Summary
- Warren Buffett (Trades, Portfolio) describes Benjamin Graham as the second most influential person in his life after his own father.
- Graham recommended five investing strategies — index, defensive, enterprising, net current asset value and special situations.
- Amazon qualifies under Graham's index investing category today, as part of a diversified portfolio of blue chips and other index stocks.
Clash of the titans
Amazon.com Inc. (AMZN, Financial) is a Seattle-based e-commerce and cloud computing company that was founded by Jeff Bezos. Amazon is the largest internet retailer in the world by revenue and market capitalization and second-largest after the Alibaba Group (BABA) in total sales.
Benjamin Graham is known as the "father of value investing."Â His former student, Warren Buffett (Trades, Portfolio), describes him as the second most influential person in his life after his own father.
Previously, we discussed "How to Build a Complete Benjamin Graham Portfolio."
Graham recommended five investing strategies, depending on the kind of investor one was. Index investing was for the most passive investors, while special situations was meant only for the professionals.
In this article, we will determine if Amazon qualifies for investment under one of these strategies. We'll start by evaluating Amazon against Graham's 17 rules for defensive, enterprising and net current asset value investment.
Financial condition
Below are Amazon's sales and balance sheet figures used to calculate some of its Graham ratings and its net current asset value (also known as NCAV or net-net).
- Annual sales: $177.8 billion
- Current assets: $60.2 billion
- Intangibles: $13.4 billion
- Goodwill: $13.4 billion
- Total assets: $131.3 billion
- Current liabilities: $57.8 billion
- Long-term debt: $24.7 billion
- Total liabilities: $103.6 billion
- Shares outstanding: 493 million
Note: Graham analyses are done exclusively with annual data.
Per-share values
Given below are the values used to calculate Amazon's defensive price (Graham number) and enterprising price (serenity number).
- Book value per share: $57.25
- Tangible book value per share: $29.67
- Earnings per share / EPS: $6.15
- EPS - 1 year ago: $4.90
- EPS - 2 years ago: $1.25
- EPS - 3 years ago: -52 cents
- EPS - 4 years ago: 59 cents
- EPS - 5 years ago: -9 cents
- EPS - 6 years ago: $1.37
- EPS - 7 years ago: $2.53
- EPS - 8 years ago: $2.04
- EPS - 9 years ago: $1.49
Defensive Graham investment requires 10 years of uninterrupted positive earnings. Enterprising Graham investment requires five years of uninterrupted positive earnings. NCAV Graham investment requires one year of positive earnings.
Graham ratings
Using the above figures, we get the following Graham ratings for Amazon.
- Sales or size (100% ⇒ $500 million): 35,573.20%
- Current assets/ [2 x Current liabilities]: 52.00%
- Net current Aassets/ long-term debt: 9.35%
- Earnings stability (100% ⇒ 10 years): 30.00%
- Dividend record (100% ⇒ 20 years): 0.00%
- Earnings growth (100% ⇒ 33% growth): 312.03%
- Graham number (%): 5.08%
- NCAV or net-net (%): 0.00%
- Equity/debt (for utilities and financials): 26.75%
AÂ defensive Graham grade requires that all ratings — except the last three — be 100% or more.
An enterprising Graham grade requires minimum ratings of — N/A, 75%, 90%, 50%, 5%, N/A, N/A, N/A and N/A.
An NCAV Graham grade requires minimum earnings stability of 10%.
Intrinsic value
Amazon's intrinsic value here would be the price corresponding to its Graham grade — defensive, enterprising or NCAV.
- Defensive price (Graham number): $72.67
- Enterprising price (serenity number): $46.79
- NCAV price (or net-net): $0.00
- Graham grade: Index
- Intrinsic value: N/A
- Previous close: $1,430.79
- Intrinsic value (%): N/A
But since Amazon does not clear Graham's qualitative criteria for the defensive, enterprising or NCAV investment grades, no specific intrinsic value can be assigned to it.
Special situations
In a recent CNBC interview, Buffett said:
"I'm amazed at the managerial talent of Jeff Bezos... I've blown it in terms of making any money on [Amazon]... But I would never bet against it."
Amazon may qualify under Graham's special situations category for professional investors (strategy number five in the portfolio link above); as would most of Buffett's investments. But Graham did not give a specific framework for special situations (for obvious reasons), so such an analysis is therefore outside the scope of this article.
But, at a minimum, a special situations analysis would be required to establish beyond doubt that Amazon meets Graham's central definition:
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return."
Final assessment: Defensive
In conclusion, Amazon qualifies for investment under Graham's index investing category (strategy number one in the portfolio link above) being a constituent of major indexes such as the S&P 500 and the S&P 100.
This conclusion is additionally borne out by the fact that Apple (AAPL, Financial), Microsoft (MSFT, Financial) and Amazon collectively make up almost 10% of the S&P 500; and that Amazon accounted for more than a quarter of the S&P 500’s gains this year.
Index stocks also fall within Graham's definition of defensive investment. So Amazon is a defensive Graham stock. But the index stock's subcategory does not have a specific intrinsic value calculation. The Graham ratings section instead gives an overall picture of Amazon's margin of safety.
Note that no stock ever qualifies alone under Graham's framework. Every stock is always a constituent of a portfolio of similar stocks. Amazon would, therefore, qualify for investment as part of a diversified portfolio of blue-chips and other index stocks.
