Yesterday, we talked about how in general, companies’ valuations follow the classic “fading return” model where it is assumed that eventually, all returns fade to the cost of capital. Yet ValuAnalysis research confirmed that a growing number of disruptive companies are not following this path – instead their economic rent (the ratio of free cash flow to economic assets) increases over time rather than decreases and is described as the “Antifade”.
One of those companies is Amazon. The company’s operating rent has been stable during the past decade, i.e. the company is not yet fading. The company generates over $20 billion of normalized net Free Cash Flow and trades on about 78x this amount (2020). However, Amazon is all about leverage. The current multiple is more than justified based on the economic free rent that it produces. The more Amazon is able to repel its fade, the higher the multiple is likely to stay. Crucially, “fade-beating” is at the heart of the company’s execution.
The research firm, ValuAnalysis, believes that based on Amazon’s free cashflows and a 20-year competitive advantage, the current multiple implies a fairly stable return (17.3% and 17.5% for the next two decades, respectively) and a marked step down in revenue growth from one decade to the next (12% and 7.5%, respectively).
Tomorrow, we’ll take a look at Tesla.