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Technology Stocks : Amazon.com, Inc. (AMZN)

AMZN 244.22

+9.6%

Oct 31 9:30 AM EST

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To: Eric D. Moody who wrote (11302)	7/22/1998 6:16:00 PM
From: Pancho Villa	of 164684

I was very impressed by the press release. I see continued revenue growth and a clear strategy to continue growing. It is amazing how popular this bookstore is outside the US where most people with net access know about it and many buy from it! I was burnt badly shorting this puppy and I am not about to short it again in the recent future but this does not prevent me from trying to see if the 6+ billion market cap. can be supported by an extremely favorable valuation analysis: From the results reported it seems safe to assume that AMZN gross margin is appx.22.5% and that it can not get any better, that is the nature of internet commerce if anything increased competition will drive gross margins down. Let's settle for a long run 20% margin which may be quite optimistic. Pricing pressures I assure you will develop. Since internet businesses are supposed to be so efficient let's suppose that other expenses, including marketing expenses, S&A etc. can be ignored. In other words let's assume that AMZN makes a 20% profit on whatever revenue they have. Suppose that right now AMZN revenues were already twice those of BKS. From BKS latest 10K we see this amount would be: 2.8 billion * 2 = 5.6 billion Therefore their profit before taxes would be 5.6 * 0.20 = 1.12 billion At a 35% tax rate their profits after taxes would be .730 billion, or 730 million. So our extremely optimistic analysis resulted in annual revenues of 5.6 billion or approximately 12.7 times their current rate of 444 million/year. Reaching this revenue level in let's say a five year time frame would imply an annual compounded growth rate of 66% (you find this by taking the fifth root of 12.7). Now, assuming AMZN had revenues of 5.6 billion and was making 730 million/year now, their current PE would be: 6.5 billion/.73 billion or 8.8. Which to my surprice is not as low as I would have expected, given all the inflating we did! Plenty of value investments selling at these multiples even now and their revenues/profits are real. Look for example at BS rated a buy by Zacks with a PE of 9.1. ( I know I am ignoring the fact that BS is not a growth stock while AMZN is. I hope you agree that after all the inflating we did we can ignore AMZN's growth we have already factored it in!) So what do you think? The ride may be unpleasant but AMZN is a short! Take a small position so that you can live with it! IMO a short position equivalent to 3% of your trading portfolio value should reward you with at least a 1.5% boost in return within the next 12 months (this assumes a 50% drop in price at some point in time within the next 12 months). Pancho

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