Amazon (NASDAQ:AMZN) has received significant coverage recently due to growth in sales of its e-book reader, the Kindle, which was one of the most popular holiday gifts in 2009. Amazon’s stock reached a high of about $140 in December amidst much speculation that it could reach $200.
Kindle Can’t Do It
Although we estimate that the Kindle will grow from selling an estimated 2 million units in 2010 to nearly 10 million by the end of our forecast period, the Kindle contributes only 5% of Amazon’s value. The largest portion of Amazon’s value comes from its Electronics & General Merchandise (EGM) business and Amazon will need to see greater growth in this business for the stock to reach past $180.
Electronics & General Merchandise 48% of Amazon’s Value
We currently have a Trefis price estimate of $113 for Amazon and estimate that its most valuable business, constituting 48% of Amazon’s value, is its Electronics & General Merchandise business. This means a large portion of Amazon’s value is coming from the sale of items like TVs, DVD players, computers, computer accessories, apparel, footwear, sporting goods and many other types of merchandise outside of the books, DVDs and other “media” that Amazon is traditionally associated with selling.
Electronics & General Merchandise Crucial for $180+ Amazon Stock
We believe that for Amazon’s stock to reach $180+, there will have to be higher than expected growth in the company’s EGM business. We’ve identified the 5 most important drivers of value within Amazon’s EGM business and how increases in those driver forecasts can propel Amazon stock higher.
We focus on two of the drivers related to Amazon’s international business below and highlight the rest. For each of the five drivers, we identify how much value an improvement in that driver can add to Amazon’s stock.
1. Amazon’s International Market Share Increases Faster (+$10)
We estimate that Amazon will have 2.6% market share in 2010 within the $260 billion international online retail market for electronics and other general merchandise (excluding books and other media). We believe that Amazon’s share will reach 7% by the end of the Trefis forecast period.
However, if Amazon is able to capture 2% additional international market share, reaching 9% share by the end of the forecast period, than this can contribute an additinoal $10 to Amazon’s stock. We expect Amazon to capture more international market share within its existing markets as well as to enter new international markets over the forecast period. The additional increase in share beyond our forecast could come from Amazon’s entry into large new markets such as Brazil and India.
You can modify our forecast shown below to see the impact of additional Amazon market share within the international market.
2. International Online Retail EGM Market Grows Bigger (+$20)
We forecast that the online international retail EGM market will grow to constitute about 8% of the overall international EGM market by the end of our forecast period. This implies a $500 billion online EGM market internationally. If the online market were to grow faster than we expect to 12% of the overall international market, or nearly $750 billion, this would contribute an additional $20 to Amazon’s stock.
3. Amazon’s US Market Share Increases Faster (+$7)
Amazon’s US market share within the online EGM market would have to ramp up to 12% by the end of the Trefis forecast period instead of our current estimate of 9% for the stock to gain an additional $7 in value.
4. US Online Retail EGM Market Grows Bigger (+$10)
The retail EGM market in the US would have would have to shift even more online than our current forecast. We estimate that 15% of the US Retail EGM market will be online by the end of our forecast period and that this would have to increase to 20% for an additional $10 boost to Amazon’s stock.
5. EGM Operating Margin Reaches 6% (+$10)
If EGM Operating Margins ramp back up to historical highs of 6% rather than remaining nearly flat at our current estimate of 4.5%, then Amazon’s stock will gain an additional $10 in value.
Create Your Own Amazon Valuation
Do you think it’s possible for Amazon’s stock to increase beyond $180? You can easily create your own Amazon valuation here by modifying the forecasts mentioned above to see what Amazon’s stock price would be worth based on your expectations.
