My 1st Million At 33 – yes, you can do it too

Amazon just announced its quarterly profit at 78 million dollars, or 19 cents per share, with revenue jumping by 35% from a year ago to 2.88 billion. With 19 cents in quarterly profit, that is a current P/E of 111.

Here is my take after looking over its financial statements. The gross margin for AMZN is roughly 25%. For every dollar it sells, it earns about 25 cents (at least for 2006/2007). In order to get to 35% revenue jump, the operating expenses had to increase by about 27%. This is showing some economic leverage power, but not by much. If we assume that AMZN can continue to grow its revenue at 35% annually, and also increase its operating expense by 27% annually, one year from now, AMZN would have 2880 * 1.35 * 25% – 585 * 1.27 = 160 million quarterly profits. Projecting 5 years out with this hyper-growth, the income after 30% tax bite (but without interest) will go from the current 94.5 million to 907 million quarterly. The annual revenue will be about 52 billion. For a comparison, Walmart’s revenue is currently at 355 billion.

At the price of $85 dollar, or 34.8 billion market cap, assuming that AMZN will trade at a P/E of 20 in 5 years, that will be 72 billion market cap. Apparently, if the growth story upholds, there is still room for stock to double.

Unfortunately, everything is at best an assumption. Using a very good growth, law of compounding always work towards your favor. Company stocks always keep rising until the growth starts to slow or even go in reverse.

But at the minimum, the bulls are not so crazy at least on paper. Is this an internet dot com Act II, but simply better?