This morning I read a research report that I thought was written by the Onion’s nascent Financial Analysis vertical, titled, Amazon: Why it is Still Inexpensive. Upon further review, the report was written by a reputable internet analyst Carlos Kirjner from the fine firm of Bernstein Research. The highlight of the note:
If valuation is an art, Internet valuation is modern art and valuing Amazon is, at first blush at least, abstract expressionism. In this report, we try to make Amazon valuation more concrete by exploring multiple valuation methods. Based on our estimates 1) we value Amazon using: 1) price to sales, 2) price to gross profit, 3) price to retail gross profit (gross profit ex Other Revenues), 4) sum of the parts (SOTP) based on price to sales, DCF and relevant retail and AWS comparables.
The results of all these different methods illustrate why we are bullish on Amazon stock. We think the business is fundamentally advantaged in retail has a distinctive cloud play in AWS that is becoming much broader than just an infrastructure or platform-as-a-service business 4, and is attractively valued. In fact, based on the analyses shared in this report, our target price of $420 per share is in our view quite conservative.
Even the Henry Blodget of 1999 would be proud of that line, “valuing Amazon is…abstract expressionism.”
We have expressed our dislike for AMZN the Stock (not the Company) on many occasions over the past year. At the end of the day, we think valuing any company, including AMZN, comes down to future cash flows, not abstract expressionism. In that regard, AMZN’s stock is pricing in a very optimistic future, with little in the past to suggest AMZN’s ability to achieve such cash flows.
Looking at the charts, the stock looks more vulnerable than it has in years. The 3 year chart shows that AMZN did hold its 150 day moving average on the most recent market weakness:
However, AMZN’s gap lower on earnings in late January was on its highest share volume since early 2012 (and its highest notional traded in many years, given the $370 stock price). Since then, AMZN has not been able to get above its falling 50 day moving average, now around $376, which coincides with the stock’s intraday high on the day after earnings:
The stock’s low prior to earnings was $380, above which there is ample supply from the traders in the stock in December and January.
With $375-$385 stout resistance on the upside, the key area on the downside is $340-$347.50. A break of there, and AMZN’s long-term uptrend would be cleanly broken for the first time in 2 years.