Valuing Companies like AMZN and CHTR

[TheAiGuy]

Hi all,

 

I'm starting to look at companies like Amazon and Charter that don't show a lot of current profits but are plowing all of their money into investments. At a high level, I'm wondering how to think about value of these companies because it's not at all clear to me what makes a good measure. In one sense, you can price these companies (as opposed to value them) with and EV/EBITDA or P/S multiple using market comps, but that's a relative value technique and I'm looking for an absolute worth.

 

One idea is to take a guess at revenue (for AMZN) X years in the future, think about what the likely business make-up will be, slap a margin on that and discount it back. That's a VC-style approach.

 

Another thought, though, is to think of what the business is currently worth given intangibles like market position, possible monopolies, etc and track that change over time. That's basically impossible, but it's what's important.

 

Any ideas?

[jawn619]

I've heard of people looking at amazon and saying they spend x% of their revenues as maintenance capex, everything else is "growth capex". They save a lot of taxes this way because they're booking "losses" and growing at an insane rate.

[Aurelius]

I would start with learning how Josh Tarasoff thinks about Amazon.com:

-http://csinvesting.org/wp-content/uploads/2012/08/amzn-valuexvail-2012-josh-tarasoff1.pdf

-https://www.youtube.com/watch?v=XAubRoZbI9U

-He also wrote an article called: "How to Create Value Without Earnings: The Case of Amazon" (google it. you probably have to pay for this one)

 

Listen to what Benedict Evens has to say about Amazon:

-http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works?rq=amazon

-http://ben-evans.com/benedictevans/2014/9/5/podcast-amazon

 

Bill Miller, Bill Nygren & Pat Dorsey have shared their view on Amazon - Google it.

 

Read COBF Amazon thread. I would especially pay attention to what JAllen has to say. The discussion start here: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/amzn-amazon-com-inc/msg172829/#msg172829

[muscleman]

Hi all,

 

I'm starting to look at companies like Amazon and Charter that don't show a lot of current profits but are plowing all of their money into investments. At a high level, I'm wondering how to think about value of these companies because it's not at all clear to me what makes a good measure. In one sense, you can price these companies (as opposed to value them) with and EV/EBITDA or P/S multiple using market comps, but that's a relative value technique and I'm looking for an absolute worth.

 

One idea is to take a guess at revenue (for AMZN) X years in the future, think about what the likely business make-up will be, slap a margin on that and discount it back. That's a VC-style approach.

 

Another thought, though, is to think of what the business is currently worth given intangibles like market position, possible monopolies, etc and track that change over time. That's basically impossible, but it's what's important.

 

Any ideas?

 

Regarding AMZN, you can read JAllen's comments in our board's AMZN idea thread.

I'd like to add the following for you to be aware of. It is definitely more complex to value.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/value-investing-is-a-mistake/msg225231/#msg225231

 

Stock compensation is a large part of AMZN employee's income, so AMZN is essentially using the overvalued stock to invest in new projects through stock compensation. Suppose AMZN's stock "Fundamental value" is $150 and it is currently trading at $450, that's 3 times overvalued. Suppose a project's cash rate of return is 15%, which is common for software industry, by using overvalued stock compensation to pay employees to build these projects, the actual rate of return on these projects suddenly become 45% instead of 15%, and this fact along would increase the "Fundamental value" of the stock.  :)

 

On the other hand, if value investors think AMZN is worth $120 and suppose tomorrow it opens at $40, value investors would buy hand over fist. But one thing they ignored is that a lot of talented engineers will be unhappy and leave and that will further deteriorate the fundamentals. Then the fundamental's deterioration will further induce the price drop, not to say that based on my logic above, a 15% cash rate of return project will suddenly become 5%. Eventually the situation will either stabilize like BBRY after losing a ton of value, or it will directly go bankrupt.

 

==================

In regards to CHTR, it is trading at 20x FCF. The stock is overvalued in terms of FCF, but it is using the overvalued stock to acquire other companies. After every acquisition, the fundamental value of the company goes up. It is simple math if you use overvalued stock to acquire companies at an undervalued or even fair valued price. Therefore after each acquisition, the fundamental value increases, which would further push up the value of the stock.

 

 

 

In both cases CHTR and AMZN, the margin of safety is in the business moat. There is no hard way to say, this company's liquidation value is 10 and stock is trading at 5, that's safe. let's buy it. That's the investment thesis applied to SHLD and it hasn't been working for the past 10 years.  :)

 

[constructive]

I would definitely recommend Damodaran's blog for valuation of growth companies. He explains his assumptions and logic very well - his approach is much more intellectually rigorous than is typical, especially in the growth space.

[TheAiGuy]

JAllen's comments are really good -- thanks for the heads up.

 

Stock compensation is a large part of AMZN employee's income, so AMZN is essentially using the overvalued stock to invest in new projects through stock compensation. Suppose AMZN's stock "Fundamental value" is $150 and it is currently trading at $450, that's 3 times overvalued. Suppose a project's cash rate of return is 15%, which is common for software industry, by using overvalued stock compensation to pay employees to build these projects, the actual rate of return on these projects suddenly become 45% instead of 15%, and this fact along would increase the "Fundamental value" of the stock.  :)

 

 

On the other hand, if value investors think AMZN is worth $120 and suppose tomorrow it opens at $40, value investors would buy hand over fist. But one thing they ignored is that a lot of talented engineers will be unhappy and leave and that will further deteriorate the fundamentals. Then the fundamental's deterioration will further induce the price drop, not to say that based on my logic above, a 15% cash rate of return project will suddenly become 5%. Eventually the situation will either stabilize like BBRY after losing a ton of value, or it will directly go bankrupt.

 

I completely agree -- a lot of the value is that they can pay their bills by issuing "overpriced" stock to their engineers. Doing so lowers their funding costs, but I'm not sure how you quantify the value of that. It is easy to see the rate of growth, accounting for this using something like EBITDA/share or Gross Profit / Share (20-30% a year per share value).

 

==================

In regards to CHTR, it is trading at 20x FCF. The stock is overvalued in terms of FCF, but it is using the overvalued stock to acquire other companies. After every acquisition, the fundamental value of the company goes up. It is simple math if you use overvalued stock to acquire companies at an undervalued or even fair valued price. Therefore after each acquisition, the fundamental value increases, which would further push up the value of the stock.

 

 

 

In both cases CHTR and AMZN, the margin of safety is in the business moat. There is no hard way to say, this company's liquidation value is 10 and stock is trading at 5, that's safe. let's buy it. That's the investment thesis applied to SHLD and it hasn't been working for the past 10 years.  :)

 

Again, I completely agree. That's what I think is interesting about problem.