Today, I offer a comparable valuation of Amazon (AMZN) relative to the companies from the FAAMG (Facebook (FB), Apple (AAPL), Alibaba (BABA), Microsoft (MSFT), and Alphabet/Google (GOOGL) (GOOG)) list through multiples. I provided something similar for Apple the other day, and judging by the comments, not everyone has understood correctly the sense of such an analysis.
So, here's what I did.
For each company on the FAAMG list, I calculated the EV/Revenue, EV/EBITDA and EV/FCF multiples. Taking into account the fact that these companies belong to different sectors of the economy and are at different points in their life cycles, I adjusted the multiples for the growth rates of the basic indicators (I used a four-year CAGR). Then, I determined the median of the values for each of the multiples and calculated how much a share of Amazon's stock should cost if its multiples corresponded to the median.
In other words, I calculated how much Amazon's share should cost in order to meet the average level of the FAAMG multiples adjusted for growth rates. In addition, for clarity, I calculated and graphically showed how this valuation had changed over the last nine months.
Please note that I calculated the multiples based on enterprise value which takes into account the companies' debt and cash. Thus, these parameters were taken into account in my analysis.
So, let's begin.
The comparable valuation based on the EV/Revenue to growth multiple has shown that Amazon is the cheapest company on the FAAAMG list:
In this case, the implied price is $3,287, which is 2 times more than Amazon's actual share price.
Though, I am a little confused by the fact that over the last nine months, the implied price has approximately equally exceeded the actual share price of Amazon. In other words, for the market, it's okay to evaluate Amazon like this:
Comparing Apple through the EV/EBITDA to growth multiple, we obtain almost the same result:
But, in the case of the EV/EBITDA to growth multiple, nine months ago, the implied price almost corresponded to the actual price and now, it is twice as high. In my opinion, this is a sure sign of a relative undervaluation of Amazon:
The comparable valuation based on the EV/FCF to growth multiple is the most interesting one. The current implied price is several times higher than the actual price:
Although, in June, it was lower:
Obviously, this is due to the record growth rate of FCF of Amazon.
So, we have done a comparable valuation of Amazon using historical data. Now, let's look into the future. And we will do similar calculations using the P/E (forward) and P/S (forward) multiples divided by the expected annual growth rates. In this case, we compare the dollar evaluation of each percent of the future company's revenue and profit growth. Here is my formula:
This is what we get analyzing the P/S to growth (forward) multiple:
The result, in this case, is similar to the comparable valuation on the basis of the EV/Revenue to growth multiple: the implied price is several times higher than the actual price, but this condition was a permanent feature in the past. In other words, one cannot speak of an unequivocal undervaluation.
But the comparable valuation on the basis of the P/E to growth (forward) multiple produces an interesting result:
As we can see, the implied price exceeds the actual price, although it used to be invariably lower. The situation changed only after the last adjustment of the forecasts.
No matter how you compare, whether in terms of the actual multiples or in terms of the forward ones, now Amazon is considerably undervalued relative to FAAMG.