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Technology Stocks : Internet Analysis - Discussion
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To: kjhwang who wrote (366)5/13/1999 11:19:00 PM
From: Chuzzlewit  Read Replies (3) of 419
 
Translation of the method:

Step 1. Assume a net margin.
Step 2. Multiply that margin by sales; result -- assumed earnings
Step 3. Divide the market capitalization by the assumed earnings; result -- an assumed P/E.
Step 4. Now divide this number by 2.3 because, well, just because.

The assumed P/E is just about as useful as employing a dowser to find water.

Let's try the valuation in another way. Let's assume that AMZN is a mature company -- one with no growth prospects. How big would it have to be to justify its price?

Let's say that it would have a P/E of around 10. That means that it would need earnings of around $15BB. Assuming a 6% net margin, that would imply annual sales of roughly $250BB. Sales are currently around 1.4 BB. At a 60% growth rate how long would it take to achieve that level of sales? 11 years. Assuming that sales could actually achieve that amount, we are looking at a result 11 years out. That is to say, in 11 years the shares of AMZN might be worth $150 if all of our assumptions were true. How much would those shares be worth today? Let's start with a risk-free rate of return of 5.5%. Now let's add a risk premium. Let's use a very modest risk premium -- say 10%. Now let's discount those shares at 15.5% for 11 years.

And the answer is: $30.74. And that is an extremely optimistic estimate because we have used a low discount rate for risk-adjustment and assumed a rather high net margin given AMZN's business model.

Can anybody say tulip?

TTFN,
CTC
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