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

To: Jan Crawley who wrote (4590)	5/21/1998 10:19:00 AM
From: Candle stick	Respond to of 164684

Good posts from the Yahoo! boards by a fellow named "privatequity" Some of you may have wondered why many of us on this board talk about Amazon.com stock being overvalued. Afterall, isn't there almost unlimited upside potential here-how could a rapid growing company like this ever have a stock price that gets overvalued? First, as a general rule, the higher a company's growth rate, the higher its stock price to earnings ratio (P/E). A rapid grower can have a quite high P/E while a slow or no growth company might have a P/E of 4 in a bear market or about 7 in a bull market. Lets move to a hypothetical business outcome that shows an example of stock overvaluation. ASSUMPTIONS 1) As a buyer of Amazon stock today at you expect/hope to receive a 20% return on your money-why would you take the risk if you only expected 8 or 10%? 2) Your holding period is 7 years to the year 2005 when AMAZON.COM SELLS EVERY BOOK IN THE UNITED STATES, a $20 Billion market. 3) Amazon's profit after tax is 3% (not bad when you consider the company only produces a relatively low 20% gross profit). Also, remember,despite the monopoly position we've assumed in 2005, the company should hold net profit to 3% to avoid the gaze of the [Hillary] Clinton Justice Department Anti-trust group. VALUATION The company has $20 Billion sales and net profit of $600 million in 2005 ($20B X 3%). The eps is $25/share ($600 Million profit/24 Million shares outstanding). The average share price is $175 in 2005($25eps X 7 P/E-don't forget, the company can't grow book sales anymore because it sells everybook in America already). You want to make 20%/year return so you pay $49/share today (Present value of $175 discounted at 20% over seven years). OUTCOME Please don't get hung up on the fact that we didn't include music sales, etc. as I am just trying to give you an idea of the magnitude of the tremendous overvaluation here. These are not trick numbers, just common sense investment analysis. Basically, if we assume that Amazon.com sells every adult trade, juvenile trade, mass market paperback, book club, mail order, religious, university press, elementary, high school and college book in America ($20 Billion) from the year 2005 and on, the stock would be worth $45 today. Yet it now sells for double that amount. Please step back and look at the big picture here. This is what we mean by overvaluation. -Privatequity