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JohnCLeven (77.35)

AMZN in 2013 reminds me of MSFT in 1999

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January 30, 2013 – Comments (4) | RELATED TICKERS: AMZN , MSFT

I just can’t find a way to rationalize AMZN at today’s prices.

Perhaps, I’m not as smart or experienced as the AMZN bulls, but I think current earnings and profits DO matter. Only time will tell of course, and I might eat these words later, but…

I’m expecting those who buy AMZN at today’s prices to experience a return similar to those who bought MSFT at the end of 1999. Both companies we’re thought to be beyond traditional valuation. In the late 1990s, tech investors were making fun of those “old fashioned” investors who still believed in antiquated terms like “earnings” and “cash flow.”

If you bought MSFT on Dec 31, 1999 at the split adjusted price of $29.18, you paid about 74x earnings. Since 1999, MSFT has grown EPS grow by over 500%, but the share price was recently $27.94. That’s a 12 year annualized return of -0.36%. MSFT has been “growing into” its valuation for over 12 years. That’s what happens when you pay too much. 

Here’s a decent article that I think illustrates MSFT’s “lost decade” pretty well:  http://seekingalpha.com/article/227011-after-a-lost-decade-is-microsoft-a-buy

Let’s fast forward to 1/28/13.

There is a new “revolutionary” company to which people proclaim that the standard rules of business analysis and valuation don’t apply. Of course, it’s AMZN, which now has a PE over 3000. (MSFT’s PE was 74.)

Let’s say you wanted to buy AMZN at 283.51(Last Friday’s price) and expect at least a 10% annualized return over the next 10 years. For a 10% annualized return in 2023, you would need AMZN’s share price to rise from $283.51 to $735.

Now, let’s assume AMZN has a 2023 P/E of 50. That’s about as high a P/E as anyone can justify, in my opinion.

For AMZN to have that $735 share price and 50 PE in 2023, AMZN would require EPS of $14.70. AMZN currently has EPS of $1.37, per Morningstar. This means they would need to grow earnings by 1072% over the next 10 years AND have a P/E of at least 50 (or greater).

I’m not an expert, but it seems awfully difficult to find a way to arrange those two variables, EPS and PE, in any realistic way over the next 5-10 years, that will justify current prices. It seems like extraordinary speculation at best, with ZERO margin of safety. It’s the type of investment that Ben Graham would say has been "paid in full and perhaps overpaid for the expected prosperity."Well respected CAPs member and AMZN bull, portefeuille , says “In a few years AMZN and WMT will have revenues of about the same size, with AMZN having "higher profit margin", so the "undervalued" stock is AMZN, I think ...”

He could certainly be correct, as he often is, but WMT has 464B in sales compared to just 57B for AMZN. And WMT’s mkt cap is 234B and for AMZN’s is 118B. So WMT has 8x the sales of AMZN and at just 2x the mkt cap. AMZN may end up with sales greater than Wal-Mart...someday… but when?

Even if WMT’s sales growth rate is zero, it would still take AMZN over 6 years at an insane 40% annualized sales growth rate to eclipse Wal-Mart in sales. And that’s if everything goes right for AMZN, and everything goes wrong for WMT. More likely it’ll be 8 or more years.

So basically, AMZN everything needs to go just about perfectly over the next 3, 5, and 10 years. How often does near-perfection happen? Very rarely! Remember friends, you pay a HEFTY price for a rosy consensus. That was the case in 1999, and in my opinion, the case for AMZN in 2013.

I believe it was Sir John Templeton who said the most dangerous words in investing are “This time it’s different.”In the case of AMZN 2013 vs MSFT 1999, this time ISN’T that different. (In my opinion)

 

Thanks for reading,

-John

p.s. If you are interested in AMZN at these levels please, PLEASE reply with your reasoning, and/or assumptions for AMZN’s future growth and valuation, in a way that makes for a market-beating annualized return going forward. Thanks!

ps.ps. Idk why the formatting came out wierd. If you're a tech guy, and you know why, please let me know!

4 Comments – Post Your Own

#1) On January 30, 2013 at 11:31 AM, JaysRage (89.29) wrote:

Amazon at this point reminds me more of Google 15 years ago than it does Microsoft at any point.  In my opinion, you almost have to force yourself to pretend that Amazon didn't start as a book company.  They are an emerging tech major and e-retailer.

Apple now and Microsoft at their pinnacle are better comparisons. 

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#2) On January 30, 2013 at 11:48 AM, JohnCLeven (77.35) wrote:

One other stat i'd like to add, with regards to AMZN's sales vs WMT's is: If WMT grows sales at 4% and AMZN grows at 30% (realistic I think), it will still take 10 years for AMZN to pass WMT in sales.

@JaysRage

Thanks for the comment. I'll have to go back and look at those two on my lunch.

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#3) On January 30, 2013 at 5:01 PM, miteycasey (30.46) wrote:

Apple has a chance to change course, unlike Microsoft ever did.

Think they started off with the MAC. Now the MAC computers count for 10% fo their profits or something like that. Microsoft could never move away from the PC OS like that...they are trying it now.

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#4) On June 12, 2013 at 7:52 PM, JohnCLeven (77.35) wrote:

UPDATE

After spending some more time looking at AMZN, and considering other methods of valuation, instead of a strictly earnings based valuation, AMZN could be a solid investment:
1) IF AMZN keeps growing revenue at these crazy 30-35% growth rates that they have been, over the next 5-10 years.
AND
2) IF AMZN’s Free Cash Flow/sales % metric gets back closer in line to their 10 yr historic average of 6.3%.
So, in short, AMZN may not be as overvalued as I previously believed.
That said; just because AMZN MIGHT not be some crazy bubble, doesn’t mean it’s the best place to put your money either.
Will AMZN maintain 30+% revenue growth rates over the next 5 – 10 years?
I don’t know.
Will AMZN’s FCF/sales% metric revert back closer to the 10 year mean of 6.3%?
I don’t know.

I can’t properly predict those two variables in any meaningful way. (But maybe you guys can?)
I’m not sure if anyone really can bc AMZN is a rather unique situation.
Companies like KO and MCD are so much easier to predict than AMZN.

For example, if AMZN can generate $17 of per-share free cash flow for FY2017 (which would be a 6 yr compounded growth rate of 24.5% from 2011’s $4.55 per share) and, say, AMZN is selling for 25x FCF or $425 per share, then you’ve got yourself about a 9.8% annualized return, from today’s prices, which could easily beat the market.

So with that, I will meet the AMZN bulls halfway, and say that AMZN might not be a crazy bubble after all.
*HOWEVER, that doesn’t mean I think AMZN is a wonderful investment, or even in the top quartile of investment ideas. I still think AMZN is pretty risky and speculative. For me at least.

I will now toss AMZN in the “too hard” pile, where it belongs (for me at least), and close out this pick with a lucky CAPs gain.

Best of luck to AMZN bulls and bears alike!

“Rapid destruction of your ideas, when the time is right, is one of most valuable qualities a human can acquire. You must force yourself to consider arguments on other side. If you can’t state arguments against what you believe better than your detractors, you don’t know enough. You must we willing to destroy old ideas.”
“If Berkshire has made a modest progress, a good deal of it is because Warren and I are very good at destroying our own best-loved ideas. Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.”
“Keynes said “It’s not bringing in the new ideas that’d hard. It’s getting rid of the old ones.” And Einstein said it better, attributing his mental success to “curiosity, concentration, perseverance, and self-criticism.” By self- criticism he meant becoming good at destroying your own best loved and hardest-won ideas. If you can get really good at destroying your own wrong idea that is a great gift.”
– Charles T. Munger

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