Hi Dale Baker; Long mathematical note on the quarterly revenue series for AMZN, and why I will be able to cover my short in the single digits (though I'm more inclined to wait until chapter 11.)
The problem with figuring out the value of AMZN is that AMZN is a *story stock*. A story stock is one that is expected to do great things at some time in the future, but not in the present. Story stocks bleed money in the present, but they have some *story* that explains why they should be highly profitable in the future.
The AMZN story is that the current losses are of no great importance, and that they are instead building a market. What is important, instead, is the growth rate in the revenue of the company. I, and most of the other shorts on this thread, believe that the growth of AMZN is a lot closer to being finished than the longs, and that the recent quarter's results are supportive of our belief. There has been some suggestion on this thread that AMZN's recent quarter's results were not really comparable to the previous quarter's reseults due to seasonality. The purpose of this note is to analyze AMZN's revenue numbers with this caveat in mind. In other words, I am going to look at the revenue series in ways that will eliminate seasonality effects.
Raw data is from Wall Street City:
HISTORICAL QUARTERLY RESULTS REVENUE (Thousands of U.S. Dollars) 1996 1997 1998 1999 1st Qtr MAR 875 16,005 87,361 293,643 2nd Qtr JUN 2,230 27,855 116,044 314,377* 3rd Qtr SEP 4,173 37,887 153,698 4th Qtr DEC 8,468 66,040 252,893
tscn.com Seasonality suggests that quarterly results should only be compared with the same type of quarter, typically that of the year before. One could suppose a "strong seasonality" - that the four seasons were completely independent, and have growth rates that are incomparable. This might be the case if the public is celebrating Christmas less and less, for instance. I will instead assume "weak seasonality" - that more business tends to be done in certain quarters, and that the amount of business done in one quarter tends to be some (fixed) multiple of the business done in another quarter, all other things being equal. This is more or less the meaning of seasonality as used by the Federal Reserve, when it gives "seasonally adjusted" figures. I will also assume that the seasonality of AMZN's business has stayed constant and will remain so. I am hoping for comments on these assumptions. Hope springs eternal in the human breast, but don't marry a stock...
AMZN has been growing so quickly that until the most recent quarter, seasonality has been hidden by the huge secular revenue growth rate. The AMZN longs would have us look only at the year over year figures, which are still great, but this puts an investor into a precarious position. Under this restriction, if AMZN quit growing right this quarter, we wouldn't be able to detect it until about a year from now. In the event that other investors were not so stupid, we would end up in a situation where we might have to sell our shares *after* everybody else... Somebody recently posted a comment about stock that I liked: *The first rule in investing* is don't panic. The second rule, is that if you must panic, do it before everybody else. So what I am doing here is showing a way of looking at the quarterly numbers in such a way as to detect a reduction in the growth rate without having to compare consecutive quarter's growth rate, but also without having to wait for the full year data lag.
The first thing to do is to convert the above raw data into a table of data that shows quarter over previous year's quarter growth rates. This is what the longs would have you do with this data, but on a company who's growth rate is rapidly dropping, this estimate of the growth rate will be way too high. This is because the year over year figures include 4 quarters of growth rate, only one of which is the latest and most cogent.
I've added two columns of calculated numbers to the usual *Yearly Increase* figures:
**AMZN Growth Rates:**
Yearly Growth Date Revenue Increase Change Lossage ---- -------- -------- ------ ------- Q96 875 2Q96 2230 3Q96 4173 4Q96 8468 1Q97 16005 1729% 2Q97 27855 1150% -579% -33% 3Q97 37887 808% -342% -30% 4Q97 66040 680% -128% -16% 1Q98 87361 446% -234% -34% 2Q98 116044 317% -129% -29% 3Q98 153698 306% -11% -3% 4Q98 252893 283% -23% -8% 1Q99 293643 236% -47% -17% 2Q99 314377 171% -65% -28%
In the above table, the *Yearly increase* is the revenue rate of increase from the same quarter, previous year. These figures, since they compare similar quarters, are seasonally adjusted. If seasonality consists of certain quarters having a larger proportion of business than others, than that ratio will divide out. The resulting series labelled
*Yearly Increase* are therefore seasonality free, and can be manipulated on a quarter to quarter basis. The fact that these *Yearly Increase* numbers form a beautifully smooth series is an indication that the seasonality has been removed from them. The first manipulation is to take the differences between consecutive *Yearly Increase* rates. The *Change* column does just that. The *Change* figures have a secular tendency to decrease considerably in magnitude, and that means that they are hard to estimate for future quarters. A nicer data series is the *Growth Lossage*, which is the percentage change in the *Yearly Increase* taken from consecutive quarters.
As an aid to those wishing to put all this into a spread sheet, so they can modify the assumptions and compute their own growth rates (just like those highly paid securities analysts who are currently bailing out of this stock), here are some sample calculations for 2Q99:
*Yearly Increase*: ((314377 / 116044) - 1) * 100 = 171 *Change*: 171 - 236 = -65 *Growth Lossage*: (65 / 236) * 100 = 28
Examining the above table, it is perhaps surprising that AMZN's year over year growth rate has done nothing but decrease. That is, all the entries in the *Change* column are negative. Another way of putting this is to say that AMZN's growth rate has been decreasing - they are growing slower with each passing quarter.
The second thing to notice is that between 2Q97 and 3Q98, AMZN's rate of growth loss was decreasing. That is, AMZN seemed to be coming closer and closer to maintaining a high growth rate. This peaked in 3Q98, which had a 306% growth rate, just a little less than 2Q98's 317% growth rate.
The final thing to notice is that in 4Q98 between 2Q99, AMZN's loss in growth rate has again accelerated. By looking at the *Growth Lossage* numbers, it is clear that what actually happened is that for 3Q98 to 4Q98 AMZN had an unusually low loss in growth rate. I believe that this is due to the high level of advertising done by AMZN during those quarters. With the recent quarter's results, the return to a historical loss in growth rate of around 23% per quarter is clear.
Now that we have a reasonable handle on the revenue series, we can do some extrapolation into the future, and get some estimates as to what AMZN is really worth today...
**AMZN Growth Rates 3Q99 &c. extrapolated:**
Yearly Growth Date Revenue Increase Change Lossage ---- -------- -------- ------ ------- Q96 875 2Q96 2230 3Q96 4173 4Q96 8468 1Q97 16005 1729% 2Q97 27855 1150% -579% -33% 3Q97 37887 808% -342% -30% 4Q97 66040 680% -128% -16% 1Q98 87361 446% -234% -34% 2Q98 116044 317% -129% -29% 3Q98 153698 306% -11% -3% 4Q98 252893 283% -23% -8% 1Q99 293643 236% -47% -17% 2Q99 314377 171% -65% -28%
3Q99 356579 132% -39% -23% 4Q99 508314 101% -31% -23% 1Q00 522684 78% -23% -23% 2Q00 503003 60% -18% -23% 3Q00 520605 46% -14% -23% 4Q00 705623 35% -11% -23%
So by 4Q00, I am looking at a company with a year over year growth rate of around 35%, and sales of something like $2.25B ttm. This is a little over twice AMZN's current ttm sales.
AMZN is a retailer, and the industry average profit margin (according to the above link) is 3.21%. I really don't think sales of $2.25B will be enough to make AMZN profitable, particularly since the trend in profitability (which I will do an analysis of later) has turned so amazingly negative, but *if* they could achieve this level of profitability it would be $72MM per year. Given a revenue growth rate, at that time, of 35% per year, the stock market might put a multiple on these profits of 35, for a market cap of $2.5B. The current shares outstanding number is 162MM, but AMZN is leaking more shares out at a rate of something like 11% per year, so I will assume 180MM shares. This gives a stock value of $2.5B/180MM = $14 per share. Of course there is going to be a 2 for 1 split in a few months, so the actual stock value would be likely in single digits. Remember that 18 months is not very long from now.
Given a value of $14 per share 18 months in the future, the current value would be somewhat less, depend on the risk adjusted rate of return. Given AMZN's incredibly high volatility, (and losses) I would be amazed if people were buying this stock with an expectation of a return of less than 20% per year. Eighteen months of 20% to get to $14 gives a current "fair" value of AMZN of around $10 5/8. Of course the upcoming split takes this value well into single digits.
The other question is whether or not AMZN will be able to post profits with sales of only about twice their current annual sales. I suggest not, but will do more analysis of this later.
-- Carl
P.S. If you wish to risk $375 going short AMZN, and you are worried about, say 30 point moves going against you, you can always short 10 shares. |