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Originally Posted by sc000t
Can someone quickly explain the rational behind AMZNs valuation? Anyone follow this company closely care to fill me in, I'd be interested in learning.
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I'll give it a shot without going too indepth. First off, Amazon is considered by nearly everyone as the company that is going to absolutely dominate retail online (which is always part of the equation -- they are the structural winner). I don't own amazon, but if it sold at multiples similar to other retailers it'd be my biggest holding by far. (I love amazon -- spend about 15k a year on the site -- mostly stuff for my kid)
Amazon chooses to forgo current profits for future profits/cashflow. From the very start they've told you that this is their strategy (they took this playbook out of Costco and Walmart's play book). Some companies try to expand profit margins (think apple or and luxury retailer). Amazon's strategy is to work with the smallest of profit margins to gain market share by A) crushing their competition who cannot operate profitably at similar price pts and B) investing their profits back into their customers (customer satisfaction and acquisition).
A fun question to ask people, especially the younger generation is what percentage of retail sales are done online. Answer Below the paragraph. If this # explodes as is expected and Amazon continues to gain share and widen their moat as they have thus far (Estimated 13% of global ecommerce in 2011) they'll easily grow into their valuation (you never know if they'll continue to be able to do this -- especially internationally in places like China, etc). Just plug in the numbers expected growth in the overall market online, online sales growth, Amazon's increased share. Well that's the bull thesis at least.
For the guy who thinks their profit margins are thin -- that's just the way they like it. they figure with their infrastructure (best in class by far) if they squeeze margins -- it will just be impossible to compete with them over the long haul. Their operating margins have been 0.5% to 1.5% generally. If they were to increase prices by 50 cents for every $100 i doubt they'll lose too many customers. They can increase their profits at any time.
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