Stocks

ModernGraham Valuation: Amazon Inc. (AMZN)

moneyCompany Profile (obtained from Google Finance): Amazon.com, Inc. (Amazon.com) serves consumers through its retail websites and focus on selection, price, and convenience. The Company offers programs that enables sellers to sell their products on its websites and their own branded websites and to fulfill orders through them , and programs that allow authors, musicians, filmmakers, application developers, and others to publish and sell content. The Company operates in two segments: North America and International. The Company serves consumers through its retail websites, and focus on selection, price, and convenience. The Company designs its websites to enable millions of products to be sold by the Company and by third parties across dozens of product categories. Customers access its websites directly and through its mobile websites and apps. It also manufactures and sells Kindle devices. In October 2013, Amazon.com Inc acquired TenMarks Education Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 0/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 ** See conclusion
MG Opinion Overvalued
Value Based on 3% Growth $13.00
Value Based on 0% Growth $7.62
Market Implied Growth Rate 213.23%
Net Current Asset Value (NCAV) -$11.88
PEmg 434.97
Current Ratio 1.07
PB Ratio 19.66

Balance Sheet – 9/30/2013 

Current Assets $17,334,000,000
Current Liabilities $16,135,000,000
Total Debt $3,043,000,000
Total Assets $31,861,000,000
Intangible Assets $2,635,000,000
Total Liabilities $22,774,000,000
Outstanding Shares 458,000,000

Earnings Per Share

2013 (estimate) $0.52
2012 -$0.09
2011 $1.37
2010 $2.53
2009 $2.04
2008 $1.49
2007 $1.12
2006 $0.45
2005 $0.78
2004 $1.39
2003 $0.08
2002 -$0.40

Earnings Per Share – ModernGraham 

2013 (estimate) $0.90
2012 $1.21
2011 $1.81
2010 $1.86
2009 $1.41
2008 $1.08

Conclusion:

Value investors seeking to follow Benjamin Graham’s methods have established criteria for whether a company is worthy of investment; in the case of Amazon, the company scores almost as poorly as is possible under these requirements.  In fact, the only requirement for either the Defensive Investor or the Enterprising Investor that Amazon satisfies is the market cap.  As a result, includes a level of risk that is far too high for either investor type, and Intelligent Investors would be best suited by researching other opportunities, beginning with a review of ModernGraham’s Valuation of Apple.  From a valuation side of things, Amazon’s EPSmg (normalized earnings) have dropped from $1.08 in 2008 to an estimated $0.90.  This drop in earnings leads the ModernGraham valuation model to return an intrinsic value of $0, indicating that any value in the company must come from something other than earnings.  It should also be noted that the market seems to be implying a growth rate of over 200%, which is far above what the company has achieved historically.  As a result, Amazon would appear to be overvalued at this time.

What do you think?  Do you agree that Amazon Inc. is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Amazon Inc. (AMZN) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill

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