A Benjamin Graham Value Analysis For Amazon

Summary

• Warren Buffett describes Benjamin Graham as the second most influential person in his life after his own father.
• Graham recommended five investing strategies — Index, Defensive, Enterprising, NCAV and Special Situations.
• AMZN qualifies under Graham's index investing category today, as part of a diversified portfolio of blue chips and other index stocks.

Classic Graham Screener Free!

Clash of the Titans

Amazon.com, Inc. is an electronic commerce and cloud computing company that was founded by Jeff Bezos and is based in Seattle, Washington. Amazon is the largest Internet retailer in the world by revenue and market capitalization, and second largest after the Alibaba Group in total sales.

Benjamin Graham is known as the "father of value investing". His former student, Warren Buffett, describes him as the second most influential person in his life after his own father.

Earlier, we discussed How To Build A Complete Benjamin Graham Portfolio.

Graham recommended five investing strategies, depending on the kind of investor one was. Index investing was for the most passive investors, while Special Situations was meant only for the professionals.

In this article, we'll see if Amazon would qualify for investment under one of these strategies. We'll start by evaluating Amazon against Graham's 17 rules for Defensive, Enterprising and NCAV investment.

Financial Condition

Given below are Amazon's Sales and Balance Sheet figures used to calculate some of its Graham Ratings, and its Net Current Asset Value (NCAV / Net-Net).

• Annual Sales: $177,866.00 Million
• Current Assets: $60,197.00 Million
• Intangibles: $13,350.00 Million
• Goodwill: $13,350.00 Million
• Total Assets: $131,310.00 Million
• Current Liabilities: $57,883.00 Million
• Long Term Debt: $24,743.00 Million
• Total Liabilities: $103,601.00 Million
• Shares Outstanding: 493.00 Million

Note: Graham analyses are done exclusively with annual data.

Per Share Values

Given below are Amazon's BVPS, TBVPS and EPS values used to calculate its Defensive Price (Graham №) and Enterprising Price (Serenity №).

• Book Value Per Share: $57.25
• Tangible Book Value Per Share: $29.67
• Earnings Per Share / EPS: $6.15
• EPS - 1 Year Ago: $4.90
• EPS - 2 Years Ago: $1.25
• EPS - 3 Years Ago: $-0.52
• EPS - 4 Years Ago: $0.59
• EPS - 5 Years Ago: $-0.09
• EPS - 6 Years Ago: $1.37
• EPS - 7 Years Ago: $2.53
• EPS - 8 Years Ago: $2.04
• EPS - 9 Years Ago: $1.49

Defensive Graham investment requires 10 years of uninterrupted positive earnings. Enterprising Graham investment requires 5 years of uninterrupted positive earnings. NCAV Graham investment requires 1 year of positive earnings.

Graham Ratings

Using the above figures, we get the following Graham Ratings for Amazon.

• Sales or Size (100% ⇒ $500 Million): 35,573.20%
• Current Assets ÷ [2 x Current Liabilities]: 52.00%
• Net Current Assets ÷ Long Term Debt: 9.35%
• Earnings Stability (100% ⇒ 10 Years): 30.00%
• Dividend Record (100% ⇒ 20 Years): 0.00%
• Earnings Growth (100% ⇒ 33% Growth): 312.03%
• Graham Number(%): 5.08%
• NCAV or Net-Net(%): 0.00%
• Equity ÷ Debt (for Utilities and Financials): 26.75%

A Defensive Graham grade requires that all ratings — except the last three — be 100% or more.
An Enterprising Graham grade requires minimum ratings of — N/A, 75%, 90%, 50%, 5%, N/A, N/A, N/A and N/A.
An NCAV (Net-Net) Graham grade requires a minimum Earnings Stability of 10%.

Intrinsic Value

Amazon's Intrinsic Value here would be the price corresponding to its Graham Grade — Defensive, Enterprising or NCAV.

• Defensive Price (Graham №): $72.67
• Enterprising Price (Serenity №): $46.79
• NCAV Price (Net Current Asset Value or Net-Net): $0.00
• Graham Grade: Index
  
• Intrinsic Value: N/A
• Previous Close: $1,430.79
• Intrinsic Value(%): N/A
  

But since Amazon does not clear Graham's qualitative criteria for the Defensive, Enterprising or NCAV investment grades, no specific Intrinsic Value can be assigned to it.

Special Situations

In a recent CNBC interview, Warren Buffett said:

I'm amazed at the managerial talent of Jeff Bezos... I've blown it in terms of making any money on [Amazon]... But I would never bet against it.

Amazon may qualify under Graham's Special Situations category for professional investors (strategy #5 in the portfolio link above); as would most of Buffett's investments. But Graham did not give a specific framework for Special Situations (for obvious reasons), and such an analysis is therefore outside the scope of this article.

But, at a minimum, a Special Situations analysis would be required to establish beyond doubt that Amazon meets Graham's central definition:

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.

Final Assessment: Defensive

In conclusion, Amazon qualifies for investment under Graham's Index Investing category (strategy #1 in the portfolio link above) being a constituent of major indices such as the S&P 500 and the S&P 100.

This conclusion is additionally borne out by the fact that Apple, Microsoft and Amazon collectively make up almost 10 percent of the S&P 500; and that Amazon accounted for more than a quarter of the S&P 500’s gains this year.

Index stocks too fall within Graham's definition of Defensive investment. So Amazon too is a Defensive Graham stock. But the index stocks sub-category does not have a specific Intrinsic Value calculation. The Graham Ratings section instead gives an overall picture of Amazon's Margin of Safety.

Note that no stock ever qualifies alone under Graham's framework. Every stock is always a constituent of a portfolio of similar stocks. Amazon would therefore qualify for investment as part of a diversified portfolio of blue chips and other index stocks.

Classic Graham Screener Free!

Peter Thiel (2012)

Thiel explains how Amazon is the only one of the Big Tech companies to be investing its cash-flow correctly into growth.

Warren Buffett (2016)

2019 Update: Jeff Bezos quotes Benjamin Graham

"In the short run, the market is a voting machine but in the long run, it is a weighing machine."

Bezos uses Graham's famous quote to explain his approach to creating value for Amazon's investors.

2019 Update: Berkshire Invests In Amazon

"The idea that value is somehow connected to book value or low price/earnings ratios or anything — as Charlie has said, all investing is value investing. I mean, you’re putting out some money now to get more later on. And you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.

And all the same calculation goes into it, whether you’re buying some bank at 70 percent of book value, or you’re buying Amazon at some very high multiple of reported earnings."