Saturday, December 5, 2009

Costco + Ebay + ? = Amazon

In October 2007, Crocs (CROX) shares fetched nearly $70 each, giving the company a market value of $6 billion. This for a company that makes plastic shoes!

Nothing against plastic shoes, but $6 billion?

I remember looking at other $6 billion companies at the time. One example: Whirlpool (WHR). The largest appliance manufacturer on the planet vs. plastic shoes. In 2007, Whirlpool made over $600 million. Crocs? $168 million. But Crocs was growing! Or not. It's lost money ever since. Compare the market values now!

Amazon isn't the fad that Crocs was, but its fans are just as devoted. The logic is the same too. I love the product therefore I love the stock. There is little (if any) regard for underlying fundamentals.

The current market value of Amazon is $60 billion. For this "price", an investor could buy eBay (EBAY) with a current market value of $30 billion and Costco (COST) with a value of $26 billion. With the petty cash left over, our retail shopper could pick one of the following from the discount aisle:

PetSmart (PETM)
Abercrombie & Fitch (ANF)
Supervalu (SVU)
Netflix (NFLX) - just had to include this one
Dicks Sporting Goods (DKS)

Each has a market value of $3 to $4 billion.

With Amazon, you get a company with $4 billion in net cash and around $1 billion in free cash flow. And don't forget the growth!

With our Amazon-alternative, we'd get at least $6 billion in net cash and about $4 billion a year in free cash flow. This portfolio has growth too. If you're not that committed to retail, just buy Disney (DIS) and throw in Dicks for kicks.

The Amazon-alternative offers 50% more cash and $3 billion in additional free cash flow for the same price. Time value of money? Growth? Either way, Amazon will never catch up.

While Amazon isn't the next Crocs, market value comparisons can illustrate massive disparities. And they sure are fun.

Special thanks to Stephen in CT for contributing to this exercise.

Disclosure: Short Amazon.

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