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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: H James Morris who wrote (4202)	5/11/1998 11:08:00 AM
From: Candle stick	Respond to of 164687

I liked this post from the Motley Fool boards on AMZN: boards.fool.com Subject: Re: BORDERS IS HERE (really) Author: privatequity Date: 5/9/98 5:29:31 PM (ET) "Find me a bear that says this. "Amazon is a great story - they provide a fabulous service and seem to be executing flawlessly. The valuations are too high for my liking and as such I will not participate. THe risk/reward ratio not for me." The first person to say that will be the first person to present a logical bearish argument." Castanza, I am a bear-but-friend-of-Amazon so I agree that what they have done to date is very very impressive. And I believe the managment is quite sharp and will announce many bad future surprises for bears like neat strategic alliances, nifty cross selling tricks, creative uses of customer data bases that bears like me can't even fathom. But lets assume for the moment all of the following: 1) The bull market continues to the year 2002 i.e.no P/E ratio compression. 2) Amazon executes their business plan flawlessly and hits their internal proforma budgets. 3) Gross margins hold and don't decline any before 2002 from competition. 4) The company has paid down long term debt to the old $75mm. 5) AMZN has not diluted any current shareholders by issuing any additional stock over the next five years. Now lets look at the company's EBITDA in 2002 (bear with me here as this is the way we private deal guys think:EBITDA is earnings before interest charges, depreciation, taxes and amortization) which is projected to be $67.8 million in the year 2002 and lets assign a multiple to that (much like you public guys use a P/E multiple) of 35 times and we get a total enterprise value of $2.373 billion less the debt of 75 gets us to an equity value (or market cap in your terms) of $2.3 billion which is where the stock is today. So if you stock freezes at its current price for 4.8 years it will be "correctly" valued in the year 2002 counting in the hypergrowth of the customer base and all the other good possibilities out there. If the poor souls buying the stock today have no price appreciation for almost five years they are going to have a rather putrid estate to pass to their loved ones. What this means is that it doesn't matter if the bears have considered whether the company will lower its purchasing costs with higher sales volumes or that there are a projected 94.2 million web users in 2001 ready to buy in 2002 BECAUSE ALL THIS IS ALREADY IN THE STOCK PRICE and then some. We are using company assumptions here that were spoon fed to the analysts. Everything is already baked into the cake. Now for the really chilling news: I used an EBITDA multiple of 35. When we private guys buy companies the size of Amazon we pay 6 to 9 times EBITDA. Lets increase those multiple for the liquidity of the public markets and for Amazon's assumed continued hypergrowth after the year 2002 and we still can't come close to a 35 EBITDA multiple. This valuation is of record breaking, mind boggling proportions. There has never been anything like this in investment history. Can the stock go up more? Absolutely, because little investors won't stop to think that the stock split or the acquisitions have long, long been discounted by the current price of the stock and think that they have discovered some new hidden value others have overlooked. The internet is hot so how could you go wrong, how could you pay too much for something that is this hot? As a final note, it is the little guys who are buying tomorrow because the big boys-the so called smart money-thinks along the lines discussed above and won't jump into a pool with no water. In addition to the overvaluation, the average daily volume precludes a big player from getting in (or out) as rapidly as they would like with this stock. A rule of thumb here is you could trade about 35,000 shares per day without affecting the price at current volumes, which is just too little to move big money. I just hope for the sake of the little longs, that what big money is stuck in the stock doesn't try to get out at this point.