Is Amazon Overvalued?
SmartMoney has an interesting story in its Price Check column about Amazon. It explores value of Amazon in four valuation methods:
1) Ben Graham's Formula: P/E = 8.5 + 2G (G = annual earning growth rate). By putting G = 25%, the valuation is $33.35.
2) Discounted Cash Flow: the article uses the calculator from MoneyChimp.com with the following aggressive assumptions:
- EPS = 0.57 (consensus estimate)
- EPS to grow 25% for 10 years, with a stable growth rate of 4% thereafter
- Discounted at 10%
Valuation = $47.78
3) Capital Asset Pricing Model: Risk-adjusted discount rate = risk-free rate + beta * (benchmark rate - risk-free rate)
Amazon.com is too volatile in recent years so its three year beta is actually 2.6. The article uses a judgment call to set the beta as 1.2 (which is reasonable as Amazon is definitely more risky than the overall market). Assuming the risk-free rate to be 10-year treasury yield, the risk-adjusted discount rate is set to be 11.12%, which brings the valuation in DCF calcuation to be $38.54.
4) The Damodaran Method: Valuation = $36.42.
The article concludes that Amazon is significantly overvalued, which I concur. However, it's hard to short this market favorite now. I'm considering to buy put options sometime to play this game.
Also the calculators are pretty interesting. I decide to use them to examine my current holdings after this round of quarterly releases.
Paul Sturm produced this interesting article in the Stockscreen column of SmartMoney's December issue. Basically he discussed two statistical anomalies of the general stock market: Read
Barron has a comprehensive story about Warren Buffett during the weekend. Good to learn Buffett thinks the market is overvalued too. Read
Barron published an article (requires WSJ subscription) about best online investing web sites. Some of the sites I have not tried before: Read
