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Strategies & Market Trends : The Art of Investing -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (686)	5/13/1999 5:19:00 PM
From: Sun Tzu	Respond to of 10553

Just to elaborate on the method discussed in the article and using theirown example of AMZN, this is how it goes: Amazon has market cap of $150157 = $23.55 B The estimated revenue for 1999 = $1.4 B. Assuming for the moment that they are not profitable only because they are using their "profits" to grow the company further, then if* they were not spending the money on growing their business, they would have had net profit margins of 6% which is 20% higher than the leading retailer i.e. Wall mart (this is the part where it matter which industry the company is in). As such, on the estimated $1.4B revenue they would have made $1400M * 0.06 = $84 M. This would give AMZN the practical PE of 23550/84 = 280 Now we look at the growth side of the equation and assume that AMZN will have the average earnings growth rate of 60% (which is an impressive rate to achieve). We look at the stock market as a whole and see that the top leading companies have the PEG ratio of about 2.3. Asigning this top multiple to AMZN's presumed 60% growth rate, we get the "fair" PE of 138, which is about half of the practical PE of 280 that derived above. Hence, even under the best circumstances, AMZN is overvalued by 100%. Like I said, this is as close to my selection method as I've seen anyone come. The main differences are that (a) I use operating margins instead of net margins because they are less manipulatible. (b) I value companies based on their revenue growth and price to sales ration instead of earnings. Again to take out the accounting magic out of the selection. (c) Though my program does not do this yet, in my final selection I use the peer multiple on the stock and not the stock market's top multiple. It may be instructive to do this excersize according to my method instead of Mr. Morris' and to use WMT's multiple of sales and operating margin as the top limit of what AMZN can be rationaly priced as. Sun Tzu P.S. I'd be curious to know what you will find out using this method, if you do try it.