Let me be clear — I actually have no opinion on whether you should buy, sell or hold Amazon.com, Inc. (AMZN). However, for the numbers geeks wondering on what basis Amazon stock looks cheap, we can have some fun.
Amazon stock bulls believe AMZN is all about potential.
As the argument goes, Jeff Bezos has established Amazon as a revenue machine that generates lots of free cash flow, allowing him to focus on building the company and to worry about AMZN stock later.
Amazon.com is already the one-stop shop to buy just about anything. Now it is adding planes and trucks to its infrastructure, playing around with drone delivery, innovating and improving logistics, and has this massive Amazon Web Services business that just keeps growing.
The bull argument is that Amazon has its hands in so many things that, even beyond its core retail business, it has the money to experiment to the point where it is a quasi-venture capital fund. Only one or two of its experiments needs to pay off to hit big.
In fact, if it gets its plane/truck/drone/delivery infrastructure in place, it may not even generate so much revenue as save it a ton of money on using third party shipping partners. In fact, it may even become a competitor to those, and start to take business away from them!
Taking Debt Into Account: There are a few companies that one cannot value on a price-earnings ratio basis. Amazon stock is one of them. The next best thing is to value it on an enterprise-value-to-Ebitda ratio, which essentially takes market capitalization plus cash (minus long-term debt) and compares it to cash flow. Amazon stock is at 37.5; LinkedIn Corp (LNKD) just got bought out at an EV-Ebitda ratio of 58 (it’s now at 88); Facebook Inc (FB) is at 33 and Shake Shack Inc (SHAK) is also at 33.
Skyrocketing Revenue: Another argument made by Amazon stock bulls is that revenue, which obviously contributes to cash flow, is the engine that keeps Amazon running. There’s no doubt about it. Revenue increased from $74.45 billion in FY13 to $89 billion in FY14 to $107 billion in FY15. That’s an astonishing rate of 20% annually. This quarter’s estimates are expected to rise 27.6% to $29.58 billion, and then another 24.6% to $31.6 billion in the following quarter.
That’s one reason why Amazon looks cheap on a price-sales basis.
For the past year, Amazon’s price has trumped sales by just three times, which is less than eBay Inc (EBAY). And it’s not at all out of line with many other famous names: Microsoft Corporation (MSFT) has a P/S ratio of 4.6, LinkedIn went out at 5.45, Facebook is at a whopping 16.8 and even names like Visa Inc (V) are at 13.4.
Return on Equity: How about ROE, or return on equity? This is the amount of net income returned as a percentage of shareholder equity. This is a tougher measurement because Amazon stock doesn’t have much net income. Its ROE is 9.1%. Well, LinkedIn has an ROE of negative 4.16%. Facebook’s is a mere 11%. FedEx Corporation (FDX) only manages 6.57%.
Once again, I’m not offering any recommendation here. What I do see, however, are three metrics under which Amazon stock may be considered cheap on a relative basis.
Invest cautiously.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
