IBM: Damned If You Don’t, Damned If You Do

 

 

 

For years investors have been clamoring for IBM (IBM) to transform their business via acquisition, as tech infrastructure moves to the cloud and away from IBM’s legacy businesses. Despite some very small deals, the company instead opted to buyback stock and pay dividends with its prodigious free cash flow.

To put this capital allocation decision in perspective, consider that between 2010 and 2017 IBM spent $34.4 billion of dividends and repurchased $82.4 billion of stock, for a total of $116.8 billion of profits that were not reinvested in the business over and eight year period. Compare that with IBM’s current equity market value of $110 billion. Wow.

Thew result has been a stagnant business from a numbers standpoint ($15 billion of free cash flow in 2010 versus $13 billion in 2017), and a larger lead for the new age/cloud-based competition.

When we learned yesterday that IBM had agreed to buy Red Hat (RHT) for $34 billion, or $190 per share, a stunning premium of 63% compared with the prior closing price, you could have a few different reactions (or combination thereof). One, “it is about time they make a big move.” Two, “well, oh well, it’s five years too late.” Three, “great move, but why on earth pay such a steep price?”

IBM stock went down yesterday, which makes sense when taking a short term view (the deal is dilutive in the early years), but seems strange with a long term view (could IBM possibly be worth less on a per-share basis with RHT onboard?).

The way I see it is that if IBM was valued at 9x free cash flow without Red hat, it should not be worth less than that with it. But that begs the question, can RHT really make a dent in IBM’s massive business? If IBM’s valuation multiple is going to expand on the heels of this deal, RHT needs to show up in the numbers.

So let’s go through the numbers. RHT adds $3.3 billion of revenue, $650 million of EBITDA, and $775 million of free cash flow to IBM. If we assume IBM uses $10 billion of cash and borrows $24 billion at 5% to fund the $34 billion acquisition, debt costs will rise by roughly $1.2 billion pre-tax. Call it $1 billion annually after-tax. There goes the added free cash flow generation from RHT… completely negated (and more) from the added debt load.

IBM said that they would suspend share buybacks until 2022, so let’s assume they use 100% of free cash flow after dividends (roughly $6 billion per year) to repay 50% of the RHT-related debt in 2020 and 2021. At that point, perhaps the RHT business is generating $1 billion of free cash flow and debt service on the remaining $12 billion of incremental RHT debt is $500 million after-tax. The result in 2022 is a deal that is accretive to free cash flow by $500 million, or roughly 4% vs 2018 financial results ($12 billion free cash flow guidance for 2018).

Does this Red Hat deal add risk to IBM? Unlikely. Does it materially change the growth rate and underlying profits of the business? Unlikely. Does it mean IBM stock should go down? Unlikely. Could it result in a 10x or 12x free cash flow multiple longer term, vs 9x today? Perhaps.

Add in a dividend yield north of 5% and IBM stock around $120 per share seems likely to be able to put in a floor, assuming the RHT deal does not spur competing bids. Given the price being paid, it will likely not result in a surging IBM stock price, but from a risk/reward perspective, I would conclude that IBM is a meaningfully more attractive deep value/income-producing stock with RHT than it was without it.

Full Disclosure: No position in IBM at the time of writing, but holdings may change at any time

As Coastal Housing Markets Cool, 2017 IPO Redfin Is Worthy Of A Watchful Eye

For all of the business model evolutions and technology-led disruptions throughout the service economy in recent memory, the 6% realtor sales commission (a truly obscene amount for higher priced homes) for the most part has been unscathed. Tech upstarts like Redfin (RDFN) are trying to make a dent and are making progress, albeit slowly.

Public for less than 18 months after their IPO priced at $15, RDFN is using technology to save home buyers and sellers money. The company has been expanding its 1% sales commission structure rapidly, which can cut home sellers commission expense by 33% (4% vs 6%). Like Zillow (Z), RDFN also strives to offer customers ancillary services, such as mortgages.

RDFN stock had been trading pretty well, relative to the $15 issue price, up until recently:

The issue now is that RDFN was started in Seattle and focused initially on higher priced big cities for its lower sales commissions. The reason is pretty obvious; taking a 3% cut on a $200,000 home in Spokane is equivalent to taking a 1% cut on a $600,000 Seattle listing because each will take roughly the same labor hours. The idea that said Seattle seller would pay $36,000 to sell their house is a bit nutty, but that structure has largely survived in the industry.

Fortunately for RDFN, the coastal housing markets have been on fire, including double-digit annual gains in their home Seattle market for many years now. The result has been a strong revenue growth trend for the company, with 2018 revenue expected to top $475 million, versus just $125 million in 2014.

With those same markets now showing clear home price deceleration and inventory stockpiling, RDFN should see pressure on its near-term financial results, and likely similar headwinds for the publicly traded shares.

Long term, however, RDFN’s future appears bright as it continues to expand its business across the country, taking aim at the traditional 6% sales commission structure. The company’s market share reached 0.83% as of June 30th, up from 0.33% in 2014. While that figure is tiny, it shows you just how much business is out there for newer players to steal.

To be a long-term bull on RDFN, one needs to believe that over the next 10-15 years they can continue to grow market share and perhaps reach 5% penetration of a market worth tens of billions per year. The good news is that the company has enough money to try and get there. After a recent convertible debt offering, RDFN has about $300 million of net cash on their balance sheet, compared with an equity value of roughly $1.65 billion. That cash is crucial, as the company is purposely losing money now to grow quickly (cash burn has been in the $20-$30 million per year range).

It is hard to know what a normalized margin structure for RDFN could look like, and therefore assigning a fair value is not easy. With nearly $500 million in revenue and $300 million of cash, the stock does not appear materially overpriced today if one thinks they can earn 15%-20% EBITDA margins over time and therefore trade for 1.5x-2.0x annual revenue.

That said, if coastal markets continue to cool over the next few quarters, RDFN could dial back financial projections for Q4 and 2019, which would likely put pressure on the stock short-term, despite it being a long-term story for most investors. Accordingly, I think RDFN is an interesting stock to watch, especially for folks looking for growth without having to pay a huge premium for it.

The Price of “FAAAM” – 5 Tech Stocks Now Worth Over $4 Trillion

We hear a lot about the “FAANG” stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) leading the S&P 500 higher in recent years, which is undeniably true, so I decided to take a look at a slightly modified version to see where valuations are within the group.

Below you will find data on “FAAAM” which I have coined to represent the top 5 most valuable companies in the S&P 500 today. By adding Microsoft in place of Netflix, we have a fivesome worth more than $4.1 trillion, or about 16.5% of the entire S&P 500 index ($25 trillion total value).

There are many conclusions investors can gleam from this group of tech stocks, and not everyone will agree. I will share a few of my views and feel free to chime in.

  • While not unprecedented, having such concentration within the dominant U.S. equity index means that near to intermediate returns for the market are largely correlated with large cap tech leaders. Given that none of the valuations are inexpensive, and Apple is probably the only one that looks to be no worse than fairly valued, investors relying on this group for future returns will need growth rates (in revenue and earnings) to continue at high rates for quite a while. It is hard to know whether this expectation is reasonable. For instance, will the size of these firms lead to slower growth by default, or are they dominant enough to continue to garner the lion share of the sector’s growth overall?
  • At 18x EV/EBITDA, are the valuation of this group reasonable enough to expect that the stocks, on average, can generate double-digit annualized returns over, say, the next 5-10 years? If 20% annual growth rates in the underlying businesses persist, then the valuations are not likely too high, but that is a big open question. For instance, Amazon’s revenue in 2018 is projected to reach $235 billion (current analyst consensus estimate). To keep growing at 20% per year, the company needs to find an incremental $50 billion of revenue every year, which equates to $1 billion every week! The stock is priced as though such an outcome is likely. What happens if revenue growth slows to 10%?
  • Of the five companies in “FAAAM” the only ones I would consider putting fresh money into, based on growth and valuation, would be Apple and Facebook. Apple’s run to $1 trillion this week on the heels of a strong earnings report could signal the stock is topped out in the near-term. Facebook, however, trading down lately after ratcheting down growth expectations on their latest conference call, is really the only FAAAM stock that is down materially at all. While I am not exciting to buy any names in the group at current prices, they could very well have the best mix of untapped growth opportunities and less-than-exuberant investor sentiment.

Facebook Growth and Margin Warning Should Not Have Surprised Anyone

Shares of Facebook fell hard on Thursday after guiding investors to slower growth and falling operating margins going forward. Many FB bulls acted as this was a total shock (and obviously the stock was not reflecting the news either), but really this was bound to happen. In fact, FB had already warned that expenses would rise faster than revenue in 2018, to deal with all of the issues the company has been battling in the news lately. As a result, margin compression should not be surprising.

Evidently investors also believed that even with 2 billion active users, the company could continue to grow revenue at 40%-plus. How that is possible when 2018 revenue will top $50 billion and user growth has slowed dramatically (there are only so many connected humans on the planet) is hard to understand. Perhaps investors see Amazon growing revenue 39% this past quarter and just assume that every high flying tech company can do the same. Amazon, however, is the exception, not the rule.

Below is a summary of Facebook’s financial results, including some estimates I came up with for what 2018-2020 might look like. These are not all that different from the numbers I had been working off of for my last FB post earlier this year, but now that the company has publicly guided investors in that direction, it should be less of a speculation on my part.

As you can see, GAAP free cash flow is unlikely to get much above $7 per share, even assuming the company can grow revenue by more than 100% over the next three years. Using my preferred measure, which includes stock-based compensation as though it was being paid out in cash to employees, free cash flow might struggle to get materially past $5 per share.

The big question for investors, then, is what multiple to put on such growth. The large cap tech leaders have been getting 30-40x multiples in recent years, but it is hard to know whether slowing growth rates (as these firms get so large) will crimp those valuations.

Facebook bulls would probably argue 30x that $7 figure is more than reasonable, and therefore would suggest a rebound to $210 per share (versus the current low 170’s) is on the horizon over the next 6-12 months. Add back the company’s cash hoard and maybe $225 is doable (the stock was already at $217 two days ago!).

More cautious investors might use 25x and prefer the $5 free cash flow figure, which would mean $125 per share, or $140 including FB’s ~$40B of cash in the bank.

That leaves us with perhaps 20% downside and 30% upside depending on which camp you are in. Such a risk/reward does not exactly get me excited to build a position in the stock, but at least the shares are coming back to reality.

FB bulls are getting a good entry point and the bears have more reasons to watch from the sidelines. If I had to guess, I would give the bulls a slight edge and would not consider betting against the stock at current levels. In more specific terms, I think FB shares are more likely to see $200 again before breaking below $150 (the Cambridge Analytica bottom).

As Large Cap Tech Continues to Lead, Valuations Begin to Stretch

There is no doubt that the tech sector is where investors will find earnings growth in today’s market, and many money managers are willing to pay full valuations to stack their portfolios with most, if not all, of the big name innovators.

Even though it means sometimes missing out on huge share price run-ups, I tend to buy these companies when they miss a quarter, during a market drop, or any other time when the valuations look “reasonable” (knowing full well they rarely will be cheap on an absolute basis). There was a great opportunity in Amazon (AMZN) in 2014, for instance. Last year, Alphabet (GOOG) in the low 900’s looked like a good bet. Facebook (FB) briefly dipped below $150 earlier this year during a string of negative press, though I regrettably didn’t pull the trigger on that one.

In fact, massive buying of these leading tech companies has resulted in the sector comprising 26% of the S&P 500 index, a level not seen since the peak of the dot-com bubble in March 2000 when tech accounted for a stunning 34% of its value. For comparison, financial stocks peaked at 20% of the S&P in 2007, before the housing collapse and no other sector has ever reached the 20% level. Amazingly, the five most valuable stocks in the index today are tech names:

I have previously written about Amazon’s recent share price ascent and how its price to revenue multiple is getting quite rich — which has not stopped the stock from jumping 20% since — and today I want to dig into Alphabet as well. While that stock around $900 last year looked like a solid GARP (“growth at a reasonable price”) play last year, as it approaches $1,200 today I am a seller.

A big issue with these tech companies is their tendency to dole more and more stock, instead of cash, to employees as part of compensation packages. This allows them to produce inflated cash flow numbers, which investors/analysts then use to justify their investments/recommendations. When I value them, conversely, I use an adjusted free cash flow metric that subtracts from reported free cash flow all stock-based compensation. To me, this adjusted number more fully reflects how much cash the business is actually generating.

Below are some data points for Alphabet, from 2015 through 2018:

As you can see, stock-based compensation at Alphabet equates to roughly one-third of free cash flow. Therefore, when the investing community cites strong operating cash flow, or impressive free cash flow, they are ignoring billions in stock comp. To give you a feel for the magnitude of these numbers, my internal estimates indicate Alphabet’s stock comp will come within striking distance of $10 billion in 2018. It is more than just rounding error.

Despite strong sales growth (the consensus view calls for 20% per year, on average, for 2018 and 2019), investors are paying quite a big price for the stock at current prices. At $1,180 each, GOOG fetches just shy of 50x times my 2018 free cash flow estimate, less stock-based comp, of $25 per share.

As an alternative, using EV/EBITDA, which includes stock comp and gives the company full credit for their large net cash position, the multiple is an unattractive 18x (using my 2018 EBITDA estimate of $41 billion).

While there will always be investors willing to pay up for growth, the main thesis in recent years (“the stocks are not expensive”) might be harder to justify now. As a result, I think it is more important than ever to be opportunistic and focus on taking advantage of near-term pullbacks, rather than buying the biggest U.S. companies indiscriminately just because they have performed so well in recent years.

Full Disclosure: I have been selling shares of GOOG this week

Charter and Comcast Shares Fall on Hard Times, Look Ripe for Rebound

It has been about five months since I outlined the valuation disconnect between the two leading consumer telecommunications providers in the United States in a post entitled Is the Enthusiasm for Charter Communications Getting Overdone?  Charter (CHTR) and Comcast (CMCSA) together provide nearly half of the country’s households with cable, broadband, and phone service. A lot has happened since then, so I thought it would be interesting to revisit the situation.

It turns out that my post last August roughly marked the short-term peak, and shares have fallen about 30% since:

Whereas the shares near $400 seemed very overpriced compared with the likes of Comcast (11.5x EV/EBITDA vs 8.6x), they now appear closer to fair value at around 8.8x my 2018 EBITDA estimate. Comcast has also hit a rough patch in terms of stock performance, on the heels of its bid for UK’s Sky Plc, which would further entrench them into the pay television world. While CHTR has fallen 30%, CMCSA has dropped 20%, and now fetches $32 per share, or just 7x my estimate of 2018 EBITDA.

In my mind, Comcast looks very cheap and Charter appears to be reasonably priced, without factoring in any upside they could see from increasing prices on broadband services (they are priced well below Comcast currently), or from their upcoming cellular phone service offering, which promises to look very similar to Comcast’s recently launched and fast-growing Xfinity Mobile service.

My wife recently switched from Sprint to Xfinity Mobile and is paying $12 for every 1 GB of data usage, with no additional charges other than the phone payment itself. Having switched to Google Fi from Sprint earlier this year, I had planned on adding her to my plan upon the termination of her contract, but Xfinity Mobile is actually an even better deal because Google Fi pairs a $15 plan charge along with a $10 per GB data rate. You can add family members for just $10 more )rather than another $15), but it would have cost $20 to add my wife to my plan, whereas Xfinity charges just $12.

With such a compelling price (using Verizon’s network), it is no wonder that Comcast last quarter added more post-paid mobile subscribers than AT&T and Verizon combined. Charter is set to launch a similar service later this year, also using Verizon’s network (pricing not yet available), and I would suspect they will see quite a bit of traction at that point. In fact, with Comcast and Charter in attack mode, it is easier to see why Spring and T-Mobile might think they can get regulators to bless their merger. The big cable companies, along with Google, are truly strong competitors in the marketplace.

And there is the constant merger talk involving Charter, whether they be the buyer or the target. Talks with Verizon and Sprint supposedly dic not progress too far last year, but as a large triple play operator without a dedicated mobile or content business, it is not hard to understand why Charter could continue to be a player in the M&A market (thus far they have simply rolled up a bunch of regional cable companies).

Simply put, Comcast would fetch $40 per share if it just traded at 15 times annual free cash flow, and they have a fairly diverse business as it stands, even without buying Sky. Investors are worried about them overpaying in the M&A world, but the current price seems to account for those fears already. And with Charter stock now trading at a fair price, the risk-reward appears very favorable given that they have optionality in terms of their mobile offering, broadband pricing, and continued M&A activity.  For the intermediate to longer term, I do not see material downside for either stock, and 20% gains would not surprise me.

Investors should also take a look at T-Mobile, now that they are going to try to get a Sprint deal done officially. The stock initially bounced well above $60 on the news, but has faded back into the mid 50’s. They are performing best in the mobile world right now and the stock is not expensive. It looks like it could be a case of “heads, we win” (continued strong operating performance going at it alone, and “tails we win big” (the deal with Sprint has massive synergies) situation.

Full Disclosure: Certain clients of PCM were long CHTR, GOOG, TMUS, VZ, and Sprint debt at the time of writing, but positions may change at any time without notice

Big Question Mark for Facebook: Profit Margins (Not Advertiser Behavior or User Engagement)

There has been a lot of commentary in recent days about how user engagement will change, if at all, in the wake of Facebook’s user data privacy hiccups, as well as how advertisers will react and whether they will shift dollars to other social media platforms. I actually do not think either one of those metrics will materially change in the coming months. What is more important in my eyes is how Facebook’s margin structure could be permanently different in 2018 and beyond.

Sure, there will be some users who stop using Facebook and blame the recent issues, but those users were probably not using the platform much to begin with, and as with most things, people tend to have a short memory. Diners typically return to restaurant chains even after illness outbreaks and shoppers did not abandon Target or Home Depot after massive credit card data breaches.

I also would not expect material advertiser migration. It reminds me of the NFL ratings drama over the last season or two of professional football. Television ratings have declined, in part due to an abundance of games (Monday, Thursday, Sunday), more viewing options that are not easily tracked by Nielsen (streaming services, mobile apps, etc), and more competition for eyeballs (Netflix, etc), but the NFL is quick to point out that despite lower ratings, NFL telecasts still get more viewers than most every other television program. As a result, if you want to allocate ad dollars to TV, the NFL will remain one of the best ways of doing so.

The same should be true with Facebook. If both the user base and the average time per day spent on the app drop a few percentage points, Facebook will not lose its spot as one of the best ways to reach consumers on social media.

The bigger question from an investor standpoint is what Facebook’s margin structure looks like going forward. More specifically, how much expenses are going to rise and whether those costs are on-time or permanent. I suspect they will rise dramatically and will be permanent. After all, up until recently the company really just built the platform, turned it on, and let anybody do pretty much whatever they wanted with users and their data. It is obvious now that in order to maintain trust and their dominant position in the marketplace, they are going to have to [police the platform on an ongoing basis and limit the exposure to bad actors. This will cost money, lots of it, and will not bring in any incremental revenue. As a result, profit margins will fall and stay there, in my view.

This is critical for investors because the stock’s massive run-up in recent years has been due to a growing user base leveraging a scalable cost base. Facebook’s EBITDA margins grew from 48% in 2013 to 57% in 2017, and the stock price more than tripled. That margin expansion is likely to reverse beginning this year, to what extent remains unknown. Could those 9 points of margin leverage be recaptured by rising expenses of running the platform? I don’t see why not.

In that scenario, investors may no longer be willing to pay 10-11x forward 12-month projected revenue for the stock, which has been the recent range. If that metric instead drops to 8x (~$149 per share), it will have implications for the stock (currently fetching $160) even if advertisers and users stay completely engaged with the platform.

Full Disclosure: No position in FB at the time of writing, but that may change at any time

Facebook Could Become Solid GARP Play If Near-Term Pressures Continue

Facebook (FB) stock debuted less than six years ago at $38 per share and went through two very distinct sentiment shifts. The current environment, as the company faces pressure from multiple sides to better control use of its massive platform, could very well mark yet another shift.

In May 2012, Facebook IPO’d and flooded the market with stock, so much so that anyone could buy shares at the offer price. Investors were skittish that the company could move quickly to capitalize on the move from desktop to mobile usage and the stock quickly fell into the teens. That turned out to be one of the best growth stock investment opportunities in recent memory, because back then very few people understood just how much money the company would earn in just a few short years.

For instance, what if you knew that Facebook would grow revenue from $5 billion in 2012 to $27.6 billion by 2016, and that free cash flow would go from negative to $4 per share that year? Well, the stock probably never would have traded under $20 and I would bet that investors would have gobbled up every IPO share they could at $38 each.

That was very reminiscent of the Google IPO, which many people thought was wildly overpriced, only to be shocked a few years later when the company’s profits made the IPO price look like an enormous bargain (in hindsight only, of course).

As a result of huge profit growth, sentiment in Facebook has shifted dramatically in recent years and the stock had surged to $176 per share by the end of 2017, as free cash flow reached nearly $6 per share last year. While not overpriced necessarily, the bar has certainly been reset quite high, and therefore Facebook is more susceptible to near-term problems, such as how they are controlling the use of their user data and advertising platform.

The chart above shows the entire history of Facebook’s public stock performance and therefore the recent decline barely registers as a blip. If we look at the last year, we see that the shares have largely been moving sideways, and the recent drop is only about 15% from the highs:

So are the shares getting close to an attractive level? It likely depends on two factors; what valuation methodology you use, and whether you think the company can continue to grow per-share cash flow, or if future growth will be hampered by user base maturation and increased costs associated with policing the platform more heavily.

My base case is that they grow, but at materially slower rates, and margins come down some but remain quite high. As far as valuation, I prefer to use free cash flow per share, but I deduct non-cash, stock-based compensation. That metric for 2017 came out to roughly $4.65 per share (versus $5.91 if you ignore SBC). My estimate for 2018 is roughly $6.50 per share, but I realize there is risk in this figure because we really don’t know how much expenses are going to increase in the face of current political and social pressures.

For Facebook to get into the sweet spot as a GARP (growth at a reasonable price) investment, I would have to see a multiple of 20-25x free cash flow less stock-based compensation. On my 2018 estimates, it equates to $131-$164 per share. The current quote, after a 5% drop today, is $163 per share. In other words, FB stock is arguably now finding itself in GARP territory.

Given that near-term sentiment could very well accelerate to the downside, and considering that modeling 2018 growth rates of 35% in both revenue and free cash flow (the current consensus) are probably skewed to the aggressive end of the spectrum, I would probably want to pay less than the current price. However, if the stock reaches the midpoint of my 2018 range ($150-ish), it could very well make for a strong GARP investment from my vantage point.

Full Disclosure: No position in FB at the time of writing, but positions may change at any time 

 

Amazon Shares Pierce $1,430 And Sit Firmly Above 3x 2018 Forecasted Revenue

Valuing shares of Amazon (AMZN) has always been a difficult task since the company does not at all care about short-term profit margins. Investors are left with trying to estimate, based on the company’s various businesses, how large each will get and what type of margins will likely be achieved once each reaches maturity.

Of course, such an approach becomes nearly impossible when you have no sense of which businesses Amazon will choose to enter over time (or maybe the better question is which they will “not” enter). Traditional retail was one thing, but now with cloud services and advertising revenue, margins are going to be all over the map.

I recently trimmed many of my clients’ positions, as I have done once or twice since I made the investments beginning in 2014. My methodology has been inexact, to account for the aforementioned issues regarding Amazon’s various ventures, but it generally involves looking at AMZN on a price-to-sales basis and then seeing what margin/multiple assumptions are baked into such valuations. For instance, if you think they will ultimately earn a 10% profit margin at maturity, you might be willing to pay 20 or 30 times normalized profits, which would equate to 2-3 times annual revenue.

Given the company’s growth, my personal view is that anything up to 3x revenue is at least somewhat reasonable, as I don’t see margins going above 10% given the company’s desire to remain value-based in the eyes of consumers, and anything over 30x profits for a growth company makes me nervous. And if someone argued that they will never reach 10% margins and a 30x multiple is too high, I can totally understand that view. I just think some valuation flexibility is warranted given that Bezos might actually get as close as anyone in business to total world domination.

So below I have posted updated graphs that show Amazon’s stock price over the last two decades or so (not very helpful when trying to evaluate the valuation), as well as their year-end price to trailing 12-month revenue ratio (far more helpful in doing so). Note: the 2018 data points are based on today’s stock price and consensus 2018 sales estimates.

As you can see, AMZN stock hovered around the 2.0x price-to-sales ratio level between 2004 and 2014, with a range of 1.5x-2.5x or so. In recent years, as momentum stocks have led the market higher, that number has surpassed 3x and currently sits around 3.2x.

Given that position sizing in portfolios is always important to me, this graph tells me that now is not a bad time to trim AMZN. Trading above 3x revenue would seem to indicate that investor sentiment is quite high. There may be good reasons for that, of course, but as the company gets bigger and bigger, its growth rate is sure to slow. In fact, in order to grow by the 29% rate that Wall Street analysts are expecting in 2018, total sales need to rise by a stunning $51.5 billion. That very well might happen (and acquisitions like Whole Foods will only help), but when growth slows to only 10 or 15%, investors might not want to pay 3.2x revenue any longer. In my mind, anything above 3.0x tells me to tread carefully.

What do you all think? What kind of profit margins do you think AMZN will earn at maturity (i.e. when its growth rate is in-line with the average company)? What multiple of revenue seems right to you?

Full Disclosure: Long shares of Amazon at the time of writing (even after selling a chunk at $1,400 recently), but positions may change at any time