Here’s Why Amazon.com Commands a $140 Billion Valuation

At first, it may seem a bit strange that Amazon.com (NASDAQ: AMZN) is worth nearly three times more than Costco (NASDAQ: COST) on the open market, considering Costco earned more profit during its fiscal 2013 than Amazon has earned throughout its entire existence, but the truth is matter is that stock prices are often forward-looking mechanisms.

In other words, the market has a perfectly good explanation for why Amazon commands a $140 billion valuation.

Looking backwards
If you were to compare Amazon to Costco on a historical basis, you would likely conclude that Amazon is grossly overvalued.

Metric

Amazon (2012)

Costco (Fiscal 2013)

Full-year revenues (billions)

$61.1

$105.2

Revenue growth (YOY)

27.1%

6.1%

Full-year gross profit margin

24.8%

12.6%

Full-year net income (millions)

($39)

$2,039

Full-year net profit margin

N/A

1.9%

Market capitalization (billions)

$141

$52

Source: Amazon 2012 annual report, Costco earnings press release, and author calculation. YOY = year over year.

A strong disconnect
The trouble with analyzing a company's historical financials is that they don't always align with the market premium assigned to the intangibles like management, culture, purpose, competitive advantage, and disruptive nature, let alone its growth potential. At this point, it's pretty safe to say Amazon investors have assigned an enormous premium to at least some of these hard to measure intangibles.

To help me get better sense of some of these intangibles like employee satisfaction and CEO approval, I turn to Glassdoor.

Company

No. of Reviews

Overall Rating (out of 5)

CEO Approval

Recommend to friend?

Amazon 

2,167

3.4

87%

65%

Costco 

808

3.8

93%

83%

Source: Glassdoor

Out of the over 250 thousand companies being tracked on Glassdoor, Costco is ranked the 46th best place to work by employees, and Amazon didn't make the top 50 list.

What's more, Amazon's one year median employee tenure rate is the second lowest among Fortune 500 companies, according to Payscale. This is despite Amazon encouraging employees to stay longer by offering them a back-end loaded stock grant package, in which the majority of the package vests in the second half of a four-year period.

Although the data suggests that investors aren't assigning a high premium to Amazon's employees, it doesn't rule out the possibility that CEO Jeff Bezos could be making up the lion's share of premium.

A proven track record
Thanks to Bezos' relentless pursuit of new business opportunities, Amazon's revenue growth has been simply astounding. Between 1997 and 2012, the year Amazon went public to its most recent full-year results, annual revenues compounded at a growth rate of 49% per year. During this time, Amazon's full-year revenues grew from $147.8 million to $61.1 billion.

Presumably, this kind of track record has instilled an enormous amount of confidence into investors that Jeff Bezos will eventually deliver profits necessary to sustain Amazon's current valuation. Until then, Amazon will continue aggressively pursuing new business opportunities and improving its existing businesses in lieu of showing profits. In other words, the stock will likely remain a forward-looking mechanism for the foreseeable future.

The ultimate disruptor
Amazon didn't become the "Everything Store" by being overly concerned with showing profits for investors. The company is expected to post 22% revenue growth in 2013 not because it conservatively approaches new business opportunities. It's because it's aggressively fulfilling its mission of becoming earth's most customer-centric company for consumers, sellers, enterprises, and content creators.

At the end of the day, the market is betting big on Jeff Bezos because he's built an organization that embraces new business opportunities and becoming the ultimate disruptor. Unless this track record of excellence changes, a case can certainly be made for why Amazon deserves the $140 billion valuation it currently commands.

More disruptive insights 
Thanks to Amazon and other industry disruptors, the retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


 
 
 
 
 
 
 
 
 
 
 

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  • Report this Comment On October 18, 2013, at 2:32 AM, skippywonder wrote:

    61 billion in revenue and they still can't manage a profit. That should be concerning.

    Right now the market likes Amazon because its cash flow is simply outrageous. But if they hit one year of sluggish revenue growth, their operating float will get hit with a ton of bricks and the stock will come back to earth with crushing speed.

    AMZN is a ticking time bomb.

  • Report this Comment On October 19, 2013, at 9:40 AM, cmalek wrote:

    They are called "intangibles" for a reason - they cannot be quantified. They also are interpreted according to the bias of the "expert" doing the interpreting. Give ten people the same set of "intangibles" and you'll get back eleven different opinions.

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