The biggest victim of the recent bear market in tech stocks has been Amazon.Com (NASDAQ:AMZN). With a drop of nearly 22% in just one month, the bear market has sunk founder and CEO Jeff Bezos’ fortune by about $30 billion. It sunk mine by $25,000 and I have just 50 shares of Amazon stock in my retirement account!
I had long been suspicious of Amazon’s valuation and had even taken some money off the table before the year started. Shares briefly traded at under $1,500 each before bouncing back around 2.23% recently. By the time you read this they might be over $1,600.
Amazon is highly volatile for a big tech stock because they have never split (there are still just 488 million shares) and because opinions about Amazon are all over the place.
Valuation and Amazon Stock
About five years ago, when I first getting my sea legs on the financial beat and got into Amazon stock, I valued Amazon on a sum-of-the-parts basis.
This meant I valued services revenue at roughly 10 times, and merchandise sales at just one-half times revenue. For the September quarter, Amazon had AWS revenue of $6.67 billion, growing at 46%, and subscription services, $3.7 billion for the quarter growing at 52% year over year. Multiply by four, for a full year, and then by 10, and that’s a value of $415 billion.
There are also online merchandise sales of $29.06 billion, growing at 10% per year, and physical stores, $4.2 billion for the quarter. Multiply that by four, then divide by two, and you get $16.6 billion. This still leaves Amazon way overvalued at its $750 billion market cap.
The company, however, puts its cash flow report ahead of its other numbers. That’s how it values itself. Operating cash flow for the third quarter alone was $8.58 billion, and this may be the most important number in the whole report. It’s more than twice the figure for a year earlier, and it isn’t even Christmas yet. Last year’s Christmas quarter cash flow was $12.24 billion.
Amazon’s operating cash flow is accelerating. Its total operating cash flow for 2017 was $18.4 billion. Over the last four quarters it’s $26.6 billion.
Reversing Alibaba
Amazon’s cash flows are exploding because it’s becoming more like what Alibaba (NASDAQ:BABA) was. As I wrote in 2014, Amazon is an infrastructure company. Over half its merchandise sales are of products it doesn’t own, generated by third party sellers.
Amazon is the electronic and physical glue that holds the modern online economy together. Small companies use Amazon’s physical infrastructure to compete with giants like Walmart (NYSE:WMT), and start-ups use its cloud to compete with their own big industry competitors.
Any attempt to break up Amazon, as has been suggested, would devastate the small business and start-up economy. It would also be the greatest economic present we could ever give China.
The Bottom Line on Amazon Stock
At its current market cap of $750 billion, Amazon is fairly valued for the business it’s doing and the growth it’s getting. But it’s not getting credit for the transformation it is undergoing, from the “everything store” to electronic glue holding opportunity together.
Amazon’s ad revenue, classed as “other” in its quarterly report, grew 123% year-over-year in the third quarter. Its health efforts, which have barely begun, aren’t in the report at all. Its dominance in voice services, based on the Alexa interface, isn’t in the numbers either.
Yes, this should be a $1 trillion company. It will be, once the market understands it.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.
