How Do Investors Value The Enigma That Is Amazon, And How Should They?
by Timothy Phillips
Spectacular Amazon (AMZN) revenue growth and the star power of CEO Jeff Bezos have mesmerized investors over the past couple of years to generate one of the greatest stock runs a company this size has ever undergone while delivering deteriorating earnings and cash flow (Figure 1). Companies such as Amazon.com, SalesForce.com (CRM) and Netflix (NFLX) are three examples of companies in the middle of major investments that have traded short-term profits for long-term growth. When in these modes traditional valuation methods such as Discounted Cash Flow [DCF], Price to Earnings (P/E) multiples and sum of parts analysis are not applicable. In the case of Amazon, investors have pinned the stock price to a multiple of forward revenue with extremely high correlation (R2 > 0.94 over the past 5 years). We will examine if the magnitude of this metric is appropriate based on a simple approach to valuing companies in this situation. read more »
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