From The Street.com:
"Herb on TheStreet: Is Amazon Really Worth
Two and a Half Times More than Microsoft?
By Herb Greenberg
Senior Columnist
11/3/98 6:30 AM ET
With Amazon.com (AMZN:Nasdaq) up another 4 1/8 yesterday, to
131, Eric Von der Porten of Leeward Investments in San Carlos,
Calif., put his fingers to his calculator keys and walked away wondering
whether Amazon is really worth two and a half times Microsoft
(MSFT:Nasdaq). (Yep, you read that right!)
"Here's the simple math," he says, gathering up some steam. "In the last
quarter, Microsoft had revenues of $4 billion and generated a gross
margin of $3.6 billion. The company's $265 billion market value is
therefore 18 times its annualized gross margin. Amazon, on the other
hand, generated only $35 million in gross margin from its $154 million in
revenues, so its $6.3 billion market value is 45 times its annualized gross
margin. The market is therefore valuing each dollar of Amazon's gross
margin 2.5 times more highly than each dollar of Microsoft's gross
margin.
"Now, you will ask, I'm sure, why focus on gross margins, not
revenues? After all, the typical tech/growth analysis would look at
revenue multiples. In that light, Amazon might look 'cheap' at only 10
times revenue vs. Microsoft's 16 times.
"There are several reasons for this. First, in order to eventually produce
earnings (a concept with which Amazon has no familiarity), a company
must first produce gross margins. When I was with a venture capital
firm 10 years ago, an in-depth study of about 80 venture investments
showed that a company's ability to generate gross margin was far more
significant in predicting investment success than was its ability to grow
revenue, or even near-term profits.
"Second, when you are comparing companies with widely different
gross margin percentages, revenue comparisons lose any meaning. No
one in his right mind would compare Intel (INTC:Nasdaq) and
Flextronics (FLEX:Nasdaq) on a revenue multiple basis, even though
both companies have something to do with computer hardware. Since
Intel's gross margins are more than five times those of Flextronics (more
than 50% vs. less than 10%), gross margins are far more important than
revenues in evaluating these companies' abilities to generate profits and
long-term shareholder value.
"Sure, it's nice to be able to compare companies on an earnings basis
too. But Amazon and many of its Internet brethren are trying to convince
the investing world that earnings don't matter anymore. It's a bit
reminiscent of the joke about the thrice-divorced woman who left her
last husband because he was a venture capitalist and he just kept
telling her how great it was going to be.
"So I can't tell you and I won't tell you what I think Amazon is worth. But,
with all due respect to Mr. Buffett, I think I can tell you what it's not
worth. And to JJC and all the other Amazon trading junkies: Next time
you call your broker with a buy order, remember that ratio, 2.5:1, and
ask yourself: 'How lucky do you feel today?'"
And this trivia contest: Other than biotechs, what companies were
hugely unprofitable for their first few years after going public but went
on to major success? I don't know the answer; you tell me.
" |
