I won’t sit here and tell you that I have any idea what a reasonable valuation for Amazon.com, Inc. (NASDAQ:AMZN) should be. I mean, I have SOME idea, but seeing how nobody else really has any idea, I may as well throw darts. AMZN stock tends to move in big chunks based on big news, such as an earnings report.
Even though Amazon stock missed estimates when it reported last week, and the stock got whacked, I say it means nothing because there is no hard-and-fast way to value AMZN stock. Without that centralized, normalized metric as a baseline, it is difficult to interpret what the earnings report actually means except in a general sense.
Nevertheless, I’ll try.
First, the market got tied in knots over Amazon missing revenue estimates. Revenue was $43.74 billion, which fell short of the $44.68 billion total. Gasp. Web Services revenue fell $64 million short, coming in at $3.536 billion. Double gasp. Q1 guidance was for $33.25 billion to $35.75 billion, short of $35.95 billion expected.
The sky is falling.
Why AMZN Stock Isn’t Really in Any Trouble
Of course, nobody mentioned that AMZN actually turned in a $749 million profit, up 55% from the previous year. Web Services had operating income of $926 million compared to $580 million last year and that accounted for almost three-fourths of Amazon’s total operating income. Mind you, the loss in its international e-commerce unit blew up to $487 million from a loss of $108 million the year before.
See, AMZN stock really is different from any other stock because it is basically taking huge chunks of cash and free cash flow and investing in a very-long-term infrastructure and services plan.
Amazon is constantly investing in and beefing up its Prime service, which various sources put at 65 million subscribers (Bezos won’t say). This doesn’t mean just the techy stuff like Price Reading, Audible Channels and Twitch, but the hub of Prime: free 2-day delivery.
That’s where the rub is from an expense standpoint. AMZN stock added 18 more cities to Prime service, which means more infrastructure to support those cities, like warehouses and labor and transport. The company needs fulfillment centers. That’s why it’s building a $1.5 billion new airport hub in Cincinnati.
Then we can add in the investments in Amazon Fresh, which also requires tons of infrastructure to support, and its expansion into India.
Spend, spend, spend in order to grow, grow, grow.
What’s so bizarre and different is that most companies would — after more than 20 years in business — have predictable earnings and growth. Except Amazon is trying to take over the world, and Bezos isn’t worried about profit because he has tons of cash flow. This is very John Malone of him, and we know how successful Malone has been, even as predicting earnings-per-share for any of his zillion tracking stocks is equally impossible.
Thus, a revenue miss means nothing to me. We’re in the top of the third inning.
Bottom Line on Amazon Stock
Still, can we value Amazon stock at all? Well, yes … sort of.
Take Enterprise Value-to-EBITDA ratio: AMZN stock trades at about 30. Facebook Inc (NASDAQ:FB) trades at 24. Wal-Mart Stores Inc (NYSE:WMT) trades at 7.7. Liberty Interactive Corp (NASDAQ:QVCA, NASDAQ:QVCB) trades at 8.4. So on this basis, AMZN stock is crazy expensive.
On a price-to-sales basis, Amazon stock trades at 2.9. The other stocks above trade at 14, 0.43 and 0.88, respectively. So AMZN stock is arguably expensive by this metric as well.
How about return on equity? This is the amount of net income that is returned as a percentage of shareholder equity. Amazon is at 14.52%. For FB, WMT, and QVCA, return on equity is 19.76%, 18.46% and 11.67%. In this case, AMZN falls in the middle.
Ultimately, that’s why I prefer to sell naked puts on Amazon stock that are far out of the money and expire months down the line. I make a little money with much less risk.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.