Fundamental Fridays: Amazon.com

In the third installment of Fundamental Fridays, TST will examine Amazon.com, Inc.

Amazon.com operates retail web sites and provides programs for third parties to sell products on its sites.  The company was founded by CEO Jeff Bezos (pictured at left) in 1994. In the past 52 weeks, shares of Amazon.com (Ticker: AMZN) have traded as low as $34.68 and as high as $97.43.  Shares closed yesterday at $47.32.  Let’s see what the fundamentals have to offer.

Valuation measures

Price-earnings - Compares the current market value per share to the earnings per share.  P/E ratio for AMZN: 28.24, P/E industry average: 16.75.  P/E sector average: 7.09. Signal: OVERVALUED

Price-sales – Compares the current market value per share to the revenue per share.  P/S ratio for AMZN: 0.97 , P/S industry average: 0.76,  P/S sector average: 0.38   Signal: OVERVALUED

Price-cash flow – Compares the current market value per share to the cash flow per share.  P/CF ratio for AMZN: 18.97, P/CF industry average: 9.10, P/CF sector average: 2.12   Signal: OVERVALUED

Some analysts use earnings or sales with the following formula to solve for a stock’s expected price.  The formula below typically uses ratios based on 5-year averages.

Expected stock price = historical P/E average x Current EPS(1 + EPS growth rate)

Unfortunately, there is not a 5-year EPS growth rate available for AMZN and the company’s 3-year EPS growth rate is negative.  Fortunately, the same formula can be used substituting sales or cash flow per share in place of earnings.  From ADVFN Financials I was able to find the P/S ratio for the past 5 years and a 5-year sales per share growth rate.  So the new formula looks like this: 

Expected stock price = historical P/S average x Current SPS(1 + SPS growth rate) = 2.62 x 13.05(1+0.2746) = $43.58     Signal: OVERVALUED. The expected stock price of $43.58 is less than the current price of $47.32

Note: Even if a 5-year average EPS growth rate was available, I would probably opt out of using it because the 5 year P/E average is 184.1 and that is too high to yield realistic results especially considering the current P/E is around 28.

Profitability Measures 

Return on Assets – Net income relative to total assets.  ROA for AMZN: 11.39%, ROA industry average: 1.59%

Return on Equity – Net income relative to total equity.  ROE for AMZN: 38.08%, ROE industry average: 6.04%

Profit margin – Net income relative to revenue.  PM for AMZN: 3.51%, PM industry average: 1.14%

Bottom Line:  AMZN is extremely profitable relative to its competitors, however profitability is reflected in valuation (through the P/E) ratio and in that regard AMZN appears to be overvalued.

Based on the ratios used today, TST’s Fundamental Friday Recommendation for Amazon: SELL

Ratios should always be evaluated relative to a company’s competitors, sector and industry averages to see how the company stacks up.  Ratios should never be used as the sole basis for trading decisions. The data used is pulled from financial statements which have been known to be subject to manipulation and varying accounting practices.

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