once more on Amazon (AMZN)

I’ve been doing a lot of thinking/daydreaming/musing about AMZN lately.  I don’t know quite why, since I’m probably not going to buy the stock.  But my mind apparently doesn’t want to let go.

The latest thing to pop into my head is something I’d seen on the Value Line page for the stock but hadn’t paid much attention to.  It’s that:

–during the bounceback from the 2000 collapse of the Internet Bubble, AMZN shares tended to trade at about 30x cash flow.  In the recovery from the Great Recession, its cash flow multiple expanded to 50x.  Both are mind-boggling figures, to be sure-the second more so.

What could cause this gigantic multiple expansion, particularly during a period when investors were scared out of their wits and therefore more cautious than usual?

…possibly a better appreciation of the transformative nature of the internet and AMZN’s premier position as online merchant.  Cash generation from operations continues to grow at about 25% a year, virtually the same as before the GR, despite the company’s larger size.  That’s both a plus and a minus.  It’s an heroic achievement to maintain growth in the face of ballooning size.  But that’s usually something that keeps the multiple from contracting, not that causes it to expand by 60%.

…so I can’t help thinking that a lot of the favorable move is due to the Fed’s super-accommodative money policy.

Which gets me to my point.

Let’s assume that the economy’s release from intensive care and a return to normal money policy cause AMZN’s cash flow multiple to shrink to a “mere” 30x.  In simple terms, this means the stock should lose 40% of its value–maybe not all at once, but ultimately.  Continuing relentless growth in cash flow could cushion the fall somewhat.

Since the end of January, when the Fed made it clear it would continue baby steps toward normal despite weakening economic indicators, AMZN shares have pretty much made the entire reverse movement already–they’ve lost 25% of their value in a flat market.  They haven’t been alone, either.  Every other story stock has fallen this much–or more.

This thought makes me want to speed up my efforts to dig through the rubble.

 

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