A New Dutch East India Company or Bernanke’s Mississippi Bubble Stock? Part II
FinTrust Brokerage Services Equity Research
Sept 4, 2018
*Please see important certification and disclosure information at the bottom of this page.
Industry: Wholesale Distribution
GICS Sector/ Sub code: Electrical Apparatus and Equipment / 5063)
Company Summary: Founded in 1994, Amazon.com opened its virtual doors on the World Wide Web in July 1995. Fortunately for earthlings, Amazon seeks to be “Earth’s most customer-centric company (Source AMZN 10-k),” however, this leaves the rest of the universe open to competition and non-earthlings subject to non-customer-centric predators. Amazon.com clearly faces competition in the “Middle Kingdom” of China from Alibaba, and we sincerely look forward to the space race between Jeff Bezos’s Blue Origin, Richard Branson’s Virgin Galactic, Elon Musk’s SpaceX, and Paul Allen’s Vulcan Aerospace. We believe it will capture the public’s attention in the 21st century in a manner similar to the early automobile and airplane industry races of the early 20th century. In addition to its investments in drone technology, Amazon.com operates across five segments: consumers, sellers, developers, enterprises, and content creators and provides advertising services and co-branded credit cards. Conventionally, or terrestrially, the company can be said to operate across retail, logistics, consumer technology, cloud computing, media and entertainment, and increasingly, artificial intelligence.
Analyst Notes:
Analysis by Allen Gillespie, CFA®, (917) 679-6335 and (864) 288-2849
- We are issuing this special report due to the following factors: 1) We continue to receive questions regarding AMZN’s stock price and our divergent Sell recommendation, particularly given AMZN’s market capitalization, so we need to more clearly explain our Bitcoin Gold Dow Theory 2) Tax rates have changed since our previous report 3) Amazon has successfully executed on growth initiatives and merger related items.
- In order to properly understand our recommendation, one must understand our Bitcoin Gold Dow Theory analysis framework, which is an effort to understand the differences between nominal and real prices in the modern economy. This framework holds that the modern analyst should measure prices in relation to gold for tangible assets and measure the market value of intangibles to bitcoin to derive real prices and real estimates of economic activity and values.
- Under our Bitcoin Gold Dow Theory analysis framework, there are three ways overvalued stock prices can return to fair value. 1) Share prices can fall 2) Share prices can remain the same while the companies increase their underlying value (value and price converge in the future) 3) The value of money falls (this would result in an increase in nominal share prices but a decline in the real purchasing power of shares).
- Since the time of our previous report, the price of money (as measure by gold and BTC) has declined, tax rates have declined, and Amazon has increased its underlying value. Thus, in real prices as measured by BTC, AMZN’s share price has declined by 25% since our Sell recommendation while our USD price recommendation has been incorrect.
- At the time of our previous report (July 24, 2017), Amazon was valued at $1025.67 while BTC traded at $2779 or a ratio of .369. We had a price target of .04 BTC, $640, or .11 gold oz which implied a BTC price of $16,000, a gold price of $5800, or a decline in Amazon’s share price in USD. We point this out given that our BTC target was surpassed in December 2017. At today’s BTC price of $7,200 the ratio of Amazon’s share price to BTC is .278 and while Amazon’s share price to gold ratio is roughly 1.68.
- Fintrust Brokerage Services is maintaining our Sell rating, but we are raising our nominal price target price from $640 current USD to $1,111, or 0.096 BTC or 0.19 gold ounces in our real purchasing power price estimates on the basis of our dividend discount model. This represents 44.8% nominal downside from today’s price of $2,012. As previously stated, our estimates our naturally wide given we are in the midst of the largest money debasement in a “Western” country, excluding the German hyperinflation, since John Law in 1720.
Fintrust Recommendation
Fintrust Rating: SELL
Target Price: $1,111
Current Share Price $2012.71
Expected Return -44.8%
52 Week Price Range $931.75 – $2022.38
Fintrust Brokerage Services, LLC rates companies a BUY, HOLD, SELL, or SHORT.
- A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.
- A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.
- A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.
- A SELL SHORT is given when the security is expected to decline in value over the next year.
The distribution of ratings across Fintrust’s entire company universe is 62.5% Buy, 25% Hold, 12.5%Sell, and 0% Short
Key Figures
Key figures pricing data reflects previous trading day’s closing price. Other applicable data are trailing 12-months unless otherwise specified.
- ROE 12.9%
- ROA 2.8%
- ROIC 5.9%
- Debt / Capitalization nmf Payout Ratio 0%
- Revenue (mms) $208,125
- Net Income (mms) $6,275
- Outstanding (mi) 487.8
- Shares Short (mil) 4.8
- Market Capitalization ($ mil) $981,681
- Beta 1.42x
Valuation
- Adj. EPS (16A) $4.91
- Adj. EPS (17A) $6.15
- Adj. EPS (18E) $17.32
- P/E (16) 410x
- P/E (17) 327x
- P/E (18) 116x
- Est. 2016-2018 EPS Growth 352%
Analyst’s Notes….Continued
- Our valuation calculations under various scenarios range from a low of $941 to a high $2237 per share in current USD. The wide range of estimates is the natural outgrowth the company’s high growth rates and historically low interest rates. Discounted cash flow models for high growth companies in a negative to near zero interest rate environment return nearly infinite prices for the value of an equity that invests cash today and promises cash tomorrow because cash today has nearly no value, while cash later, if it materializes, has potentially large value.
- Using Valueline, we calculate that Amazon has realized a 10-year historical earnings growth rate of 26%. In addition to our own analysis, we used Valueline’s 2019 earnings estimate of $19.35 and projected cashflows forward for 20 years and then discount those earnings back at 6% and adding this sum to Valueline’s estimated 2018 book value estimate ($73.90) we derive a fair value estimate of $1,129. At the current $2012 per share price, we estimate that the market is discounting Amazon’s like a 20-year monopoly.
- While we understand the market’s pricing for AMZN, we continue to note that one of history’s other great trading, logistics and information monopolies, the Dutch East India company, realized returns of 18% for 200 years, after being granted a 21-year monopoly, but its earnings and dividends were irregular in amount and form. In addition, we note that the company’s stock price reached a record low dividend yield of 3.5% and record stock price high of just over $1100 per share, during the period that coincided with the peak insanity of John Law’s monetary system in 1720. Using Valueline’s 2019, $45.45 per share cashflow estimate for each Amazon.com share and dividing by 3.5% we derive a $1299 price. Importantly for price targets, Amazon.com retains its earnings, whereas the Dutch East India Company distributed its earnings (source: globalfinancialdata.com), as a result, the share price, book value, and our estimates of fair value would be expected to continue to increase over time.
Conclusion, Recommendation & Risk
Our conclusion, recommendation and risk assessment remain the same as in our previous report which is reprinted below.
As recorded by Washington Irving, John Law’s “System” eventually collapsed as “capitalist gradually awoke from their bewilderment” in the system which was designed to “depreciate the value of gold and increase the illusive credit of paper” (short gold, long high yield anyone?) and they began to seek “something real.” As a result of this awakening, capital began to be “carried out of the country” (anybody notice the start of the rebound in international equities in 2017?) and the “very compulsory measures that were adopted to establish the credit of the bank hastened its fall, plainly showing there was a want of solid security” (do you have foreign currency, metals or cryptos?).” Eventually, Law was forced to reduce the value of the bank’s notes by one-half and the shares of CDO fell from 9000 to 5000 livres.. While the bank notes were restored to their full value, Irving reports that “government itself had lost all public confidence equally with the bank.” (any chance of a collapse in political confidence?)
In turn, this failing of confidence in government, led to a massive hyperinflation as paper money was refused. Irving reports that jewels, precious stones, plate, porcelain, trinkets of gold and silver, all commanded any price, in paper while land was bought at fifty years’ purchase… Monopolies now became the rage among the noble holders of paper” (got your FANG stocks?) Law was forced to flee France and Irving quotes Voltaire as saying, “He was a quack to whom the state was given to be cured, but who poisoned it with his drugs, and who poisoned himself.”
Recommendation:
Our $1,111 price target reflects Amazon.com potential growth rate, strong balance sheet and ability to internally finance acquisitions, historic generation of steady gross margin and other financial metrics, but given its modestly unattractive valuation, we believe that AMZN is appropriate at lower valuations for a long term holding for risk-tolerant investors. Acqusitions, if chosen correctly and integrated successfully, add scale and scope in an industry that rewards both attributes, and could potentially drive share value higher than our estimate, whereas competition could compress margins. Given our review of the company’s historic operating and financial results, we rate management as highly capable, and focused.
Risk to our recommendation:
Risk include, but are not limited to, greater competition for AWS from other technology companies, anti-trust, political and business uncertainty, F/X fluctuations, the failure to successfully integrate acquisitions, and increased operating cost for a larger proportion of sales. Finally, we believe the stock market as a whole and the value of nominal price generally could be volatile as the system of quantitative easing collapses.
We performed a DCF evaluation of AMZN based on our 10-year forward earnings forecast, which is summarized in the preceding table. Our key assumptions are that (1) AMZN’s Cost of capital is 10.6% and that (2) the Company’s discounted Terminal Value is driven by an assumption of 26.0% ongoing revenue growth. Our model indicates that the shares’ target price is $1,111, or 44.8% downside. As the following Share Price Matrix illustrates, the target price is sensitive to very modest changes in WACC or perpetual unlevered free
cash flow growth rate assumptions.
*Important Disclosures:
Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirect compensation in exchange for any specific recommendation in this report. In addition, said analysts have not received compensation from any subject company in the last 12 months.
Ownership and Material Conflicts of Interest:
An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after the issuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by the research analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account must be approved.
The research analyst nor a member of his household own any of the securities of the subject company including any options, rights, warrants, futures or long or short positions. Neither the research analyst nor a member of his household own 1% or more of any of the securities of the subject company based upon the same standards used to compute beneficial ownership for the purpose of reporting requirements under 13(d) of the Securities Act of 1934, as amended.
The research analyst or household member is not an officer, director, or advisory board member of the subject company.
The research analyst has not made a public appearance in front of more than 15 person to discuss the subject company and does not know or have reason to know at the time of this publication of any other material conflict of interest.
The firm has no knowledge of any material conflict of interest involving the company mentioned in this report.
At the time of this report, Mr. Gillespie owns bitcoins, ether, and other cryptocoins, Alphabet shares, and has exposure to various gold and silver related investments including gold mining shares, metals, long volatility, and international equity related mutual funds and ETFs.
Receipt of Compensation:
The firm does not engage in investment banking activities.
The subject company (ies) has not been a client in the past 12 months preceding the date of distribution of this research report and is not currently a client. The firm has not received non-investment banking compensation for products or services or other non-securities services from the subject company or any affiliated company.
The research analysts at the firm do not receive any compensation based on investment banking revenues and may be paid a bonus based upon the overall profitability of the firm.
Investment Banking Relationships:
The firm has not managed or co-managed a public offering or received investment banking compensation in the past 12 months regarding the subject company (ies).
The firm does not expect to receive or intend to seek investment banking compensation in the next 3 months from the subject company (ies).
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