The stock of online retailer Amazon (AMZN) is seriously overvalued.
- Amazon fails Warren Buffett’s Retained Earnings test. Over the last 5 years it has spent almost 3 times as much on new operating assets (property, plant, equipment) as the earnings it has retained. It is no longer profitably growing. They have done this by increasing debt (total debt/equity now >1) and to a lesser extent issuing shares. The fixed-charge coverage ratio has fallen below 1; it should be more than 2.
- Amazon’s Gross Margins are the same as Wal-Mart’s, around 25%, and profit margins are less than it’s rival (Wal-Mart a consistent 4%, Amazon 1-2%).
- Amazon’s cash return on invested capital (CROIC) has fallen from 29% in 2010 to 5% currently.
- Not all free cash flow is truly ‘free’, as in able to be returned to shareholders. My calculation of ‘unrestricted’ free cash flow gives Amazon an earnings yield of a paltry 0.3%. You can get more than that on US Treasurys. At current price you are paying too much for Amazon’s growth.
With their new focus on building regional and local product warehouses, it’s almost like Amazon is becoming Wal-Mart. Before the recent push into many new physical warehouses (say pre-2012), Amazon was growing profitably, able to expand out of retained earnings. Besides the capital cost, these warehouses require maintenance capex expenditures. Perhaps the most significant piece of info is that while revenue has grown +30% per year for many years, depreciation (DDA) has grown hundreds of percent (from $100-200M in early 2000’s to nearly $5 billion currently).
Perhaps a larger threat is that Wal-Mart could become Amazon – what’s to prevent Wal-Mart from teaming with Fed-Ex (or hell using drones) and using their stores as a base for speedy home delivery? Wal-Mart knows a thing or two about low prices, and will not stand by and let Amazon take over the retailing world. While Amazon has expanded into other markets (Prime TV, cloud services), there’s plenty of competition there too (Netflix, everyone else is in the cloud).
Note: The calculation of free cash flows etc. are my own. I do not short individual stocks and do not recommend shorting Amazon. In fact I’d never recommend shorting a wonderful company growing revenues at as high a rate as Amazon. My thesis here is just that Amazon stock has risen beyond any ‘Growth At A Reasonable Price’ value.