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Strategies & Market Trends : Roger's 1998 Short Picks
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To: Don Westermeyer who wrote (17232)1/28/1999 1:12:00 AM
From: Kailash  Read Replies (1) of 18691
 
Don -

I suppose you saw the latest analyst target on Amzn of 190. The reasoning?

"Target Price Of $190 Could Be Attainable Sooner Rather Than Later.

We are raising our price target from $60 to $190. Our price target of $190 is based on discounted cash flow analysis. We extend our DCF analysis through the year 2005, growing revenue between 40%-45% year over year. We grow gross margins to the high 20% range and operating margins into the mid-teens. Our terminal growth rate is 11.6% and our cost of capital is 13.3%, bearing in mind that Amazon's capital structure is weighted towards debt. The result is a $29.6 billion valuation, or $190 per share. We also arrive at this valuation using a discounted 2004 EPS of $3.65 to arrive at a present value of $2.21, to which we apply a 86 times multiple to arrive at our $190 target price."

The point is that even if margins do grow 45% a year, it still works out to a P/E of 86 (pulled out of which hat?) five years from now. So in the rosiest of scenarios, the stock is still obscenely overvalued. How about a P/E of 15? That leaves the stock at $33 in 2005; discounted for uncertainty, I'd be willing to pay $10 for it now. In the mean time, let's be happy someone is willing to subsidize our book purchases.

Kailash
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