netrashetty
Netra Shetty
Amazon.com, Inc. (NASDAQ: AMZN) is a US-based multinational electronic commerce company. Headquartered in Seattle, Washington, it is the largest online retailer in the United States, with nearly three times the Internet sales revenue of the runner up, Staples, Inc., as of January 2010.[3]
Jeff Bezos founded Amazon.com, Inc. in 1994 and launched it online in 1995. The company was originally named Cadabra, Inc., but the name was changed when it was discovered that people sometimes heard the name as "Cadaver". The name Amazon.com was chosen because the Amazon River is one of the largest rivers in the world, and so the name suggests large size, and also in part because it starts with "A" and therefore would show up near the beginning of alphabetical lists. Amazon.com started as an online bookstore, but soon diversified, selling DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. Amazon has established separate websites in Canada, the United Kingdom, Germany, France, Italy, Japan, and China. It also provides international shipping to certain countries for some of its products.
If Amazon’s 66 million active customers all lived in the same country, it would be the world’s 19th most populous country, with more citizens than every European country except Germany. And if every US household spent $170 at Amazon.com this year, the total amount they’d spend would still be less than Amazon’s 2010 revenues of over $34.2B.[1] Amazon has used the internet to create a truly global business platform, one which is poised for incredible growth in the coming decade. The question in many investors' minds these days is how profitable that business can be.
Sales have surged year over year at the world's largest e-commerce company, with revenues growing 40% from 2009 to 2010[2] due to a combination of low prices, shipping promotions, and rollouts of new product categories.
While most people naturally think of Amazon as the internet superstore that sells products in over forty categories, from books to electronics to groceries to jewelry to auto parts, the company has gradually expanded beyond that simple business platform; today Amazon is simultaneously an e-commerce and internet technology platform, a fulfillment and logistics platform, a search technology, an internet advertising platform, and even an internet startup incubator.
Business and Financials
Amazon Historical Performance[3]
2007 2008 2009 2010
Net Sales ($millions) 14,835 19,166 24,509 34,204[4]
Net Income ($millions) 476 645 902 1152[5]
Operating Expenses (excl. Cost of Goods Sold) ($millions) 2,513 3,153 4,402 6,228[6]
Cash ($millions) 1,022 2,539 2,769 3,444[7]
Contents
1 Business and Financials
2 The Global Superstore
2.1 Business Model
2.2 Category Expansion
2.3 International Expansion
2.4 Third Party Seller Marketplace
3 Other Businesses
4 Hot Button Topics
4.1 Digital media: disappearing opportunity
4.2 Amazon Kindle
4.3 Amazon Prime: good or bad?
4.4 Ecommerce platform: losing partners
4.5 Bundling services: Economies of Scale
4.6 Joyo: Amazon in China
4.7 Development online: A9, Clickriver
4.8 Other future online opportunities
4.9 State Sales Tax Treatment
4.10 Dependence on Technology and Cloud Computing
5 Risks and Opportunities
6 References
In the fourth quarter of 2010, AMZN's revenue increased 36% to $12.95 billion. Net income increased from $384 million to $416 million. Spending picked up this recent holiday season, with the company reporting customers ordered a record of 158 items per second during its busiest shopping day. However, investments in distribution along with marketing increased operating expenses. Operating expenses grew 38% this quarter. Amazon's main category, electronics and other general merchandise, increased by 60%, while traditional media increased by 12%.[8]
In its second quarter of 2010, AMZN's revenue increased to $4.06 billion, up 41% from $2.89 billion in the second quarter of 2009. This increase in sales was primarily due to the 69% increase in sales of the electronics and general goods category. Its net profit increased to $207 million. However, rising fuel costs have caused its free shipping programs to be more expensive. In this quarter, outbound shipping costs increased 38% from the previous year to $314 million.[9]
In the first quarter of 2010, AMZN's revenue grew by 47% from $4.18 billion to $7.13 billion. Although the company faced the release of Apple's iPad this quarter, Kindle sales accounted for 2% of AMZN's revenue, with e-book sales accounting for an additional 1.5%. The category of electronics and general merchandise grew by 72% this quarter. Its profit also rose 68%, from $177 million to $299 million.[10]
In fourth quarter of 2009, AMZN not only reported an earnings surge of more than 70% from 2008 Quarter 4 but also announced a surprise $2 billion share buyback program.[11] Online sales during holiday season '09 proved to be the largest yet and online services falling into the company's "other" segment grew 32% from the prior year.[11] Information regarding sales of Amazon's popular Kindle reading device was not released but outside analysts have estimated that up to 2 million units may have been sold since its release and that Amazon has captured 60% of the e-reader market.[11]
The Global Superstore
Business Model
Amazon's virtuous cycle
Founded in 1995 by Jeff Bezos as an online bookstore, Amazon has since greatly expanded its business. Today, Amazon’s stated mission is to be a place where “people can come to find and discover anything they might want to buy online.” Its key pillars of lowering price, offering convenience, expanding selection, and increasing availability are interrelated in what the company calls a virtuous cycle, and together make up the foundation of the fabulous growth that has taken Amazon from a bookstore started in a garage to a $14B retail machine. Amazon’s direct-to-consumer online model allows it to keep its inventory in a small number of strategically located large warehouses, letting the company offer a vast selection of goods (removing the granularity risk of relying on any particular product line) and without the capital investment and inventory risk that traditional brick and mortar retailers face.
In comparison to brick and mortar retailers, whose input costs (e.g. rent, utilities, and labor) generally rise over time, Amazon and other technology-dependent internet retailers reap the benefits of technological progress as computational power, bandwidth, and data storage technologies all improve in quality and decline in cost over time.
Amazon gets paid by customers before it needs to pay its suppliers[12]
In addition, due to sophisticated inventory forecasting, fast inventory turns, and overall operational efficiency, Amazon has managed to build a retail business with a negative operating cashflow cycle, which means Amazon gets paid for products by customers before they have to pay their suppliers for the goods. Working capital has effectively become a source of investment cash for the company.
Category Expansion
Category Growth Rates
Although 64%[13] of Amazon's worldwide revenue still comes from media categories (books, music, video), Amazon's product footprint in the US has expanded into over 40 categories. New product categories represent significant growth opportunities for the company, given the lower online penetration rates in many of these categories. Revenue and income growth rates for these categories have regularly outpaced the growth in media categories both in the US and abroad. Q3 2007 saw the launch of Apparel & Shoes, Home & Kitchen, and Baby stores for several of Amazon's international presences, and the highly successful Fulfillment by Amazon was expanded to the UK, Germany and Japan as well.
Amazon’s digital media store has seen substantial investment from the management, and investors have been anxiously awaiting the launch of new initiatives in downloadable music, video, and text.
International Expansion
Historical Category Expansion
International businesses have represented a significant area of growth for Amazon. Although Amazon ships to almost any country in the world, it has selectively chosen to establish country-specific websites and fulfillment networks. Beginning with its expansion into the UK and Germany in 1998, and subsequently to France (2000), Japan (2000), Canada (2002), and its most recent expansion into China (2004), Amazon has expanded its geographic footprint into the world’s major e-commerce markets. International growth rates have consistently beaten that of North America, with % growth rates in revenue (Table below outlines the increased % growth rates).
Comparison of Growth in Sales between Fiscal Years (2006-2009)[14]
Years FY09-FY08 FY08-FY07 FY07-FY06
North America(%) 38 26 25
International(%) 39 33 31
This is due in part to the relative maturity of the US market, as well as to the strategy Amazon has employed in rolling out new product categories and features to its international properties. Amazon has typically introduced most of its new stores and features in the US market first, eventually replicating the most successful ventures in international markets. Amazon's international businesses have thus been able to benefit from experience gained through US experiments to grow at an accelerated pace.
Third Party Seller Marketplace
Years ago, Amazon also made a strategic decision to open up its website and create a Marketplace of third party sellers who effectively compete with Amazon for any given sale. These merchants sell a variety of new and used products for which Amazon receives a commission on products sold via its Marketplace, and although gross margins on these transactions is generally less than that if Amazon sold the item directly, the Marketplace strategy creates a one-stop shopping destination with a consistent experience for the customer. It has also helped Amazon dramatically increase its selection of available products. The bet seems to have been a smart one -- 30% of items sold on Amazon are sold by third parties.
Number of shares outstanding = 442 m
Share price at time of analysis = $128
Market capitalisation = 56.57 B
Historical Price Chart of Amazon (AMZN)
Amazon Share Price Chart 1997 - 2010
Amazon Financial Analysis
Amazon Financial Statements 2006-2009
Amazon Historical Valuation Ratios
Amazon Historical Valuation Ratios
Institutional Holding in Amazon
% Shares Owned by institutions: 65.14%
% owned by insiders = 20%
# of Holders: 865
Total Shares Held: 291,693,662 (of 442 mil shares)
3 Mo. Net Change: -3,402,452
# New Positions: 29
# Closed Positions: 31
# Increased Positions: 124
# Reduced Positions: 127
Potential for Short Squeeze in Amazon?
Short Interest (shares short) = 12m (2.69% shares outstanding)
Amazon Short Selling Interest
Repurchasing of Common Stock
Amazon has had good tight capital management - with frequent buy backs in the past (another boost to share price). However, number of shares outstanding have remained roughly the same in the last 5 years ; 426 (in 2005) to 442 (2009) million shares outstanding, and they failed to take advantage of low share price in the crash by buying up more shares at discounted prices, since it has an authorized program to repurchase up to $1 billion of common stock (which has increased to 2 billion in January 2010)
August 2006, our Board of Directors authorized a 24-month program to repurchase up to $500 million of our common stock, - repurchased $252 million (of common stocks) in 2006
-repurchased $248 million in 2007
February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.
-repurchased $100 million in 2008 under the February 2008 Board authorization.
-We did not repurchase any of our common stock in 2009.
What to Expect of Amazons Future Earnings in 2010
We put in our best case assumptions (60% growth) for Q3 and Q4 to forecast the EPS for 2010.
EPS Amazon 2010
2010 Earnings Per Share = 1.10 + 0.738 + 1.36 =3.198
Growth
Actual Q1 : 57.7%
Actual Q2: 39.8%
Forecast Q3: 60%
Forecast Q4: 60%
Assuming 60% growth EPS for Q3 and Q4 = $1.36
At Share Price of $128 (market cap = $56.5B)
Based on TheInflationist Forecast of BEST CASE EPS 2010 = $3.20 , Forward PE is 40
Even at a growth of 56% on previous year’s EPS, the forward PE is 40. If we apply the same phenomenal growth for 2011, the subsequent years (2011) PE will be 25.6
Forward Price Earning Ratio of Amazon Based on 40% vs 60% Growth YoY
Amazon Forward PE Ratio 2010, 2011, 2012
Amazon Forward PE 2010, 2011, 2012
AMAZON: Projected Share Price Based on Historical 5-year PE Range
Based on market’s level of optimism in the last five years using Amazon’s historical 5-year PE range from 29 (most pessimistic) to 128 (most optimistic), the projected share price based on varying PE valuations are illustrated in the charts below (based on 60% growth vs 40% growth scenario).
Looking at Amazon’s 5-year historical PE range, it looks A LOT scarier shorting at current levels. The 5 year PE range was “current PE” as oppose to “future PE”. So based on current PE (ie 2009 EPS of 2.04 at current share price of $128) = 62, we are at the lower end of the 5 year PE range.
60% Growth Year On Year (YoY)
Amazon Projected Share Price at PE 30-130
The charts above are a bit deceiving (apologies) since it factors in a 60% growth for 2009/2010 (ie using an EPS of $3.26)- hence its showing “future PE” as oppose to “current PE” (EPS $2.04). If we use current 2009 EPS, and apply the 5-year valuation PE range of 30-130 the chart looks more like the following:
Amazon Share Price Based on 2009 EPS at 5 Yr PE range
40% Growth YoY
Amazon Projected Share Price Based on Historical 5 Yr PE
Amazon Assets & Liabilities
Amazon Cash vs Liability Statement
Amazon Cash Flow
Amazon’s impressive cash flow is testament to the efficiencies in online businesses. It reminds us of Google’s low operating expense to revenue growth ratio. Amazon net sales increased by $10 billion from 2007 to 2009, yet the operating expenses only increased $1.8 billion. Footnote explains the items in operating expenses.
Amazon Cash Flow 2009/2010
AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; and responding to inquiries from customers. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations. Certain of our fulfillment-related costs that are incurred on behalf of other businesses are classified as cost of sales rather than fulfillment.
International Growth
International growth definitely has more room to grow. By pushing sales of Kindle, sales of e-products would definitely be easily rolled out without significant capital expenditure. If I was Baidu, I would be thinking of how to stop Amazon expanding in China.
Amazon International Earning
Competition: Amazon versus Apple
Competition wise, we see Apple as the closest rival with the launch of Ipad/iBooks. The thing is, Ipads may actually accelerate the growth of Amazon. Some argue its better for Ipad users to buy their books on Amazon than Ipads (Amazon has 10x more range at this point in time) - look out for the statistics on this and feel free to share it in the comments section.
Apple iPad/iBooks versus Amazon Kindle by CNET
Technical Analysis of Amazon.com
We are not experts when it comes to TA, neither are we true-believers of the art. We exploit it to time a fundamentally-driven trade. We expect many technical traders would be looking at $140 (the underside of broken support, now resistance), this also coincides with a Head and Shoulder pattern (refer to chart below)
Amazon Share Price Chart
Relative Performance of Amazon versus Dow Jones
Amazon Versus Dow Jones 1998-2010
Amazon has done spectacularly compared to DJIA. Lets look at how Ebay (in green below) compared to DJIA(in red) during its hay days in 2005. At a 13 year scale, Ebay has still outperformed the Dow Jones, with maximal outperformance in 2001 and 2004-2005.
Ebay versus Amazon versus Dow Jones 1998-2010
Now, we zoom in to the last 5 years comparing Ebay to Amazon and Dow Jones. Notice how its lost its gloss and has actually underperformed the Dow in this period by 50% since 2005. Point being, when growth is no longer there (or as expected), the shift in gears from high PE to low PE will result in a significant decline in share price (in relative terms at least).
5 Year Comparison Ebay versus Amazon
Conclusion on Amazon.com Analysis:
1. Fantastic management - founder run (Jeffrey Bezos is only 46 years of age) and definitely has a proven track record. Reuters has Bezos at a very reasonable $1.78 mil pa, with zero options compensation - contrast this to other companies whose management only knows too well how to look after themselves with their salaries at 1-2% market capitalisation.
2. Based on historical 5 year PEs, Amazon’s share price is capable of being from $60 to $270 (PE 29-129). Current share price of $128 is at a Current PE of 64, but a future/forecast PE of 40.
3. 2010 Net profit is expected to be at $3.20. Q1 and Q2 have exceeded most expectations at 40-58% growth in profit. The best (best earnings historically in Q4) is yet to come. Our $3.20 forecast is based on 60% growth. With US consumer spending expected to decline as Americans learn to save and spend less, this 60% growth is VERY generous in our view.
4. If we do have a double dip recession, we definitely would prefer to be on the long side of Amazon at low prices (rather than short at high prices) since its better to be a bull than a bear (short $10k worth of X, and if you are absolutely right and X goes bankrupt you make $10k, long $10k worth of Y and if you are absolutely right and it goes up 3-4 times you make $30-40k!).
5. However, the bigger you are, the harder it is to grow at such phenomenal rates. So far Amazon is showing no signs of slowing down, but look at the once invincible Ebay and Walmart. We need more competition for Amazon!
6. Amazon is priced to perfection and has no room for errors especially in current gloomy times.
7. Short at $141 (1 unit) and $150(2 units), stops at $160 (unit = depending on your capital and comfort level)
8. If Amazon’s growth declines to 20%, and market downshifts the PE-gear to a more “normal” 30 (instead of 60-120 range!), we expect to see a share price of 85.
Jeff Bezos founded Amazon.com, Inc. in 1994 and launched it online in 1995. The company was originally named Cadabra, Inc., but the name was changed when it was discovered that people sometimes heard the name as "Cadaver". The name Amazon.com was chosen because the Amazon River is one of the largest rivers in the world, and so the name suggests large size, and also in part because it starts with "A" and therefore would show up near the beginning of alphabetical lists. Amazon.com started as an online bookstore, but soon diversified, selling DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. Amazon has established separate websites in Canada, the United Kingdom, Germany, France, Italy, Japan, and China. It also provides international shipping to certain countries for some of its products.
If Amazon’s 66 million active customers all lived in the same country, it would be the world’s 19th most populous country, with more citizens than every European country except Germany. And if every US household spent $170 at Amazon.com this year, the total amount they’d spend would still be less than Amazon’s 2010 revenues of over $34.2B.[1] Amazon has used the internet to create a truly global business platform, one which is poised for incredible growth in the coming decade. The question in many investors' minds these days is how profitable that business can be.
Sales have surged year over year at the world's largest e-commerce company, with revenues growing 40% from 2009 to 2010[2] due to a combination of low prices, shipping promotions, and rollouts of new product categories.
While most people naturally think of Amazon as the internet superstore that sells products in over forty categories, from books to electronics to groceries to jewelry to auto parts, the company has gradually expanded beyond that simple business platform; today Amazon is simultaneously an e-commerce and internet technology platform, a fulfillment and logistics platform, a search technology, an internet advertising platform, and even an internet startup incubator.
Business and Financials
Amazon Historical Performance[3]
2007 2008 2009 2010
Net Sales ($millions) 14,835 19,166 24,509 34,204[4]
Net Income ($millions) 476 645 902 1152[5]
Operating Expenses (excl. Cost of Goods Sold) ($millions) 2,513 3,153 4,402 6,228[6]
Cash ($millions) 1,022 2,539 2,769 3,444[7]
Contents
1 Business and Financials
2 The Global Superstore
2.1 Business Model
2.2 Category Expansion
2.3 International Expansion
2.4 Third Party Seller Marketplace
3 Other Businesses
4 Hot Button Topics
4.1 Digital media: disappearing opportunity
4.2 Amazon Kindle
4.3 Amazon Prime: good or bad?
4.4 Ecommerce platform: losing partners
4.5 Bundling services: Economies of Scale
4.6 Joyo: Amazon in China
4.7 Development online: A9, Clickriver
4.8 Other future online opportunities
4.9 State Sales Tax Treatment
4.10 Dependence on Technology and Cloud Computing
5 Risks and Opportunities
6 References
In the fourth quarter of 2010, AMZN's revenue increased 36% to $12.95 billion. Net income increased from $384 million to $416 million. Spending picked up this recent holiday season, with the company reporting customers ordered a record of 158 items per second during its busiest shopping day. However, investments in distribution along with marketing increased operating expenses. Operating expenses grew 38% this quarter. Amazon's main category, electronics and other general merchandise, increased by 60%, while traditional media increased by 12%.[8]
In its second quarter of 2010, AMZN's revenue increased to $4.06 billion, up 41% from $2.89 billion in the second quarter of 2009. This increase in sales was primarily due to the 69% increase in sales of the electronics and general goods category. Its net profit increased to $207 million. However, rising fuel costs have caused its free shipping programs to be more expensive. In this quarter, outbound shipping costs increased 38% from the previous year to $314 million.[9]
In the first quarter of 2010, AMZN's revenue grew by 47% from $4.18 billion to $7.13 billion. Although the company faced the release of Apple's iPad this quarter, Kindle sales accounted for 2% of AMZN's revenue, with e-book sales accounting for an additional 1.5%. The category of electronics and general merchandise grew by 72% this quarter. Its profit also rose 68%, from $177 million to $299 million.[10]
In fourth quarter of 2009, AMZN not only reported an earnings surge of more than 70% from 2008 Quarter 4 but also announced a surprise $2 billion share buyback program.[11] Online sales during holiday season '09 proved to be the largest yet and online services falling into the company's "other" segment grew 32% from the prior year.[11] Information regarding sales of Amazon's popular Kindle reading device was not released but outside analysts have estimated that up to 2 million units may have been sold since its release and that Amazon has captured 60% of the e-reader market.[11]
The Global Superstore
Business Model
Amazon's virtuous cycle
Founded in 1995 by Jeff Bezos as an online bookstore, Amazon has since greatly expanded its business. Today, Amazon’s stated mission is to be a place where “people can come to find and discover anything they might want to buy online.” Its key pillars of lowering price, offering convenience, expanding selection, and increasing availability are interrelated in what the company calls a virtuous cycle, and together make up the foundation of the fabulous growth that has taken Amazon from a bookstore started in a garage to a $14B retail machine. Amazon’s direct-to-consumer online model allows it to keep its inventory in a small number of strategically located large warehouses, letting the company offer a vast selection of goods (removing the granularity risk of relying on any particular product line) and without the capital investment and inventory risk that traditional brick and mortar retailers face.
In comparison to brick and mortar retailers, whose input costs (e.g. rent, utilities, and labor) generally rise over time, Amazon and other technology-dependent internet retailers reap the benefits of technological progress as computational power, bandwidth, and data storage technologies all improve in quality and decline in cost over time.
Amazon gets paid by customers before it needs to pay its suppliers[12]
In addition, due to sophisticated inventory forecasting, fast inventory turns, and overall operational efficiency, Amazon has managed to build a retail business with a negative operating cashflow cycle, which means Amazon gets paid for products by customers before they have to pay their suppliers for the goods. Working capital has effectively become a source of investment cash for the company.
Category Expansion
Category Growth Rates
Although 64%[13] of Amazon's worldwide revenue still comes from media categories (books, music, video), Amazon's product footprint in the US has expanded into over 40 categories. New product categories represent significant growth opportunities for the company, given the lower online penetration rates in many of these categories. Revenue and income growth rates for these categories have regularly outpaced the growth in media categories both in the US and abroad. Q3 2007 saw the launch of Apparel & Shoes, Home & Kitchen, and Baby stores for several of Amazon's international presences, and the highly successful Fulfillment by Amazon was expanded to the UK, Germany and Japan as well.
Amazon’s digital media store has seen substantial investment from the management, and investors have been anxiously awaiting the launch of new initiatives in downloadable music, video, and text.
International Expansion
Historical Category Expansion
International businesses have represented a significant area of growth for Amazon. Although Amazon ships to almost any country in the world, it has selectively chosen to establish country-specific websites and fulfillment networks. Beginning with its expansion into the UK and Germany in 1998, and subsequently to France (2000), Japan (2000), Canada (2002), and its most recent expansion into China (2004), Amazon has expanded its geographic footprint into the world’s major e-commerce markets. International growth rates have consistently beaten that of North America, with % growth rates in revenue (Table below outlines the increased % growth rates).
Comparison of Growth in Sales between Fiscal Years (2006-2009)[14]
Years FY09-FY08 FY08-FY07 FY07-FY06
North America(%) 38 26 25
International(%) 39 33 31
This is due in part to the relative maturity of the US market, as well as to the strategy Amazon has employed in rolling out new product categories and features to its international properties. Amazon has typically introduced most of its new stores and features in the US market first, eventually replicating the most successful ventures in international markets. Amazon's international businesses have thus been able to benefit from experience gained through US experiments to grow at an accelerated pace.
Third Party Seller Marketplace
Years ago, Amazon also made a strategic decision to open up its website and create a Marketplace of third party sellers who effectively compete with Amazon for any given sale. These merchants sell a variety of new and used products for which Amazon receives a commission on products sold via its Marketplace, and although gross margins on these transactions is generally less than that if Amazon sold the item directly, the Marketplace strategy creates a one-stop shopping destination with a consistent experience for the customer. It has also helped Amazon dramatically increase its selection of available products. The bet seems to have been a smart one -- 30% of items sold on Amazon are sold by third parties.
Number of shares outstanding = 442 m
Share price at time of analysis = $128
Market capitalisation = 56.57 B
Historical Price Chart of Amazon (AMZN)
Amazon Share Price Chart 1997 - 2010
Amazon Financial Analysis
Amazon Financial Statements 2006-2009
Amazon Historical Valuation Ratios
Amazon Historical Valuation Ratios
Institutional Holding in Amazon
% Shares Owned by institutions: 65.14%
% owned by insiders = 20%
# of Holders: 865
Total Shares Held: 291,693,662 (of 442 mil shares)
3 Mo. Net Change: -3,402,452
# New Positions: 29
# Closed Positions: 31
# Increased Positions: 124
# Reduced Positions: 127
Potential for Short Squeeze in Amazon?
Short Interest (shares short) = 12m (2.69% shares outstanding)
Amazon Short Selling Interest
Repurchasing of Common Stock
Amazon has had good tight capital management - with frequent buy backs in the past (another boost to share price). However, number of shares outstanding have remained roughly the same in the last 5 years ; 426 (in 2005) to 442 (2009) million shares outstanding, and they failed to take advantage of low share price in the crash by buying up more shares at discounted prices, since it has an authorized program to repurchase up to $1 billion of common stock (which has increased to 2 billion in January 2010)
August 2006, our Board of Directors authorized a 24-month program to repurchase up to $500 million of our common stock, - repurchased $252 million (of common stocks) in 2006
-repurchased $248 million in 2007
February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.
-repurchased $100 million in 2008 under the February 2008 Board authorization.
-We did not repurchase any of our common stock in 2009.
What to Expect of Amazons Future Earnings in 2010
We put in our best case assumptions (60% growth) for Q3 and Q4 to forecast the EPS for 2010.
EPS Amazon 2010
2010 Earnings Per Share = 1.10 + 0.738 + 1.36 =3.198
Growth
Actual Q1 : 57.7%
Actual Q2: 39.8%
Forecast Q3: 60%
Forecast Q4: 60%
Assuming 60% growth EPS for Q3 and Q4 = $1.36
At Share Price of $128 (market cap = $56.5B)
Based on TheInflationist Forecast of BEST CASE EPS 2010 = $3.20 , Forward PE is 40
Even at a growth of 56% on previous year’s EPS, the forward PE is 40. If we apply the same phenomenal growth for 2011, the subsequent years (2011) PE will be 25.6
Forward Price Earning Ratio of Amazon Based on 40% vs 60% Growth YoY
Amazon Forward PE Ratio 2010, 2011, 2012
Amazon Forward PE 2010, 2011, 2012
AMAZON: Projected Share Price Based on Historical 5-year PE Range
Based on market’s level of optimism in the last five years using Amazon’s historical 5-year PE range from 29 (most pessimistic) to 128 (most optimistic), the projected share price based on varying PE valuations are illustrated in the charts below (based on 60% growth vs 40% growth scenario).
Looking at Amazon’s 5-year historical PE range, it looks A LOT scarier shorting at current levels. The 5 year PE range was “current PE” as oppose to “future PE”. So based on current PE (ie 2009 EPS of 2.04 at current share price of $128) = 62, we are at the lower end of the 5 year PE range.
60% Growth Year On Year (YoY)
Amazon Projected Share Price at PE 30-130
The charts above are a bit deceiving (apologies) since it factors in a 60% growth for 2009/2010 (ie using an EPS of $3.26)- hence its showing “future PE” as oppose to “current PE” (EPS $2.04). If we use current 2009 EPS, and apply the 5-year valuation PE range of 30-130 the chart looks more like the following:
Amazon Share Price Based on 2009 EPS at 5 Yr PE range
40% Growth YoY
Amazon Projected Share Price Based on Historical 5 Yr PE
Amazon Assets & Liabilities
Amazon Cash vs Liability Statement
Amazon Cash Flow
Amazon’s impressive cash flow is testament to the efficiencies in online businesses. It reminds us of Google’s low operating expense to revenue growth ratio. Amazon net sales increased by $10 billion from 2007 to 2009, yet the operating expenses only increased $1.8 billion. Footnote explains the items in operating expenses.
Amazon Cash Flow 2009/2010
AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; and responding to inquiries from customers. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations. Certain of our fulfillment-related costs that are incurred on behalf of other businesses are classified as cost of sales rather than fulfillment.
International Growth
International growth definitely has more room to grow. By pushing sales of Kindle, sales of e-products would definitely be easily rolled out without significant capital expenditure. If I was Baidu, I would be thinking of how to stop Amazon expanding in China.
Amazon International Earning
Competition: Amazon versus Apple
Competition wise, we see Apple as the closest rival with the launch of Ipad/iBooks. The thing is, Ipads may actually accelerate the growth of Amazon. Some argue its better for Ipad users to buy their books on Amazon than Ipads (Amazon has 10x more range at this point in time) - look out for the statistics on this and feel free to share it in the comments section.
Apple iPad/iBooks versus Amazon Kindle by CNET
Technical Analysis of Amazon.com
We are not experts when it comes to TA, neither are we true-believers of the art. We exploit it to time a fundamentally-driven trade. We expect many technical traders would be looking at $140 (the underside of broken support, now resistance), this also coincides with a Head and Shoulder pattern (refer to chart below)
Amazon Share Price Chart
Relative Performance of Amazon versus Dow Jones
Amazon Versus Dow Jones 1998-2010
Amazon has done spectacularly compared to DJIA. Lets look at how Ebay (in green below) compared to DJIA(in red) during its hay days in 2005. At a 13 year scale, Ebay has still outperformed the Dow Jones, with maximal outperformance in 2001 and 2004-2005.
Ebay versus Amazon versus Dow Jones 1998-2010
Now, we zoom in to the last 5 years comparing Ebay to Amazon and Dow Jones. Notice how its lost its gloss and has actually underperformed the Dow in this period by 50% since 2005. Point being, when growth is no longer there (or as expected), the shift in gears from high PE to low PE will result in a significant decline in share price (in relative terms at least).
5 Year Comparison Ebay versus Amazon
Conclusion on Amazon.com Analysis:
1. Fantastic management - founder run (Jeffrey Bezos is only 46 years of age) and definitely has a proven track record. Reuters has Bezos at a very reasonable $1.78 mil pa, with zero options compensation - contrast this to other companies whose management only knows too well how to look after themselves with their salaries at 1-2% market capitalisation.
2. Based on historical 5 year PEs, Amazon’s share price is capable of being from $60 to $270 (PE 29-129). Current share price of $128 is at a Current PE of 64, but a future/forecast PE of 40.
3. 2010 Net profit is expected to be at $3.20. Q1 and Q2 have exceeded most expectations at 40-58% growth in profit. The best (best earnings historically in Q4) is yet to come. Our $3.20 forecast is based on 60% growth. With US consumer spending expected to decline as Americans learn to save and spend less, this 60% growth is VERY generous in our view.
4. If we do have a double dip recession, we definitely would prefer to be on the long side of Amazon at low prices (rather than short at high prices) since its better to be a bull than a bear (short $10k worth of X, and if you are absolutely right and X goes bankrupt you make $10k, long $10k worth of Y and if you are absolutely right and it goes up 3-4 times you make $30-40k!).
5. However, the bigger you are, the harder it is to grow at such phenomenal rates. So far Amazon is showing no signs of slowing down, but look at the once invincible Ebay and Walmart. We need more competition for Amazon!
6. Amazon is priced to perfection and has no room for errors especially in current gloomy times.
7. Short at $141 (1 unit) and $150(2 units), stops at $160 (unit = depending on your capital and comfort level)
8. If Amazon’s growth declines to 20%, and market downshifts the PE-gear to a more “normal” 30 (instead of 60-120 range!), we expect to see a share price of 85.