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Friday, October 23, 2009

Amazon: "eMall" of World Flexes Muscles

Continuing with our short commentary on the Internet giants, we decided to also share certain highlights from Amazon's report yesterday. As with our eBay (EBAY, $23.97) and Yahoo! (YHOO, $17.67) posts this week, we'll keep this brief as Amazon's results are extensively covered by the media.

We previously mentioned that Amazon (AMZN, $93.45) is becoming the "eMall" of the World in this post, where we shared e-commerce data and insights from Emerging E-commerce Trends and Practical Insights by Mark Brohan, VP of Research, Internet Retailer. However, we also mentioned in prior Bidz (BIDZ, $3.02) and PetMed Express (PETS, $16.41) posts that Amazon was/is richly valued - here and here, respectively.

The stock remains expensive for our liking and is up significantly in pre-market trading today. Yet, we've got to hand it to Amazon: powerful franchise with impressive growth, free cash flow, and returns on capital. Below, we include a few corresponding slides from yesterday's earnings call presentation.

Trailing twelve month revenue growth of 24% Y/Y (FX neutral):

Growing free cash generation that benefits from favorable working capital dynamics (negative cash conversion cycle thanks to Internet business model):

And, an expanding ROIC as the business is asset light (does not consume significant capital to expand):

Despite already trading at 55 times trailing GAAP earnings (as of yesterday's close, adjusted for results), the Market is bidding up shares on strong results. Shorts will be further squeezed and/or forced to cover, further juicing the move. Based on TTM free cash flow of $1.9 billion, Amazon is trading at a 4.7% FCF yield (before today's expected stock move). Not nearly as high as the P/E multiple (because of working capital benefits noted earlier), but currently in a fair range for a powerful franchise. That said, continued strong forward growth should keep pushing implied FCF-based fair values higher Y/Y on favorable secular trends. The P/E will likely remain high on a relative basis.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long EBAY, YHOO, BIDZ, PETS.
© 2009 Jeffrey Walkenhorst
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  1. Hey Jeff,

    I've been following you since you posted your first analysis of UBET -- I enjoy the education and the research/commentary.

    Any more insight into BIDZ or UBET? I haven't seen you post a story on either of these companies in a bit. Both of them look to be forgotten/undervalued right now, but I'd like to hear more.



  2. Hi Dan,

    Thanks for checking in and for your kind words. My positive thesis hasn't changed on BIDZ or UBET, but I hope to at least provide a brief update sometime soon. Please stay tuned.



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