Given its history of revenue and profit growth, Costco likely deserves a higher than average multiplier. The company currently sports a multiple of 18x to 19x based on analysts’ expected revenue of $107 billion, and anticipated earnings of $2.32 billion at a profit margin of around 2.2%. On a secondary valuation basis, its enterprise value calculates to around 0.42 times sales.
Wal-Mart is a very familiar retailer with more than 10,000 stores in 27 countries. It is a consistent cash earner with a track record of buying back shares, and offers a good dividend with a current yield of around 2.6%.
The company has shown solid revenue growth of roughly 11% from 2010 through 2012, with net income increasing 22%. Given its performance, offset by some potential legal issues from Mexican operations, Wal-Mart probably should trade at the slightly discounted 11x to 12x multiple based on analysts’ projected revenue of $492 billion and adjusted earnings of $21.1 billion with a profit margin of around 4.3%. Its current enterprise value is roughly 0.59 times sales.
Relative to its peers, Amazon’s value does look stretched. One might reasonably assume that any decline in market sentiment would probably pull the shares significantly lower. A less sanguine value could be based on estimated revenues of $81 billion and an earnings margin of 4.5%, or $3.65 billion. Using a premium 20x multiple, reasonable value looks to be around $161 a share. A more exuberant 25x multiple fair value comes in around $201 a share. Assuming an enterprise value at 1.0 times sales, $174 per share looks plausible.
Conclusion
Pinpointing the key inflection point that realizes these lower prices might hinge on two factors, a revenue lag and a consistent earnings record. As long as revenue growth tops 20% a year and Wall Street anticipates commensurate profit gains, there is little reason to believe confidence in the stock will wane. Though market conviction will be tested once a noticeable slowdown in sales growth has been demonstrated, it is when Amazon’s long-term profitability can be quantitatively calculated that might pose the biggest risk to sentiment.
As the expectation of profits are priced out of the market and consistent results are priced in, optimistic hope will eventually have to be confirmed by mathematical reason. It is typically at this point where cold fact rather than prospective belief more accurately determines market value.
Successfully shorting Amazon.com, Inc. (NASDAQ:AMZN) might not be a question of “if” but more of “when”. The company’s overly enthusiastic valuation seems to hinge on a couple of key supports. Though looking unassailable now, once those supports are weakened, a meaningful share price drop might finally be seen.
The article Can Amazon Be Successfully Shorted? originally appeared on Fool.com.
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