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  • rimpinths rimpinths Jan 22, 1998 2:15 AM Flag

    short this next Tuesday?

    First, I want to clarify an error I made that you pointed out:

    "Secondly, the gross profit of AMZN is not 5 %, it is closer to 20 %."

    Sorry, I shouldn't have written "gross". Mea culpa. I meant the profit margin (profits/revenue), and 5 % is extremely generous.

    I disagree with your point that fundamental analysis can not be performed now. But I'll leave that aside for the moment. What I asked you to do is perform fundamental analysis based on levels of revenue, profit margins, and P/E ratios you expect to see in the future. There are many more fundamentals to consider, but let's to stick to those three for the moment. When (and if) Amazon becomes a "mature" business, what do you forecast for these three fundamentals?

    And here's what I think:

    1. Revenue

    $9 billion in revenue, as you suggest, is simply insane. That's TWICE the revenue of B&N ($2.5 billion) and Borders ($2
    billion) combined. No chance Amazon will sell $9 billion in books. They would have to double revenues every year for ten years to
    reach that level. Most analysts, and Bezos himself, have said $1 billion in revenue is Amazon's long-term goal. (I can dig up some
    quotes, if necessary.) I think even $1 billion is generous with all the competition, but I'll concede $1 billion for the sake of

    2. Profit Margins

    5 % tops. That is even extremely optimistic. To achieve that, Amazon must cut operating expenses relative to sales to
    ONE-THIRD of current levels. 5 % would be much better than B&N's 2.1% margin or Borders's 3.0 % margin. In general, all companies that
    depend on economies of scale (as Amazon does) have razor-thin profit margins. They make a profit by selling barely over cost ("deep
    discounts" sound familiar?), but with huge volume. Other examples: Wal-Mart at 2.9% and Costco at 2.7%. But again for the sake of
    argument, I'll give you 5 %.

    3. P/E ratios

    You said that a P/E of 20 is justifed for a *growing* company, but again I'm asking you what you think is fair for a mature Amazon. However, I'll be generous (again) and give you a P/E of 20.


    All the above assumptions are for a mature Amazon, and they are all generous. You end up with this: $1 billion (revenue) * 5
    % (profit margin) = $50 million. Multiple that times a P/E ratio of 20, and you have a market cap of $1 billion. Divide that
    among 23,859,00 share outstanding and you get about $42 a share. And that's all based on generous assumptions of where the company
    will be several years from now!!! What is wrong with my analysis? Revenue, profit margins, or P/E ratios? And to re-iterate what
    I said before, I'm not asking you to perform fundamental analysis on Amazon's current financials -- I'm asking you to perform
    fundamental analysis on speculative, future financials.


    P.S. I hope I don't come across as too harsh. I love a good debate, and not too many longs are willing to stand up for this stock. I appreciate your courage! And I don't think KO is a tulip. Maybe a little overvalued, but not a tulip. You want a tulip? Look at the financials of our sponsor -- YHOO. Also check out Roger's 1998 Short Picks at:

    target=new >

    However, I don't think you'll like the fact that AMZN is on his list.

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