Joe,
I believe, cynically, that this opinion from MF was written soley as a "justification" for why anyone in their right mind would invest in Amazon. Any traditional evaluations such as forward looking P/E would indicate that Amazon is a GROSSLY overvalued stock. Amazon has a huge amount of debt as well as negative earnings for the forseeable future. The bottom line out of the article is rather, P/E is meaningless...read: please don't sell Amazon. While it was a valiant attempt, IMO, it failed to either support the argument that P/E, PEG and YPEG are poor indicators or that one should buy or at least not sell Amazon.
Specifically, the MF says: "To price it correctly, you have to have insight not just into the earnings growth of the company, but you have to have a good idea how it might be priced down the road. How it might be priced down the road will be a function of the future outlook on cash flows, the company's cost of capital, the company's capital productivity, and the growth rate of cash flows."
Part I, insight into earnings...is rather tradional, P/E, PEG, YPEG. With a little bit of re-ordering, Part II, cost of capital and capital productivity, defines the business as one where one can receive a multiplier effect of capital investment to revenue/earnings, i.e., relatively a small capital investment will always yield a higher corresponding return in revenue and earnings. For example, a fabless semiconductor will have a lower capital investment than a "fabbed" semiconductor and, at least theoretically, can have the same revenue generated. Duh! Part III, future look on cash flows/growth rate of cash flows says that the company's net profit plus depreciation, amoritizaion and depletion is increasing. Is there a relationship between net income and earnings?
An admittedly superficial comparison between Amazon and THQI...
Part I, THQI has demonstrated earnings and earnings growth, Amazon does not.
Part II, THQI and AMZN can both, theoretically have a small capital investment that results in much larger revenue and earnings growths. Though one should acknowledge that AMZN benefits from a much larger multiplier effect and a capital investment on the part of THQI can result in a game that doesn't sell, whereas, AMZN sells lots of items, and the producer/developer of the item is at more risk than Amazon.
Part III, Cash flows growth, the potential for AMZN is much larger, by orders of magnitude than THQI. Though AMZN is at more risk to competition than is THQI, i.e, a competitor making a good game doesn't necessarily impact THQI sales, whereas a competitor to AMZN will likely effect sales to AMZN. Though I'm sure that AMZN would argue, and perhaps correctly, that there will be enough e-commerce that this will not be a significant factor.
My apologies about rambling about Amazon, I've been following it for awhile, and find the share value to be absolutely absurd.
I agree with your conclusion about THQI P/E...though I'm not sure that it's any day now. The stock is too thinly traded and a small cap of little interest to the street. I think that we should look at two possibilities, in the mid-term, next 6 months or so that the stock will be thinly bought up based on seasonal expectations or there will have to be a few forward quarters of spectacular growth for the issue to pop up on some analysts screens and have some greater covering....But I wouldn't object if you were right on this point. <g>
Best Regards,
Jim
Best Regards,
Jim |
