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  • ghowick ghowick Apr 29, 1998 3:44 PM Flag

    Reply to message 2235

    You say Amazon is worth $150 a share if they can get 5% of the U.S. book market. Let's analyze that assertion. The U.S. market for books is currently about $26 billion annually. But you must subtract from that those markets no available to Amazon: College textbooks at about $5 billion; elementary and high schools texts at about $2.5 billion;
    rack jobber paperbacks at about $2.4 billion; books bought by libraries and similar institutions at about $2.2 billion and professional books, sold largely via trade associations, professional societies, at trade shows, through membership dues, etc. at about $3.8 billion. That leaves a market
    of about $10.1 billion annually--if you assume Amazon can compete for the book club market as well as books sold through other retail channels.

    5% of $10.1 billion is $505 million. Amazon is close to that level now and is losing money at a heart-draining rate.
    Assume Amazon can get 10% of the market--not a safe assumption--and it's sales are $1 billion. At that level, AMZN should have the economies of scale to generate an after-tax margin of aroun 2.5% to 3%. Let's give them 3%.
    That's $30 million. Shares outstanding now, after recent acquisitions, are around 28 million and additional equity offering is likely required to support the company's debt load. But even if there is no further share offering, that's earnings of $1.07 per share. At the CFROI of the firm at that level, the stock could probably command a multiple opf around 24 times earnings.That makes for $26 per share. And that's easily a couple of years out.

    So if I assume they can garner twice as large a market share as you assume, I arrive at a price of $26 per share. Using the market share you assume, the company goes bankrupt.

    What's wrong with m y reasoning?

    Replies welcome.

    Good luck.

    WEhat's wrong with my reasoning?

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    • I was beginning to think people had their egos tied up in this
      stock, rather than just a piece of their portfolio ;)

    • rhaps they'll be sold over the internet? Good luck to you as well and all the best.

      Pvteq. aka fullydil.

    • I have ordered a lot of books on AMZN over the last 2-4 months. There were a number of books I wanted to buy but never did get to the bookstore. Now that the novelty of the beautiful website and my immediate needs for books has worn off I have not ordered anything for the last month. Also the next time I need a book I will check out prices at Barnes and Noble and a few other speciality websites (138 exist) and pick the one with the best price.

      Thus I believe sales growth of AMZN will flag and slow to a crawl as the other websites ramp up and undercut AMZN.

      I love the AMZN website but I love my AMZN puts even more.

      20 in 1998.

    • for your well-reasoned exchanges.

      AMZN has been a perplexing stock, and though my analysis leans more toward the overvalued side, I understand and respect the
      growth argument (certainly much more given this week's events). I like the AMZN site and have purchased several books there, but
      the stock price, in my view, just exceeds the value that management can reasonably create, even if they do better than planned,
      and even if we discount for it. Can't remember if it was this thread or SI that someone mentioned AOL's years of stock
      appreciation, in spite of no earnings, because of the hope that growth will eventually lead to profits, however thin the margins. AMZN
      could ride high for a while on that basis, but right now it looks prime for a pullback.

      Anyway, I appreciate the thoughtful, detailed and courteous posts you guys have made. That's what we sift through the spam for, and it makes the time worthwhile.

    • Pleasant change to touch on the fundamentals, rather then read
      another post telling us that the big decline is starting as we
      speak, or at least within the week. (If these people can tell
      the future, why aren't they rich?)

      Good luck with your position; I'll look with interest to see
      what happens.

    • certainly a possibility exists for far exceeding the projections. however, any prudent investor recognizes the down side
      risk far exceeds the upside potential for this stock. recognize also we are talking earnings five years out based on today's
      technology, preferences, competition. we know for sure that technology will change, consumer preferences are fickle, and competition
      lurks. the bottom line is you have a company selling overpriced books, crummy customer service, and really on the Pony Express to
      deliver the goods.

      this issue has no where to go but down. The split is a waste of money, the price will half on its own in short order.

      good luck and fortune

    • One long is gone. I sold and took my profits. I personally would get back in at 70-80 if we get that low, but I do think this one has peaked for now. There you go shorts, you can have my shares to cover.


    • "Consider a third possibility, that they far
      EXCEED those projections."

      jono45, you are right is saying they could exceed these expectations (this admission by me may drive my fellow bears crazy). The earnings numbers for 2002 I used were from AMZN numbers provided to Montgomery Securities. AMZN management would believe, if their long range plan unfolds properly, that they could actually do a bit better than this. I alluded to this in #2281 when I mentioned potential strategic alliances, etc.
      AMZN's bear following reminds me of some Club of Rome work I did in the 70's when our computers told us we would run out of
      energy world wide by today. Of course I was wrong and we didn't run out because people adjust their behavior when faced with
      discomfort (conserve more and find new energy sources in this case). But both the AMZN shorts and longs are guilty of this straight
      line thinking. AMZN management are no slouches. If it looks like they aren't going to hit their numbers one year out, they will
      change course and become even more creative (that's what we bears lose sleep over).

      "You also assume that in five years they will be valued as a
      maturing company."

      Actually, I assume they are a hyper-growth company in 2002. See posting #2303 (sorry for the confusion, privatequity and fully diluted are home vs office monikers-both me). My assumption was about a 50 PE in 2002 which reflects supersonic AMZN growth going forward into the twenty-first century.

      Where I come out. If the stock were ten or twenty percent overvalued, I could buy the upside surprise-potential argument
      (the internet is a revolution- whether or not selling books over it is equivalent to inventing the printing press remains to be
      seen). But, my numbers say that if you want a 30% annual return from the stock, and assume continued hypergrowth in 2002, you
      should pay about five TIMES less for the stock today than it's current price. This disparity is wild enough for me to believe there
      is a sizable probability the stock price will be lower two years from now than it is today. That's enough for me to make make a
      bet (and that's all it is 'cause I don't know anymore about what will happen to future prices than anyone else) agaist the stock
      (not the company). I contend the company can perform significantly better than its own projections but the disturbing thing to me
      is that even improved performance isn't sufficient for the company to come close to catching up with the current stock price.
      These honest differences in opinion is what makes all this so much fun.

    • . . . be happy. Boy, canstic, lighten up a little. I was joking.
      OK maybe I was jerking your chain a little, but only in good
      humor. <<.......GET IT?! >>

      Seriously, though, everything you say about electronic
      distribution of music could be said about books too. It's even
      more practical, IMO, since everone has a printer, but not a
      CD-writer. And downloading text uses a whole lot less internet
      bandwidth. Indeed, it's true, the world is changing.

      But not quite as fast as you suggest. After all Amazon has grown
      a significant business distributing books, printed on dead trees,
      via snail mail. 2 million people have tried them out, and it
      looks like they're going to spend half a billion dollars this

    • Check out Jaws Technologies JAWZ new encryption technology coming out to the market may 10th is uncrackable,
      and Financial Intranet FNTN in the process of establishing the nations first proprietary secure on-demand interactive high-speed video, voice and dedicated data-stream information network... Check them out.......

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