How to Think About Valuing Amazon.com's Stock

It's tough to estimate a fair value for a rapidly growing, barely profitable company like Amazon.com (NASDAQ: AMZN  ) . With little current profit and most cash flow reinvested in growth, a traditional discounted cash-flow analysis will likely significantly undervalue its true worth.

One way to get an idea is to look at the best-in-class companies with business models similar to what Amazon is trying to build and ask the question, "What if Amazon could wind up like them?"

In the slideshow below, Amazon is compared to three world-class companies with somewhat similar business lines:

  • Walmart (NYSE: WMT  ) -- the world's largest mass merchandise retailer. With over $400 billion in revenue and decent-for-the-industry 3.4% net margins, Walmart is the closest brick-and-mortar parallel to Amazon's online retail dominance.
  • Apple  (NASDAQ: AAPL  ) -- the ubiquitous manufacturer of well-loved, simple-to-use technology devices. Amazon's Kindle family of products aims to be a serious contender with Apple's iPads for portable computing and entertainment devices. Plus, with Kindle, Amazon can control a lot more of the overall electronic-publishing value stream, similar to Apple's iTunes environment.
  • Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) -- the world-class Internet search and information broker. In some sense, what Amazon knows about you may be more valuable than what Google knows about you. After all, most people go to Amazon with an intent to spend their cold, hard cash on something. Knowing what people want to buy is typically more valuable to marketers than simply knowing what people want to find.

These existing strengths are added to Amazon's fast current growth trajectory to estimate what the company could be worth -- if it delivers on the market's expectations.

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Read/Post Comments (5) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On May 24, 2014, at 9:06 AM, jbonefish wrote:

    Biggest gap in the assumptions is 'Apple-like margins on hardware' ...

    1. no way - not in this lifetime anyway

    2. AMZN has expressed no interest in making $ on hardware

    if anything this exercise shows just how overvalued the stock still is. All of those rosy possibilities only get you to about where we are today - where is the room for upside surprise or outperformance?

  • Report this Comment On May 26, 2014, at 1:54 AM, melegross wrote:

    Amazon has no positive margins on its hardware. Bezos has already stated this, so it's common knowledge. Indeed, his remarks hint that they lose money with every sale. The question is whether they are making that loss up with content sales. I doubt it.

  • Report this Comment On May 26, 2014, at 2:03 AM, melegross wrote:

    Just finished the "article". It's a lot of made up hooey.

    To many "what ifs" based on improbable guessing. All of those profits have been promised for years now, by Bezos, but haven't materialized. He's running a big scam on Wall Street fools, AMD I don't use the word in a nice way.

    Drones? Really? Do t mKe me laugh too hard. Has anyone really thought this through? Obviously not, because if they did, they would see it's impossible. The cost of buying the quality drone for this purpose could be many tens of thousands per drone. How many drones would be required to give a delivery of 30 minutes as Bezos stated? Hundreds, thousands, tens of thousands? And how many operators of those drones would be needed? At least twice, maybe three times as many as the number of drones. And what about ancillary equipment to run them? Mechanics, and electronic service personnel along with the facilities to service them

    And what happens when they crash, as they will?

    This whole thing is garbage.

  • Report this Comment On May 26, 2014, at 11:30 AM, TMFBigFrog wrote:

    Hi Fools --

    This is great conversation -- and you're hitting on exactly the point of this article. Amazon's stock is priced based on what the market expects from it in its future, not based on what it has proven itself capable of delivering today.

    Only time will tell whether a potential future similar to the one projected in the article (or a rosier one or a less prosperous one) will come to pass. Our job as investors is to look at the future the market is projecting and estimate the likelihood of that future coming true.

    As the comments point out, there's a lot of potential priced into Amazon's stock at the moment, and there are a lot of things that have to break its way for the market's optimism to be justified.

    There are a lot of smart people working for Amazon and a lot of smart people investing in it, and it has proven itself to be a very innovative company. That said, there are never any guarantees in the market, and when things go wrong, the companies priced based more on their potential rather than their proven results generally have farther to fall.

    The future will play itself out...

    -Chuck

    Inside Value Home Fool

  • Report this Comment On May 28, 2014, at 8:31 AM, Drdoug165 wrote:

    i have lost 20% on amazon since beginning my subscription to stock advisor!!! Motley fools stock advsor is NO LONGER listed in Hulbert Financial digest ranking of top performing newsletters over the last 5 and 10 year time period, seems the Gardners have lost their fast ball, over and out

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