Amazon.com, Inc. (NASDAQ:AMZN) stocks took another beating last week after third quarter earnings turned out to be worse than expected – revenues were up, but so were losses – prompting NYU finance professor Aswath Damodaran to take another crack at valuing the company to see whether the market’s reaction was rational or just an overreaction.
Field of Dreams approach to making a profit
When Damodaran looked at Amazon.com, Inc. (NASDAQ:AMZN) in 2000 as part of his book The Dark Side of Valuation, he was optimistic about the company’s future, and thought that by this time, fourteen years later, it should have revenues around $51 billion with 10% operating margin. But that’s just not how Amazon CEO Jeff Bezos does things. Instead building a profitable company he has plowed nearly everything back into new products, new business segments (did anyone imagine AWS in 2000?), and into the low prices that push competitors out. The result is the impressive revenue growth that we continue to see and margins falling toward zero.
It’s also what Damodaran calls the Field of Dreams approach to profitability: if you build revenues, profits will come. Except that as investors are reminded every three months, it hasn’t. It’s especially frustrating because you have the sense that Bezos could turn a profit with Amazon.com, Inc. (NASDAQ:AMZN) and doesn’t really care to.
DCF shows little to no upside on Amazon
We’ve mentioned this before, and anyone who has been paying attention to the stock knows where Bezos’ priorities are, but Damodaran takes his analysis a step further. If Bezos decided, right now, that he wanted to balance out growth with profits, what would he have to achieve in the next decade to justify today’s stock price? Using a discounted cash flow model he finds that Amazon.com, Inc. (NASDAQ:AMZN) needs to focus on operating margins, but even then today’s stock price ($297) seems very high.
He found that if operating margins are 2.5% or less then revenue growth actually comes at a loss, and Amazon.com, Inc. (NASDAQ:AMZN) really has to aim for 10% operating margins while making good on bullish revenue projections if it’s going to provide any upside to the current market price.
“Much as I would like to believe in miracles, it will take far more work to make Amazon profitable than it will to make Shoeless Joe Jackson show up in a cornfield in Iowa!” Damodaran writes.
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