Monday, August 19, 2013

Amazon's Value Had Better Not Be Its Capital Equipment

Yglesias suggests that can be an valuable enterprise not by actually becoming profitable on a cash-flow basis, but as an ever-growing stockpile of valuable capital equipment. That's what they're spending a whole lot of their money on, and it's not like that stuff disappears at the end of the year. They still have it, and its value is part of the value of their business. So can Amazon live up to its valuation ($130 billion in market cap at present) as a whole lot of capital equipment?

No. Not even close. Amazon's price to book value ratio is about 15:1. In other words, their total assets minus their liabilities are one fifteenth of their stock price. If Amazon were liquidated tomorrow, shareholders would lose about 93% of their money. And if you look at the balance sheet, "Property, Plant, and Equipment" is about $7 billion -- a bit over one twentieth of what the company is worth. Amazon's cash on hand actually exceeds that. (For what it's worth, I don't know whether Amazon's warehouses and offices and such are company-owned -- my guess would've been that a lot of the property is rented, and you don't get to sell that.) So the proceeds from liquidating Amazon's capital equipment don't play any significant role in justifying the value of the company.

Which is as you'd expect. Capital equipment is illiquid -- you can't buy it, use it a bit, and turn around and sell it for near the purchase price. Especially bad in Amazon's case is that it's a one-of-a-kind business. If it had, say, two competitors who were trying to grow fast and become the dominant online retail juggernaut, maybe they'd bid against each other for Amazon's stuff and drive the price up to pretty close to the price of buying stuff new. But actually zero other companies are doing that, and if Amazon couldn't make a profit and had to liquidate, that'd strike people as a bad sign for the whole idea. Maybe some other companies could retool some of Amazon's stuff to their smaller mission, but they wouldn't be inclined to pay full price. So a lot of value would just be lost. 
Post a Comment