Sunday

Amazon (AMZN) Complete Analysis

We just read Amazon’s 2009 Annual Report, and extracted some important notes for your easy reference.

Amazon

Number of shares outstanding = 442 m

Share price at time of analysis = $128

Market capitalisation = 56.57 B

Historical Price Chart of Amazon (AMZN)

Amazon Share Price Chart 1997 - 2010

Amazon Financial Analysis

Amazon Financial Statements 2006-2009

Amazon Historical Valuation Ratios

Amazon Historical Valuation Ratios

Institutional Holding in Amazon

% Shares Owned by institutions: 65.14%

% owned by insiders = 20%

# of Holders: 865

Total Shares Held: 291,693,662 (of 442 mil shares)

3 Mo. Net Change: -3,402,452

# New Positions: 29

# Closed Positions: 31

# Increased Positions: 124

# Reduced Positions: 127

Potential for Short Squeeze in Amazon?

Short Interest (shares short) = 12m (2.69% shares outstanding)

Amazon Short Selling Interest

Repurchasing of Common Stock

Amazon has had good tight capital management - with frequent buy backs in the past (another boost to share price). However, number of shares outstanding have remained roughly the same in the last 5 years ; 426 (in 2005) to 442 (2009) million shares outstanding, and they failed to take advantage of low share price in the crash by buying up more shares at discounted prices, since it has  an authorized program to repurchase up to $1 billion of common stock (which has increased to 2 billion in January 2010)

August 2006, our Board of Directors authorized a 24-month program to repurchase up to $500 million of our common stock, - repurchased $252 million (of common stocks) in 2006

-repurchased $248 million in 2007

February 2008 by a 24-month program to repurchase up to $1 billion of our common stock.

-repurchased $100 million in 2008 under the February 2008 Board authorization.

-We did not repurchase any of our common stock in 2009.

What to Expect of Amazons Future Earnings in 2010

We put in our best case assumptions (60% growth) for Q3 and Q4 to forecast the EPS for 2010.

EPS Amazon 2010

2010 Earnings Per Share = 1.10 + 0.738 + 1.36 =3.198

Growth

Actual Q1 : 57.7%

Actual Q2: 39.8%

Forecast Q3: 60%

Forecast Q4: 60%

Assuming 60% growth EPS for Q3 and Q4 = $1.36

At Share Price of $128 (market cap = $56.5B)

Based on TheInflationist Forecast of BEST CASE EPS 2010 = $3.20 , Forward PE is 40

Even at a growth of 56% on previous year’s EPS, the forward PE is 40. If we apply the same phenomenal growth for 2011, the subsequent years (2011) PE will be 25.6

Forward Price Earning Ratio of Amazon Based on 40% vs 60% Growth YoY

Amazon Forward PE Ratio 2010, 2011, 2012

Amazon Forward PE 2010, 2011, 2012

AMAZON: Projected Share Price Based on Historical 5-year PE Range

Based on market’s level of optimism in the last five years using Amazon’s historical 5-year PE range from 29 (most pessimistic) to 128 (most optimistic), the projected share price based on varying PE valuations are illustrated in the charts below (based on 60% growth vs 40% growth scenario).

Looking at Amazon’s 5-year historical PE range, it looks A LOT scarier shorting at current levels. The 5 year PE range was “current PE” as oppose to “future PE”. So based on current PE (ie 2009 EPS of 2.04 at current share price of $128) = 62, we are at the lower end of the 5 year PE range.

60% Growth Year On Year (YoY)

Amazon Projected Share Price at PE 30-130

The charts above are a bit deceiving (apologies) since it factors in a 60% growth for 2009/2010 (ie using an EPS of $3.26)- hence its showing “future PE” as oppose to “current PE” (EPS $2.04). If we use current 2009 EPS, and apply the 5-year valuation PE range of 30-130 the chart looks more like the following:

Amazon Share Price Based on 2009 EPS at 5 Yr PE range

40% Growth YoY

Amazon Projected Share Price Based on Historical 5 Yr PE

Amazon Assets & Liabilities

Amazon Cash vs Liability Statement

Amazon’s impressive cash flow is testament to the efficiencies in online businesses. It reminds us of Google’s low operating expense to revenue growth ratio. Amazon net sales increased by $10 billion from 2007 to 2009, yet the operating expenses only increased $1.8 billion. Footnote explains the items in operating expenses.

Amazon Cash Flow 2009/2010

AMAZON.COM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; and responding to inquiries from customers. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations. Certain of our fulfillment-related costs that are incurred on behalf of other businesses are classified as cost of sales rather than fulfillment.

International Growth

International growth definitely has more room to grow. By pushing sales of Kindle, sales of e-products would definitely be easily rolled out without significant capital expenditure. If I was Baidu, I would be thinking of how to stop Amazon expanding in China.

Amazon International Earning

Competition: Amazon versus Apple

Competition wise, we see Apple as the closest rival with the launch of Ipad/iBooks. The thing is, Ipads may actually accelerate the growth of Amazon. Some argue its better for Ipad users to buy their books on Amazon than Ipads (Amazon has 10x more range at this point in time) - look out for the statistics on this and feel free to share it in the comments section.

Apple iPad/iBooks versus Amazon Kindle by CNET

Technical Analysis of Amazon.com

We are not experts when it comes to TA, neither are we true-believers of the art. We exploit it to time a fundamentally-driven trade. We expect many technical traders would be looking at $140 (the underside of broken support, now resistance), this also coincides with a Head and Shoulder pattern (refer to chart below)

Amazon Share Price Chart

Relative Performance of Amazon versus Dow Jones

Amazon Versus Dow Jones 1998-2010

Amazon has done spectacularly compared to DJIA. Lets look at how Ebay (in green below) compared to DJIA(in red) during its hay days in 2005. At a 13 year scale, Ebay has still outperformed the Dow Jones, with maximal outperformance in 2001 and 2004-2005.

Ebay versus Amazon versus Dow Jones 1998-2010

Now, we zoom in to the last 5 years comparing Ebay to Amazon and Dow Jones. Notice how its lost its gloss and has actually underperformed the Dow in this period by 50% since 2005. Point being, when growth is no longer there (or as expected), the shift in gears from high PE to low PE will result in a significant decline in share price (in relative terms at least).

5 Year Comparison Ebay versus Amazon

Conclusion on Amazon.com Analysis:

1. Fantastic management - founder run (Jeffrey Bezos is only 46 years of age) and definitely has a proven track record. Reuters has Bezos at a very reasonable $1.78 mil pa, with zero options compensation - contrast this to other companies whose management only knows too well how to look after themselves with their salaries at 1-2% market capitalisation.

2. Based on historical 5 year PEs, Amazon’s share price is capable of being from $60 to $270 (PE 29-129). Current share price of $128 is at a Current PE of 64, but a future/forecast PE of 40.

3. 2010 Net profit is expected to be at $3.20. Q1 and Q2 have exceeded most expectations at 40-58% growth in profit. The best (best earnings historically in Q4) is yet to come. Our $3.20 forecast is based on 60% growth. With US consumer spending expected to decline as Americans learn to save and spend less, this 60% growth is VERY generous in our view.

4. If we do have a double dip recession, we definitely would prefer to be on the long side of Amazon at low prices (rather than short at high prices) since its better to be a bull than a bear (short $10k worth of X, and if you are absolutely right and X goes bankrupt you make $10k, long $10k worth of Y and if you are absolutely right and it goes up 3-4 times you make $30-40k!).

5. However, the bigger you are, the harder it is to grow at such phenomenal rates. So far Amazon is showing no signs of slowing down, but look at the once invincible Ebay and Walmart. We need more competition for Amazon!

6. Amazon is priced to perfection and has no room for errors especially in current gloomy times.

7. Short at $141 (1 unit) and $150(2 units), stops at $160 (unit = depending on your capital and comfort level)

8. If Amazon’s growth declines to 20%, and market downshifts the PE-gear to a more “normal” 30 (instead of 60-120 range!), we expect to see a share price of 85.

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