Using a valuation model of Amazon posted by NYU Professor Aswath Damodaran, I input current values for Amazon’s revenues, EBITDA, cash holdings, tax rate, and operating margin. I then used the model to solve for the level of expected revenue growth that corresponds to today’s equity price. The answer is slightly under 30%.
The model also shows the sensitivity of the equity price to revenue growth, other factors being equal. This, of course, is far too simple. Amazon’s capital expenditures, for example, are a significant factor in its valuation. The expected growth of higher-revenue businesses such as cloud computing may be more important than overall revenues.
Nonetheless, the model produces a reasonable sensitivity chart. At 10% revenue growth, the stock would be worth less than $700, and at 35% revenue growth, it would be worth around $2,150.
At 24% revenue growth, the projected rate for 2018, Amazon stock would be worth about $1,300, according to the model. Again, this is a guesstimate that does not take all factors into account.
The exercise is very approximate, but it illuminates the enormous sensitivity of Amazon’s equity price to fairly modest exchanges in expectations. The same observation applies to most of the technology sector.
The trouble with this analysis is that Amazon’s annual revenues already stand at $234 billion. If it grows at 30% a year, its revenues in 10 years will be $3.2 trillion. Assuming 2% US economic growth, GDP in 10 years will be $25 trillion.
Investors appear to be assuming that Amazon’s sales will be equal to 13% of US GDP in ten years, which seems fanciful. It simply is too big to grow as fast in the future as it did in the past. Of course, Amazon could do something to radically increase its profit margin, although it’s not clear what that might be.
Simply put, there’s no way to rationally explain the price of Amazon stock based on real-world assumptions about growth.