Semper Augustus – Amazon: We Don’t Think The 113.5x Multiple Was Out Of Line A Year Ago
Contributor since 2019 / 11384 Followers
Summary:
- Amazon’s shares earned 34.4% annually from 2011 to 2021.
- Amazon invented and scaled an entirely phenomenal new business from an underutilized asset base.
- The 1.6 trillion-dollar question is: What margin level does Amazon’s array of businesses collectively earn?
David Ryder
The following segment was excerpted from this fund letter.
Amazon (NASDAQ:AMZN)
Amazon’s shares earned 34.4% annually from 2011 to 2021. Revenue growth at 25.6% was nearly a tenfold increase, albeit from a small base.
The analyst must dig into the component businesses within Amazon to develop a framework to determine where growth and profitability will be derived, overlaid on where the capital in the business resides and will be spent.
The stock ended 2021 at 71.6x earnings, reflective of expectations for ongoing rapid sales growth and margin expansion to perhaps 9% or 10% from 5.0% in 2021. Glance at the multiple paid for 2011’s slight 1.3% margin. It was priced like a really fast-growing distributor with huge volumes and rapid inventory turnover. Somewhat not far off the mark for its original retail business where it owns inventory.
Understanding the business requires understanding its third-party retail operation and also their cloud business. The creation of AWS and its success are incredible. Amazon invented and scaled an entirely phenomenal new business from an underutilized asset base. If the blend of businesses ultimately reaches a 10% net margin, then the stock really didn’t trade for 124.6x in 2011 or 71.6x in 2021. Doubling the assumed margin halves the multiple.
Investors clearly didn’t like what transpired in 2022 when the margin collapsed to 1.5% from 5.0%, sending the multiple back over 100x. Dollar sales growth of 9.4% and a bit of dilution combines to send the stock down 50%.
Turning the page by a year, investors applauded the margin recovering and exceeding 2021’s 5.0%.
The extremes of how our five factors work together are on full display with Amazon. An 80.9% total return in 2023 was bolstered by 262.6% growth in the margin, a 54.8% loss from the multiple moving back down to 51.3x from over 100x. Dollar sales continued to race ahead by 11.8% and the business continues to spend capital and increase shares, costing investors 1.4%.
Math being math, a 50% decline and subsequent 80.9% gain leaves you down 8.9% total, or 4.5% per year from 2021 to 2023.
The 1.6 trillion-dollar question is: What margin level does Amazon’s array of businesses collectively earn? I have an idea and don’t think the stock’s 113.5x multiple was out of line a year ago.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.