A Relative Valuation
of Amazon
Amazon has been one of the stars in the retail firmament for the last decade and can truly be classified as a business disruptor. The changes that it has wrought and continue to create in the retail business is upending conventional retailers. The stock has been on a tear for much of the last decade as the market capitalization has crested around $150 billion, second only to Wal-Mart among retailers. The conventional wisdom is that Amazon is over valued on an intrinsic value basis, though I am not sure that the conventional wisdom is right. In this valuation, I am focusing purely on relative value. Trading at 1.98 times revenues, Amazon is blessed with high expected revenue growth (20.30%) and slim pre-tax operating margins (1.45%).
A relative valuation, against large US retailers (market cap > $10
billion)
In the first relative valuation, I looked at Amazon against large US retailers. The table below summarizes the EV/Sales, operating margin and expected revenue growth (next 2 years) at these companies (In making my assessments, I converted operating lease commitments into debt and adjusted the operating income accordingly):
|
Company
Name |
Market Capitalization |
Enterprise Value |
EV/Sales |
Pre-tax operating margin |
Revenue growth |
|
The
Home Depot, Inc. (NYSE:HD) |
$103,934 |
$123,357 |
1.57 |
11.94% |
4.72% |
|
Amazon.com Inc. (NasdaqGS:AMZN) |
$145,364 |
$147,102 |
1.98 |
1.45% |
20.30% |
|
Target
Corp. (NYSE:TGT) |
$37,623 |
$53,854 |
0.74 |
5.79% |
3.37% |
|
Lowe's
Companies Inc. (NYSE:LOW) |
$47,516 |
$62,083 |
1.16 |
7.83% |
4.59% |
|
Macy's,
Inc. (NYSE:M) |
$21,027 |
$25,945 |
0.93 |
10.88% |
2.71% |
|
The
TJX Companies, Inc. (NYSE:TJX) |
$41,018 |
$46,411 |
1.69 |
14.45% |
6.86% |
|
Kohl's
Corp. (NYSE:KSS) |
$11,170 |
$20,001 |
1.05 |
7.98% |
1.62% |
|
Dollar
General Corporation (NYSE:DG) |
$17,111 |
$24,128 |
1.38 |
11.21% |
8.77% |
|
The
Gap, Inc. (NYSE:GPS) |
$16,890 |
$22,023 |
1.36 |
17.89% |
4.07% |
|
Genuine
Parts Company (NYSE:GPC) |
$13,048 |
$14,281 |
1.01 |
8.31% |
5.03% |
|
Nordstrom
Inc. (NYSE:JWN) |
$11,480 |
$15,008 |
1.20 |
10.29% |
7.68% |
|
Bed
Bath & Beyond Inc. (NasdaqGS:BBBY) |
$13,713 |
$13,346 |
1.16 |
14.04% |
4.17% |
|
Liberty
Interactive Corporation (NasdaqGS:LINT.A) |
$14,189 |
$20,715 |
1.84 |
10.47% |
3.43% |
|
L
Brands, Inc. (NYSE:LB) |
$15,735 |
$22,292 |
2.07 |
18.99% |
5.58% |
|
Ross
Stores Inc. (NasdaqGS:ROST) |
$14,714 |
$16,413 |
1.60 |
15.45% |
6.48% |
|
AutoZone,
Inc. (NYSE:AZO) |
$17,121 |
$22,900 |
2.44 |
17.61% |
4.23% |
|
Dollar
Tree, Inc. (NasdaqGS:DLTR) |
$10,505 |
$13,041 |
1.66 |
16.14% |
8.63% |
|
The
Priceline Group Inc. (NasdaqGS:PCLN) |
$60,861 |
$61,742 |
9.09 |
36.04% |
22.20% |
|
O'Reilly
Automotive Inc. (NasdaqGS:ORLY) |
$15,215 |
$17,974 |
2.70 |
18.03% |
6.84% |
|
Netflix,
Inc. (NasdaqGS:NFLX) |
$19,831 |
$19,923 |
4.55 |
5.48% |
20.20% |
|
Tiffany
& Co. (NYSE:TIF) |
$10,929 |
$12,754 |
3.16 |
25.28% |
7.49% |
|
TripAdvisor
Inc. (NasdaqGS:TRIP) |
$11,346 |
$11,543 |
12.22 |
30.60% |
24.50% |
|
Average |
|
|
2.57 |
14.37% |
8.34% |
|
Median |
|
|
1.63 |
12.99% |
6.03% |
Amazon trades at a higher multiple than the median for the sector, but it higher revenue growth albeit with lower operating margins. To control for the differences, I ran a regression of EV/Sales against operating margin and revenue growth and obtained the following results:
EV/Sales = -2.03 + 16.92 (Pre-tax operating margin) + 26.01 (Expected Rev Growth)
(5.71) (7.27)
The R-squared of the regression is 88%. Plugging in Amazon's operating margin (1.45%) and revenue growth (20.3%) into the regression, we get a predicted value of 3.50 for Amazon's EV/Sales:
EV/Sales (for Amazon) = -2.03 + 16.92 (.0145) + 26.01 (.203) = 3.50
Amazon looks like it is under valued by about 43.36% against large US retailers.
Amazon under/over value = (1.98/3.50) -1 = -0.4336 or Under valued by 43.36%
A relative valuation against Global Internet retailers
To get a different measure of relative value, I compared Amazon to global internet/catalog retailers in the table below:
|
Company
Name |
Market Capitalization |
Enterprise Value |
Revenues |
EV/Sales |
Pre-tax operating margin |
Revenue growth |
|
Amazon.com
Inc. (NasdaqGS:AMZN) |
$145,364 |
$147,102 |
$74,452 |
1.98 |
1.45% |
20.30% |
|
Liberty
Interactive Corporation (NasdaqGS:LINT.A) |
$14,189 |
$20,715 |
$11,252 |
1.84 |
10.47% |
3.43% |
|
Home
Retail Group plc (LSE:HOME) |
$2,751 |
$5,736 |
$8,571 |
0.67 |
-2.02% |
0.00% |
|
The
Priceline Group Inc. (NasdaqGS:PCLN) |
$60,861 |
$61,742 |
$6,793 |
9.09 |
36.04% |
22.20% |
|
Expedia
Inc. (NasdaqGS:EXPE) |
$9,089 |
$9,546 |
$4,771 |
2.00 |
12.04% |
14.60% |
|
Netflix,
Inc. (NasdaqGS:NFLX) |
$19,831 |
$19,923 |
$4,375 |
4.55 |
5.48% |
20.20% |
|
HSN,
Inc. (NasdaqGS:HSNI) |
$2,999 |
$3,134 |
$3,404 |
0.92 |
8.70% |
4.33% |
|
B2W
Companhia Digital (BOVESPA:BTOW3) |
$1,898 |
$3,376 |
$2,578 |
1.31 |
5.37% |
21.30% |
|
Groupon, Inc. (NasdaqGS:GRPN) |
$4,735 |
$3,635 |
$2,574 |
1.41 |
4.08% |
19.00% |
|
Vipshop Holdings Limited
(NYSE:VIPS) |
$7,619 |
$7,357 |
$1,697 |
4.34 |
3.55% |
65.10% |
|
ASOS
plc (AIM:ASC) |
$6,021 |
$5,959 |
$1,494 |
3.99 |
5.47% |
28.50% |
|
Takkt AG (XTRA:TTK) |
$1,363 |
$1,795 |
$1,312 |
1.37 |
11.09% |
3.80% |
|
Ocado Group PLC
(LSE:OCDO) |
$3,420 |
$3,704 |
$1,297 |
2.85 |
-0.55% |
20.10% |
|
N
Brown Group plc (LSE:BWNG) |
$2,357 |
$2,694 |
$1,261 |
2.14 |
12.61% |
6.23% |
|
E-Commerce
China Dangdang Inc. (NYSE:DANG) |
$1,015 |
$957 |
$1,045 |
0.92 |
-1.66% |
22.20% |
|
TripAdvisor
Inc. (NasdaqGS:TRIP) |
$11,346 |
$11,543 |
$945 |
12.22 |
30.60% |
24.50% |
|
Ctrip.com
International Ltd. (NasdaqGS:CTRP) |
$7,408 |
$7,308 |
$890 |
8.21 |
17.64% |
28.80% |
|
Shutterfly,
Inc. (NasdaqGS:SFLY) |
$1,584 |
$1,436 |
$784 |
1.83 |
2.21% |
15.70% |
|
zulily,
Inc. (NasdaqGS:ZU) |
$5,703 |
$5,494 |
$696 |
7.90 |
1.55% |
55.60% |
|
YOOX
S.p.A. (BIT:YOOX) |
$2,027 |
$2,011 |
$627 |
3.20 |
5.75% |
23.10% |
|
AO
World Plc (LSE:AO.) |
$1,832 |
$1,860 |
$596 |
3.12 |
1.48% |
0.00% |
|
HomeAway,
Inc. (NasdaqGS:AWAY) |
$3,074 |
$2,803 |
$347 |
8.09 |
10.95% |
22.50% |
|
RetailMeNot,
Inc. (NasdaqGS:SALE) |
$1,662 |
$1,558 |
$210 |
7.43 |
27.56% |
25.90% |
|
Coupons.com
Incorporated (NYSE:COUP) |
$1,483 |
$1,476 |
$168 |
8.79 |
-5.07% |
0.00% |
|
Qunar Cayman Islands
Limited (NasdaqGM:QUNR) |
$3,279 |
$3,118 |
$141 |
22.18 |
-18.07% |
65.30% |
|
Trade
ME Group Ltd. (NZSE:TME) |
$1,359 |
$1,483 |
$139 |
10.69 |
66.98% |
11.00% |
|
Hyundai
Home Shopping Network Corporation (KOSE:A057050) |
$1,812 |
$1,799 |
$724 |
2.49 |
18.43% |
9.61% |
|
Start
Today Co., Ltd. (TSE:3092) |
$2,407 |
$2,392 |
$359 |
6.66 |
28.08% |
13.30% |
|
Rakuten, Inc. (TSE:4755) |
$15,714 |
$15,768 |
$4,932 |
3.20 |
18.34% |
12.20% |
|
Liberty
Ventures (NasdaqGS:LVNT.A) |
$4,202 |
$5,845 |
$945 |
6.18 |
-1.16% |
21.30% |
|
CJ
O Shopping Co., Ltd. (KOSDAQ:A035760) |
$1,990 |
$2,904 |
$2,381 |
1.22 |
10.64% |
8.57% |
|
ASKUL
Corporation (TSE:2678) |
$1,448 |
$1,314 |
$2,378 |
0.55 |
3.18% |
11.70% |
|
GS
Home Shopping Inc. (KOSDAQ:A028150) |
$1,418 |
$1,164 |
$994 |
1.17 |
16.11% |
8.88% |
|
Average |
4.68 |
10.52% |
19.07% |
|||
|
Median |
3.12 |
5.75% |
19.00% |
Compared to the median value for EV/Sales for this sector, Amazon looks cheap but its revenue growth is close to that of the median company in the sector.
Again, running a regression of EV/Sales against operating margin and revenue growth, I obtained the following:
EV/Sales = 0.51 + 8.38 (Pre-tax operating margin) + 17.24 (Expected Rev Growth)
(1.89) (4.19)
The R-squared of the regression is much lower at 38%. Plugging in Amazon's operating margin (1.45%) and revenue growth (20.3%) into the regression, we get a predicted value of 3.50 for Amazon's EV/Sales:
EV/Sales (for Amazon) = 0.51 + 8.38 (.0145) + 17.24 (.203) = 4.13
Amazon looks like it is under valued by about 52.2% against large US retailers.
Amazon under/over value = (1.98/4.13) -1 = -0.522 or 52.2%