Shareholder value can be proved to increase with Business Technology

[andy mulholland]

We have had a series of threads around new business models, downturns, etc so here is a linking piece courtesy of www.breakingviews.com on Amazon and the 'Kindle Premium'

the question was what is the Kindle - an outstanding example of using new technology well in terms of creating a new product/market and CRM 2.0 - worth in terms of the share price.

Answer is that Amazon capitalisation contains a $9bn premium (equals 20 times earnings) over the WalMart capitalisation which is based on relative strong retail valuation at 14 times earnings. The article strips this back to being the expected impact of the worth of Kindle on Amazon business in adding $240 to 330 million in earnings at relative low risk in the next year which would return the ration is being high end retail. But with the potential for each Kindle to add cross sale in the longer term.

the model is based on the value created by the iPod to Apple, so there is the second example.

makes a compelling case for Business Technology over IT doesn't it!

andy

[Chris Yapp]

Andy,

Welcome back.
I share your enthusiasm BUT>>>
What needs to be shown is that this is sustainable and not a bubble in the current climate.
Your argument is exactly that made by Hedge funds and Private Equity 2 years ago to justify some extraordinary evaluations. What is it ( ownership of unbreakable patent, high cost of market entry etc) that means that teh valuation multiple will not evaporate as quickly as it has grown.
Back in 2000, valuations on free email services were based on $15,000 per registered user as the value to the service provider. In less than two months it fell to less than $1000.
These kinds of multiples in the past have not been sustainable for most sectors of the economy. Conventional wisdom would suggest we are facing a tech crunch.
If we can show why it really is different this time we have a story.
At the height of the .com bubble valuations of many businesses were on multiples of their losses and numbers of eyeballs despite no clear route to profitability. Not with Amazon but with a number of Web 2.0 propositions I am sceptical, but convinceable...

[andy mulholland]

Hi Chris

it is a good point and one that i looked at too, in this case let me break out the points that were in this valuation;

Amazon sell Kindles at a profit of around 30% so there is little to no uncovered investment, the calculation on sales assumes that a kindle owner buys two books a month at 15% margin, this is half the current level they are seeing from Kindle owners.

all these figures are half of the achievement of Apple with iPod and iStore at an equivilent stage therefore thought to be a very conservative valuation based on a clear monatorisation model.

the other upside not included is the cross sell market which in Apple has turned out to be huge.

so in summary nothing is free, investment is minimal, all expected results have been halved before inclusion,and the model is based on extending the existing brand and business model.

[Chris Yapp]

Andy,

In today's Computer weekly there is an interesting fact. the current revenue for facebook per profile is$2 per profile per year. That doesn't seem to me to look sustainable. Not least click through from advertising is lower on social network sites than general web (57% compared to 79%) and purchase is lower ( 11% compared to 23%).

I think you are right that Amazon looks a better bet than most, esoecially some of the social networking sites for instance because there is real revenue...

andy mulholland said:

Hi Chris

it is a good point and one that i looked at too, in this case let me break out the points that were in this valuation;

Amazon sell Kindles at a profit of around 30% so there is little to no uncovered investment, the calculation on sales assumes that a kindle owner buys two books a month at 15% margin, this is half the current level they are seeing from Kindle owners.

all these figures are half of the achievement of Apple with iPod and iStore at an equivilent stage therefore thought to be a very conservative valuation based on a clear monatorisation model.

the other upside not included is the cross sell market which in Apple has turned out to be huge.

so in summary nothing is free, investment is minimal, all expected results have been halved before inclusion,and the model is based on extending the existing brand and business model.

[andy mulholland]

hi Chris

i have always said that the whole world cant be based on advertising revenue! - see my blog

thats why i shifted my focus to the valuations being used for capitalisation
take a reall good look at GE Veriwise to see how a service based on combining sensors, gps and rfid has in three years created a new globl business for GE. these are the kind of things that are an integration of technology and business that really provides value!

regards andy

[andy mulholland]

since writing this i have also been able to un earth the contribution that GE Veriwise has made, again a great example but in a B to B market around transport operations.