How many items does Amazon need to sell per day to justify market cap?

[ergospherical]

I'm perhaps not so interested in the "correct" answer but rather whether the methodology is valid. Let's say Amazon's market cap is ##\sim $2 \mathrm{T}##. The average item ordered off of Amazon is ##\sim $20##, and since they're about high-volumes & low-margins an estimate for the gross profit margin might be ##\sim 2 \%##, implying a gross profit per sale of ##\mathrm{GPS} \sim $0.40##.

If the total sales per year is ##\mathrm{N}## then annual gross profit is ##\mathrm{AGP} \equiv \mathrm{N} \cdot \mathrm{GPS}##. Assuming (!) this remains constant year-on-year, forever, then the present (discounted) value of this cash flow is\begin{align*}
\mathrm{PV} = \mathrm{AGP} \sum_{n=1}^{\infty} \dfrac{1}{(1+r)^n} = \dfrac{\mathrm{AGP}}{r}
\end{align*}where ##r \sim 0.1 \%## is the interest rate, i.e. ##\mathrm{N} = \dfrac{\mathrm{PV} \cdot r} {\mathrm{GPS}} \sim \dfrac{$2\mathrm{T} \cdot 0.1 \%}{$0.40} = 5 \mathrm{B}## products per year, or around ##14 \mathrm{M}## products per day! How is it for an estimate - at a glance this value seems a little too high?

 

[fresh_42]

Market capitalization includes way more than turnover. The obvious values are properties, all kinds of reserves, or brand. However, there is one highly weighted part that does not appear on the balance sheet: expectation. This not only includes the expectation of future profits but also traders' expectations of share prices. It is similar to money: the value of a single banknote is small in comparison to the promise that is printed on it.

 

[ergospherical]

However, there is one highly weighted part that does not appear on the balance sheet: expectation. This not only includes the expectation of future profits but also traders' expectations of share prices.

Is there a way to quantify this factor? Assuming one could re-do the calculation to include all the other assets and subtract all the other liabilities on the balance sheet, and hopefully find a better value for ##\mathrm{PV}##, how would you adjust this value for the future expectation of the stock (and what would this even mean in the context of my assumption that the cash flow is a perpetuity)?

 

[fresh_42]

The most prominent figure is the price-earnings ratio. But there are more to consider:
https://en.wikipedia.org/wiki/Price–earnings_ratio#Related_measures

 

[Office_Shredder]

I think the biggest issue is that you are ignoring enormous product lines that Amazon offers. I think AWS is something like half their profit?

 

[BWV]

Leaving AWS and any other specific company aside, you are asking about the valuation of low margin, high turnover businesses. The standard method is called a DuPont Analysis, which decomposes return on shareholder (book) equity(ROE). ignoring financial leverage for simplicity, then ROE = Return on Assets (ROA)

total firm value is invariant to financial leverage at this level of abstraction, so ignoring leverage is OK
then:
ROA = profit margin x asset turnover

profit margin = net income / revenue
asset turnover = revenue / average total assets

so ROA = net income / average total assets

getting to a market cap would involve estimates of future earnings growth

so the PV factor in perpetuity is 1/(r-g) not 1/r (g<r)

and r in your example is too low needs to reflect an equity risk premium, say r = 6%https://en.wikipedia.org/wiki/DuPont_analysis

 

[Office_Shredder]

I guess reading the whole post, you said they would need to sell 5 billion items a year at 20 dollars an item. That's 100 billion dollars of sales a year. They actually do about double this

https://fortune.com/2021/10/29/amazon-sales-growth-stock-price-retail/

The 49.9 billion dollars in online sales are for one quarter.