Hello you wonderful and intelligent people that make up this forum, i sincerely hope you are having a good start to the week and doing well.
When analysing a company i usually look at the Enterprise Value of the company and if this is below the Market Capitalisation this is one sign the company could be undervalued. I have reviewed various Intrinsic Value calculations of Amazon that vary from 78.72 USD and 199.02 USD. I kindly wondered what is the formula for Intrinsic Value please and how would this generally be calculated for Amazon please? If anyone could kindly please help me on this i would be forever grateful and thankful for your support, it would be more appreciated than you may know.
Sending you lots of good wishes and i truly hope you continue to achieve massive success in your investing. All the very best.
There are any number of people who would/could run such an analysis, but its inappropriate for Amazon, IMO, because such valuations just don’t work for fast growing companies or for companies that trot out new business lines.
For Tesla, that would be even more laughable.
Apple potentially could be analyzed in such a fashion because growth has slowed… and despite being ranked as “the most innovative company”… it isn’t anything like that. Not any more. It’s possible they’ll pop up with something truly innovative but that would be uncharacteristic. They spend huge sums in R&D and get very little for it.
Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.
Thank you ever so much for your response XMFRob that was very kind of you to reply and thanks so much for the detailed and helpful response that is wonderful of you.
I have recently done a Value Investing course, which looks at valuing a company and how to spot red flags when reading Annual Reports and other financial statements. However thanks so much for pointing out that it would be incorrect using this formula on Amazon, as you mentioned this is a growth stock. I am learning all the time so thanks so much for your helpful response.
Can i kindly please ask XMFRob is there any calculations that could be wise running on a growth stock? As i worry that without some kind of gauge you could buy in at a too high price. I remember Warren Buffett at one point saying he did not buy Amazon as he was concerned about he could not judge whether he was buying at the correct price. If you could kindly help with this i would be forever grateful and thankful for your support with this, it would mean the world to me.
Sending you lots of good wishes XMFRob and i truly wish you all the very best for the future. Thanks so much for being so helpful and kind.
The intrinsic value of a business (or any investment security) is the present value of all expected future cash flows, discounted at the appropriate discount rate.
The problem is in estimating the future cash flows.
This is not necessarily going to give you good quality companies. What this will give you is companies with net cash. There are many software/ tech companies that carry cash on their balance sheet, but not necessarily good business. In the case of software/ tech companies, they may not be making any profit, cash flow or just simply buying revenue and cash on the balance sheet is issuing stock forever…
Actually you need to have many factors to identify a company that is undervalued. AMZN was under valued for the best part of last decade. Why? Because they had a great growth. Many “SAGE’s” of this board ridiculed AMZN, they never understood AWS, calling it as selling commodity hardware (the gentlemen justified it by saying he was a project manager of EDS, which was bought by HP). Never understood. Today AWS is $75 B and growing. But rest of the market understood, yet they outperformed the expectation. I remember talking about on a standalone basis AWS will be worth $100 B valuation sometime in the next few years, but here we are $75B revenue. Not only that, being the biggest player, they have a pricing power. AWS is not the cheapest cloud provider!!! Many organization still go with AWS, because they are big and they see their peers are in their or simply they compare their on-prem cost. Whatever… the point is, cheap or undervalued is difficult to figure out.
Also, the last 15 years are unprecedented, we came out of a financial crisis, and Federal reserve pumped money like no tomorrow in to the system, government deficits were routinely hitting $1T, it created a situation where the big companies like Microsoft, Google, Apple were not only able to increase their sales, their margins too!!! It is unprecedented in history. Will the future be like this? I don’t know. I was never a fan of CAPE, but if you do CAPE analysis for 20 or 30 years you will see how elevated the margins’ are.
Anyways, having excess cash on the balance sheet is not an indication of an undervalued company.
Here is another example, not exactly fits a regular company template. QS, Quantumscape, they carry over $1 B on balancer sheet with 0 debt. Is it a great company? Now, they have 0 revenue and over $400 M operating losses. they just sold 42 million shares (secondary offering) to raise $320 M which they will burn in a year. They are playing Musk game, and hoping they can tell a story, sell the shares to raise cash and use that cash to build something.
Time will tell whether they are going to be successful or not. But just because they have net cash, and their EV is < market cap, they are not undervalued. To value this company you need to have a deeper understanding of the battery technology, what is the differentiation and still they need a big dollop of luck.
Today Smiledirectclub has filed for bankruptcy. 4 years back they came out with IPO raised 1.35 billion, yet in mere 4 years they are bankrupt. Balance sheet cash is great, but even $1.35 B cash doesn’t carry an organization for 5 year is scary. Valuation is a very tricky subject, dont’ reduce it to one or two measures.