Beyond Earnings

INTRODUCTION

THE PRICING PUZZLE: FOUNDATIONAL HOLT CONCEPT AND A KEY TO BETTER VALUATION

On May 13, 2017, the Financial Times reported that “investors wiped $4.6bn from the market value of the U.S. department store sector in the space of two days, as concern mounted about sliding sales and the effects of online competition.” U.S. department stores suffered an astonishing fall in market value of over 16% in two days.¹ Who is responsible for this vaporization of shareholder value? All fingers were pointed at Amazon, the biggest online retailer, which accounts for 5% of retail spending in the United States, and is presently the world’s fifth most valuable company.²

In 1994, Amazon was just a fledgling start‐up. The Internet was beginning to take off as a vehicle for commerce, and growth rates were forecast to be into the hundreds of percent. Seeing an opportunity, Jeff Bezos launched Amazon as an online retail bookstore from his garage. Over the last decade, Amazon has grown its revenue to almost 13 times from where it started for a compound annual growth of 29%.³ To say it is disrupting traditional retailers and ways of doing business is an understatement.

Amazon’s share price has increased 63,990% since its IPO on May 15, 1997, versus 300% in total return for the S&P 500 over the same period.⁴ Amazon surpassed the mighty Wal‐Mart in 2015 as the most valuable retailer in America. Despite this stellar performance, Amazon regularly posts poor earnings numbers and a subpar return ...