A basic valuation test – Amazon and Walmart
Posted in Finance on October 23rd, 2009 by Sacha PeterAmazon announced a quarter that was higher than analyst expectations. Its shares today launched up about 25%, closing at around $118 per share.
Readers of this weblog will know that the price per share is irrelevant; market capitalization is the important number. Amazon has about 441 million shares outstanding, which means the market values the company at around $52 billion. The company is expecting fourth (Christmas) quarter sales to increase by between 21-36%, so a mid-line estimate would be around 28%. Net income is expected to be around $840 million for year’s end.
Doing the math, you are paying $52 billion for $840 million in income, or a ratio of 62, or a yield return of 1.62%, assuming no further growth in income.
How much would Amazon’s earnings have to increase to warrant such a valuation? By taking an operation such as Walmart (whom has racked up $400 billion in sales, and $13.3 billion in net income after taxes) and looking at its valuation – approximately 13 times earnings we can get a hint. Amazon at 13 times earnings would be expected to earn about $4 billion a year. Both operations have extremely slim margins – about 3.3% for Walmart, and about 3.4% for Amazon in 2008. Assuming Amazon, by virtue of its business model, can get its net margin up to 4%. It would have to increase sales to $100 billion or about four times the levels it will achieve in 2009. This is a very elementary analysis, but it clearly shows that Amazon’s valuation is priced very highly.
Will Amazon be able to achieve $100 billion in sales? Perhaps in 8 to 10 years. Is there any reason to buy shares in Amazon when this growth is already priced in? Not at all.
Never confuse a company and its shares – a company can be great like Amazon, but its shares can be a horrible investment. Another company in the same category (although it is less ridiculously over-valued, but still slightly over-valued) is Costco.
Nice quick analysis. I really like your bond ideas as i have spent more time ‘playing’ with companies that have tangible book value and some options. I would like to expand my knowledge in this area especially for investing in large companies with higher debt (or any) since they are paid before common holders in bankruptcy liquidations.
Your info is almost as good as Hymas, I’ve read a few of his articles in Canadian money saver, but yours is very easy to understand.
Do you have an Rss feed for google reader? If so where is it located on your page?
Great work Sacha! I love your simple, down to earth approaches to valuation/analysis. I wish we had more finance coverage at SLP, in addition to costing.
Speaking of valuation methods could you please give your valuation on the debt of three companies. If you decide to value their debt please state which sites you used to compile data, find the debt values and figure out which debt offering was most attractive (as stated in your Sept 15th post on Holloway Lodging.
L (loblaws), GVC (Glacier media), and AG.un (Arctic Glacier). All are TSX listed.
Thanks,
Derek
Sorry disregard above message for GVC as it only has private bank revolving loan debt.
In sedar i looked at page 28 of Loblaws 2008 annual and found lots of notes outstanding but no good site to get today’s yield, prices and maturity date.
I did find preferred shares for L using TMX.
If you type in http://doubleblind.ca in Google Reader, it will find the RSS feed on its own.
If you wish me to provide valuations on various securities, I will need to be paid for such work as it is very time consuming. I can sell you the research and analysis on individual securities if you are interested, as this is one of the ways I make a living – send me an email if you wish to proceed further. Thank you.