Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – December 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Amazon.com Inc. (AMZN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Amazon.com, Inc. (Amazon.com) is an e-commerce company. The Company sells a range of products and services through its various owned and affiliated Websites. The Company’s products, offered through its consumer-facing Websites, includes merchandise and content that the Company purchase for resale from vendors and those offered by third-party sellers. The Company also manufactures and sells electronic devices. The Company offers services, such as Amazon Web Service (AWS), publishing, digital content subscriptions, advertising, and co-branded credit cards. The Company serves through the lowest prices possible on everyday product pricing and shipping offers, including membership in Amazon Prime. The Company designs its Websites to enable millions of products to be sold by the Company and by third parties across various product categories, allowing access to its Websites directly and through its mobile Websites, Kindle devices and apps.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$0.35|
|Value Based on 0% Growth||$0.20|
|Market Implied Growth Rate||6503.87%|
|Net Current Asset Value (NCAV)||-$24.86|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Amazon.com Inc. does not pay a dividend.
Amazon.com Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the low current ratio, the insufficient earnings growth or stability over the last ten years, the lack of dividends and the high PEmg and PB ratios. The Enterprising Investor is concerned with the level of debt relative to the current assets, and the lack of earnings growth or stability over the last five years, and the lack of dividends. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.86 in 2010 to an estimated $0.02 for 2014. This level of growth does not support the market’s implied estimate of growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.
Be sure to check out previous ModernGraham valuations of Amazon.com Inc. (AMZN) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Amazon.com Inc. (AMZN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Amazon.com Inc. (AMZN) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.