropping the stock down below $180 per share. But giving it a Facebook or Google multiple would put it in the $525 range, which for a company as large and diverse as Amazon would be a lot more appropriate.
Disclosure: I am not long/short any of the stocks mentioned in this article.
