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Catch me up: Amazon, another trillion-dollar company

In September 2018, Amazon became the 2nd US public company valued at $1 trillion.

That’s special: The sum of all publicly-traded US companies hit $30 trillion total that same year.

What does a trillion-dollar valuation really mean?

Reminder: Company valuations are basically the Measurable Value they’re delivering, multiplied by an arbitrary Confidence Factor decided by the market. 

So let’s break down Amazon’s:

Measurable Value:

  • 2nd largest employer in the US, behind Walmart
  • $10 Billion 2018 Net Income (“Bottom-line” Profit)
  • Business segments making up their $12 billion operating income (Profit from operations before taxes, interest, etc.)
    1. North America: $7B operating income
      1. Online retail, Amazon Prime, services, & hardware
    2. International: -$2B operating loss
      1. Similar to North America, but losing money
    3. Amazon Web Services (AWS): $7B operating income
      1. Cloud computing business – storage, analysis, services

Confidence Factor Drivers:

  1. Growth & Innovation
    1. Net Income (read: Profit) tripled from $3B to $10B in 2018
    2. Growing rapidly in a broad range of businesses
      • Core e-Commerce Operations
      • Cloud Services
      • Digital Advertising
      • Groceries – Amazon Fresh, Whole Foods
      • Prescription Drugs
      • Alexa Personal Assistant Ecosystem
      • Fire TV, Tablets, [Phone]
      • Prime Video, Music
      • Kindle & Audible
  2. Market Dominance
    1. World’s largest online retailer
    2. AWS controls ⅓ of the cloud market, more than double the next competitor (Google, Microsoft)
  3. Company-Specific Risks
    1. Antitrust lawsuits in high focus
    2. Political backlash: contested government contracts, Washington Post ownership
    3. Labor Pressures: Black Friday worker protests
  4. Macro Risks
    1. Impending Recession
    2. Trade War escalation

How does this all translate into a stock?

A stock is just a slice of the big value pie: valuation divided by the number of shares.

Total Valuation = (Measurable Value) x (Confidence Factor)

Amazon last reported profits of $11B in September, with a market valuation of $886B (down from the trillion last year)

So it’s trading at about 78x last year’s profit. Yeesh, what a markup. 

For comparison, Walmart is somewhere near 23x, and Macy’s is about 6x, Google about 25x.

The Measurable Value stuff like revenue/expenses/profit/sales, is released quarterly in public announcements.

The Factor is what moves with the news and people’s opinions.

As you read, think about how the news would affect your Confidence factor for Amazon.

Do you think this piece of new information is going to make Amazon more or less valuable in the future?

For the history buffs:

1994 – Amazon is born in a garage in Seattle with $10,000. Jeff & MacKenzie Bezos open an online bookstore.

1997 – Amazon goes public, allowing their stock to be purchased for $18/share, valuing the company at $300 million

2003 – Amazon launches Amazon Web Services, hosting websites for other companies, shares at $34 each

2007 – Amazon launches first Kindle, now selling apparel, CD’s, jewelry, and groceries. Kindle to grab 50% of android tablet market by 2012. Valuation hits $30B.

2008 – Amazon purchases Audible for $300 million. Valuation hits $20B.

2009 – Amazon purchases Zappos online shoe retailer for $900 million. Valuation hits $50B.

2013 – Jeff Bezos buys Washington Post using $250 million of his own money. Valuation hits $180B.

2014 – Amazon fails with first & last smartphone, also buys Twitch, video game streaming site for $970 million. Valuation hits $150B.

2015 – Amazon launches first Echo smart speaker with Alexa. Valuation hits $300B. 

2017 – Amazon buys Whole Foods for $13.7 billion to expand grocery service. Valuation hits $550B.

2018 – Amazon passes $1 trillion valuation. Share price $2,040.

Sources: Business Insider, Investopedia, Forbes, Interesting Engineering, CNN

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