December 24, 2000|By Pat Dorsey | Pat Dorsey,MORNINGSTAR.COM
The recent decline of Amazon.com Inc. got me to thinking as to just how low the stock might go.
Figuring this out is essentially a three-stage process. The first hurdle to get over is whether Amazon will have to go out of business any time soon. Well, Amazon was smart enough to raise capital like crazy when things were a bit frothier in e-tailing land, and the company had a cash balance of about $800 million at the end of September. That should be enough to see Amazon through the end of next year, when it expects to be cash-flow positive.
The second hurdle is assessing whether Amazon can get to the point where it's generating cash, rather than burning it. The company's projection that it will generate cash for the latter nine months of next year seems reasonable, and the bottom line is that the company's basic business model seems to work, as partially demonstrated by the operating profitability of its books/music/video business.
So now we come to the third hurdle: What's the worst-case scenario for the stock in terms of valuation?
Well, Target trades for about 1.7 times estimated 2001 revenue, and Wal-Mart trades for about 1.1 times estimated 2001 revenue. If we value Amazon at the lower end of that range at, say, one times estimated 2001 revenue, we come up with a valuation of $4 billion, which works out to about $11 per share.
Admittedly, $11 is less than what Amazon shares are trading for, but it's also a lot higher than I thought it would have been before I did this little back-of-the envelope calculation. And when you consider that Amazon's high growth rate should earn the stock at least a modest premium to more mature retailers, the "traditional retailer" valuation is probably closer to $14 or so.
