Talking Numbers: Amazon

Five years ago, Amazon (AMZN) closed at $171. It recently traded at $594. That is a pretty spectacular five year return – just over 28% annualized. Returns have been delivered by the stock. And performance has been delivered by the company. Sales per share have grown from $76 per share in 2010 to $227 per share expected for 2015. Cash Earnings per share [Estimated as Earnings Plus Depreciation, Amortization and Non-Cash Charges] has grown from $3.8 in 2010 to $12 expected for 2015. What’s to worry about? The shares have delivered spectacular returns, but the company has delivered an equally spectacular performance, so everything must be all right. But much as I like Amazon, I cannot get comfortable with Amazon at present levels. 

Numbers don’t tell you what to do. But they do guide you towards doing additional research to help you decide what you ought to do. Perhaps for me it’s the seasonal thing: Amazon has run ahead of itself driven by seasonal tailwinds, and now with headwinds ahead, it might suffer going ahead.  Perhaps it’s something as simple as finding a market capitalization of $280 billion too much to swallow, particularly given that Walmart has a market capitalization of $205 billion, despite sales being manifold over Amazon’s – yes growth potential matters, and it makes all the difference, but is that enough. 

Amazon will be reporting results on 28th January, 2016. And with the shareholder response to earnings being traditionally strong, there is reason to be nervous. I’ll leave you to determine whether the risk is reflected in the price, or whether there is more pain to come.

Here are some interesting data points:

Valuation

  • Over the past decade, Amazon has traded at a HIGH median trailing twelve month multiple of Cash Earnings of 51.75 (average 52) with a standard deviation of 6.28. It has traded at a LOW median trailing twelve month multiple of Cash Earnings of 27.5 (average 27) with a standard deviation of 8.08. The average of HIGH and LOW median trailing twelve month multiple of Cash Earnings has been 38.7 (average 39.6) with a standard deviation of 6.19. The stock recently traded at $594, which represents a Cash Earnings multiple of 49.32.  This level is over one and a half standard deviation above decade average levels. Assuming normalcy in the distribution over the long-term, this suggests that probability of a further expansion in the multiple is limited to below 5.8%. A reversion to decade median levels would take price down to $466 (21.5% implied downside): at this level the stock will be viewed in a historic context as neither expensive nor cheap.
  • Over the past decade, Amazon has traded at a HIGH median trailing twelve month multiple of Sales of 2.39 (average 2.37) with a standard deviation of 0.33. It has traded at a LOW median trailing twelve month multiple of Sales of 1.27 (average 1.21) with a standard deviation of 0.28. The average of HIGH and LOW median trailing twelve month multiple of Sales has been 1.86 (average 1.79) with a standard deviation of 0.21. The stock recently traded at $594, which represents a Sales multiple of 2.62. This level is over 3.9 standard deviations above decade average levels. Assuming normalcy in the distribution over the long-term, this suggests that probability of a further expansion in the multiple is near zero. Keep in mind that during 2015, the stock did trade up to a multiple 2.68, and in 2007 the multiple peaked out at 2.84, so the multiple can expand further, but the likelihood of expansion is low. A reversion to decade median levels would take price down to $423 (28.8% implied downside): at this level the stock will be viewed in a historic context as neither expensive nor cheap.

The valuation risk as measured looks to be high. Is your fundamental evaluation consistent with what the numbers imply?

Earnings Growth

  • Over the past decade, Amazon has delivered median annual cash earnings growth of 32.3% (average 34.3%), with a standard deviation of 23.4%. Cash earnings growth is expected to come in at 27% for 2016. This growth expectation is in line with long-term trend, and just over the growth seen during 2015. Assuming normalcy in the distribution, a decline in earnings growth to below 27% comes with a probability of below 38%.
  • Over the past decade, Amazon has delivered median annual sales growth of 25.6% (average 27.5%), with a standard deviation of 8.5%.  Sales growth is expected to come in at 16.65% for 2016. This growth expectation is below long-term trend, and below the growth of 18.2% and 18.5% seen during 2014 and 2015. Assuming normalcy in the distribution, a decline in earnings growth to below 16.65% comes with a probability of below 10%.

The risk to growth as measured looks to be low. Is your growth evaluation consistent with what the numbers imply?

Animal Spirits

  • The stock traded 0.4% over its average weekly close price over the past 4 weeks. Over the past five years, the stock has traded on average 0.71% over its average weekly close price over the past 4 weeks, with a standard deviation of 4.1%. Assuming normalcy in distribution, the odds of a decline to below 0.4% over its average weekly close price over the past 4 weeks is 47%.
  • The stock traded 6.6% below its average weekly close price over the past 10 weeks. Over the past five years, the stock has traded on average 2.36% over its average weekly close price over the past 10 weeks, with a standard deviation of 6.7%.  Assuming normalcy in distribution, the odds of a decline to over 6.6% below its average weekly close price over the past 10 weeks is 9%.
  • The stock traded 3.1% below its average weekly close price over the past 20 weeks. Over the past five years, the stock has traded on average 4.98% over its average weekly close price over the past 20 weeks, with a standard deviation of 9.36%. Assuming normalcy in distribution, the odds of a decline to over 3.1% below its average weekly close price over the past 20 weeks is 19.42%.
  • The stock traded 9.74% over its average weekly close price over the past 40 weeks. Over the past five years, the stock has traded on average 9.71% over its average weekly close price over the past 40 weeks, with a standard deviation of 13.62%. Assuming normalcy in distribution, the odds of a decline below 9.74% over its average weekly close price over the past 40 weeks is 50%.
  • The stock traded 17.7% over its average weekly close price over the past 52 weeks. Over the past five years, the stock has traded on average 13.27% over its average weekly close price over the past 52 weeks, with a standard deviation of 15.3%. Assuming normalcy in distribution, the odds of a decline to below 17.7% over its average weekly close price over the past 52 weeks is 61%.

The technical picture has recently deteriorated. And it has not deteriorated enough for it to be considered a contrarian buy. Is your evaluation of technical conditions consistent with what the numbers imply?

Based on cash earnings per share expected in 2016, I would view Amazon as reasonably valued at $592. And I would view Amazon as attractive at $420. However, I feel the multiple of sales per share has been the most appropriate valuation indicator over the past several years. And based on sales per share expected in 2016, I would view Amazon as reasonably valued at $493 – a price to nibble.  And I would view Amazon as attractive at $336 – a price to bite. 

Barring negative stock specific or macro events, I doubt animal spirits will permit the price to fall as low as that: the share ought to hold $520, and failing that $446. And with sales growth expectations set at a relatively low level of 16.65%, the surprise may well be to the upside.  A surprise to the upside could carry the share up quickly towards $633 (based on sales per share decade high multiples), and if a sales growth positive surprise comes with strong guidance, and without disappointment on the earnings front, the share could march onwards to $792 (based on cash earnings per share decade high multiples).

So really, if you own it, use derivatives to limit downside, and look to exit on exuberance.  If you don’t own it, wait – it might take time, even a long time, but wonderful companies do trade at a fair price from time to time.

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.
Or Sign in with
Joe Economy 8 years ago Member's comment

Amazon has been a darling stock for a long time, but I am starting to wonder how much steam it has left. It seems that there is strong resistance at the $700 mark and the stock creeps close but never breaks that mark.In the last month AMZN is down around 11% and only up 13% for the year which would be good for any other stock but for Amazon is a definite slowdown. Earnings are out tomorrow and we'll be watching carefully to see market reaction. This month's analyst opinions are still bullish on the stock; 12 strong buys, 25 buys, 7 holds, 0 underperform, 0 sell. I think the stock is still too hot right now and would not buy yet until it drops to the low 500 area.

Roger Harris 8 years ago Member's comment

Amazon it all about the long play. If they wanted to focus on profits, they could. But Bezos has a vision and $AMZN will eventually dominate.