In February 2014, I asked how long is long term for Amazon. At that time we could buy its entire equity for $160 b if we had that kind of money, and analysts had estimated that in a year's time the market cap of Amazon's equity would be $200 b. And lo and behold, it is $235 b now.
Analysts sometimes are better at estimating short term, rather than long term. If they were good at long term consistently, they would stop talking and become rich; and that's another matter for another day.
How can Amazon back up its story? During 2014, it clocked revenues of $88.9 b, an increase of over 19% compared to 2013 revenues. In fact, revenues have increased at much higher rate during the last five years. Check this out: Amazon had revenues of $19 b in 2008. If Jeff Bezos had a vision of scaling its revenues, well, we know where he stands.
What about its operating margins? Although, I do not go by the external service provider's reporting, I know that it is very low and has been coming down over the years.
One adjustment we can make to its reported numbers is its non-cancellable lease commitments. Nevertheless, the operating margins of Amazon are minuscule. It does generate some free cash flows to firm; yet, they aren't adequate.
Amazon started as a book retailer, and moved on to become an online general retailer, and now is also involved in cloud computing and drones. So we know, it has the ingredients to scale up its revenues much higher.
With all this, will it succeed in bringing its operating margins to a respectable number? Because without this it will not be possible for Amazon to increase its intrinsic value. Or are we missing the big picture? Can we also make a case for adjustment of its advertising costs and research and development costs and argue, if we believe in the argument, that they are more of an enduring nature?
Low operating margins have not stopped analysts from being bullish on its story. No one is recommending a sell.
Now, the mean estimate for Amazon's equity is $300 b in a year's time. I did a valuation of Amazon in February 2014, and my story about Amazon has not changed since then.
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