Barrons Mailbag:
Amazin' Amazon
To the Editor
I'm writing in reference to Alan Abelson's item on Amazon.com (Up & Down
Wall Street, May 3).
As your publication has often written, Amazon's stock price seems to defy any
logic. But in that respect, the history of investments is littered with fads and
manias, so there's nothing really unusual. What is more troublesome to me is to
see how these companies are being embraced by Wall Street analysts.
I listened to a conference call held over the Internet by one analyst, following
the realease of Amazon's first-quarter results. This analyst has a Strong Buy
rating for Amazon, with a $280 price target over the next 12 months.
Asked how he reconciled the price target with Amazon's near-term prospect of
increasing losses, he defended its business model and the price target by stating
that the company is extending its market share lead and that he projected
revenues of $10 billion within the next five years.
Assuming that Amazon will, in fact, reach $10 billion in sales in five years
(versus current quarterly annualized sales of $1.2 billion) and assuming a
generous 22% gross profit margin, I derive $2.2 billion in gross profits. I have
also assumed that Amazon's pre-tax profit will equal its gross profit; in other
words, that the company will have no expenses other than its cost of goods sold
and that net after tax should amount to $1.43 billion.
While Amazon currently has about 160 million shares, fully diluted, it also has
38 million employee options, vesting over the next few years, at an average
price of about $13. So, even ignoring the conversion of the $1.25 billion of
subordinated debt (convertible into an additional eight million shares), the
company, in five years, conservatively will have at least 198 million shares
outstanding.
Based on the unrealistically optimistic assumptions above, Amazon's 2004
earnings would reach $7.22 a share. This means the stock is trading today at 24
times 2004 EPS, while according to the analyst in the online conference call, it
should trade at 39 times that figure.
ANTONIO MARZIALE
Houston
To the Editor
Alan Abelson's biting analysis of Amazon.com is well-taken. However, arriving
at an ultimate price based on a multiple of twice or even one times sales seems
a mite too generous.
Considering that a profitable Barnes & Nobles sells at only 80% of revenues
and taking into account the fact that not a scintilla of evidence shows that
Amazon ever will make money, it is not so fanciful to come up with a $1 price
tag for this currently highflying stock in a few years' time.
ALBERT ANY
Larchmont, New York
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