A Financial and Strategic
Analysis of Amazon.com Inc.
Abstract
The main objective of this research project is to pick a company of my choice, preferably, a public company whose financial data are easily available on the Internet to conduct a thorough investigation of the company based on the most recent financial statements available (income statement, balance sheet and financial statement) and submit my finished project in the form of answers to the following four questions: 1. Provide a brief history of the company, 2. Analyze the overall financial health of the company according to your research in the accounts financial. Is the price of the shares overvalued or undervalued? 3. Choose an important competitor of your company. How is your company going against its main competitor in the industry? 4. Would you recommend this action to a new investor?
A Brief History of Amazon.com
Amazon was founded by Jeff Bezon and was first launched in 1995 as an online business that only sold books. However, Jeff had a vision of the explosive growth and domination of the company’s e-commerce. I knew from the beginning that I wanted Amazon to be “a store of everything” – says Jeff Bezon.
“Amazon” was not the company’s original name. Jeff originally wanted to give the company the dream signal name “Cadabra”. However, Toss Tarbert, Amazon’s first lawyer, convinced Jeff that the name sounded very similar to “Corpse”, especially over the phone. Therefore, Jeff finally chose to name the company after the largest river in the world, “Amazon”, because of his vision of making the company one of the largest on the planet earth.
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Amazon.com, Inc. is dedicated to retail sales of consumer products and subscriptions in North America. The company operates through three segments: North America, International and Amazon Web Services (AWS). It sells merchandise and products purchased for resale from vendors as well as those offered by external vendors through physical stores and retail websites such as Amazon.com, Amazon.ca, Amazon.com.mx, amazon.com.au, Amazon. com.br, Amazon.cn, amazon.fr, Amazon.de, Amazon.in, Amazon.it, amazon.co.jp, amazon.nl, amazon.es, and Amazon.co.uk. As of September 4, 2018, Amazon.com, Inc. had opened its third Amazon Go store in Seattle. The company also manufactures and sells electronic devices, including Kindle electronic readers, fire tablets, fire TV and eco devices; and it provides Kindle Direct Publishing, an online service that allows independent authors and publishers to put their books in the Kindle Store. In addition, it offers programs that allow sellers to sell their products on their websites, as well as their branded websites; and programs that allow authors, musicians, filmmakers, application developers, and others to publish and sell content. In addition, the company provides computer services, archiving, database and other AWS services, as well as compliance services, publication, digital content subscriptions, advertising, and joint-label credit card agreement services. In addition, it offers Amazon Prime, a subscription program, which offers free shipping of various items; access to unlimited streaming of movies and TV episodes; and other services. It serves consumers, sellers, developers, businesses and content creators.
Below are details of the company:
Name: Amazon.com, Inc. Ticker: AMZN Exchange: NasdaqGS Founded: 1994 Market Cap: $872,715,309,477 Shares outstanding: 487,741,189
Analyze the overall financial health of the company based on your research on the financial statements (6 points). Is the stock price overvalued or undervalued? (6 points).
According to CNBC, Amazon’s stock went up more than 6 percent in after-hours trading.
Here are the most important numbers:
Revenue: $60.5 billion vs. $59.83 billion, as estimated, according to Thomson Reuters
EPS: $3.75 per share*
AWS revenue: $5.11 billion vs. $4.97 billion, as estimated, according to Fact Set
To verify the information above, and to analyze the financial health of amazon.com I used two broad categories:
Profitability
Liquidity
Growth Profitability and Financial Ratios for Amazon.com Inc
Financials
2013-12
2014-12
2015-12
2016-12
2017-12
Revenue USD Mil
74,452
88,988
107,006
135,987
177,866
Gross Margin %
15.7
17.4
20.5
22.1
22.9
Operating Income USD Mil
745
178
2,233
4,186
4,106
Operating Margin %
1
0.2
2.1
3.1
2.3
Net Income USD Mil
274
-241
596
2,371
3,033
Earnings Per Share USD
0.59
-0.52
1.25
4.9
6.15
Dividends USD
Payout Ratio % *
Shares Mil
465
462
477
484
493
Book Value Per Share * USD
19.8
22.23
26.39
37.28
50.95
Operating Cash Flow USD Mil
5,475
6,842
11,920
16,443
18,434
Cap Spending USD Mil
-3,444
-4,893
-4,589
-6,737
-11,955
Free Cash Flow USD Mil
2,031
1,949
7,331
9,706
6,479
Free Cash Flow Per Share * USD
0.84
2.33
11.41
17.76
14.71
Working Capital USD Mil
1,645
3,238
2,575
1,965
2,314
Key Ratios -> Profitability
Margins % of Sales
2013-12
2014-12
2015-12
2016-12
2017-12
Revenue
100
100
100
100
100
COGS
84.3
82.62
79.49
77.86
77.13
Gross Margin
15.7
17.38
20.51
22.14
22.87
SG&A
5.72
6.61
6.54
7.11
7.73
R&D
8.82
10.42
11.72
11.83
12.72
Other
0.15
0.15
0.16
0.12
0.12
Operating Margin
1
0.2
2.09
3.08
2.31
Net Int Inc & Other
-0.32
-0.32
-0.62
-0.22
-0.17
EBT Margin
0.68
-0.12
1.47
2.86
2.14
Profitability
2013-12
2014-12
2015-12
2016-12
2017-12
Tax Rate %
31.82
60.59
36.61
20.2
Net Margin %
0.37
-0.27
0.56
1.74
1.71
Asset Turnover (Average)
2.05
1.88
1.78
1.83
1.66
Return on Assets %
0.75
-0.51
0.99
3.19
2.83
Financial Leverage (Average)
4.12
5.07
4.89
4.32
4.74
Return on Equity %
3.06
-2.35
4.94
14.52
12.91
Return on Invested Capital %
2.55
-0.68
3.31
8.42
7.09
Interest Coverage
4.59
0.47
4.42
9.04
5.49
Key Ratios -> Growth
2013-12
2014-12
2015-12
2016-12
2017-12
Revenue %
Year over Year
21.87
19.52
20.25
27.08
30.8
3-Year Average
29.6
22.78
20.54
22.24
25.97
5-Year Average
31.18
29.42
25.62
23.12
23.83
10-Year Average
30.33
29.1
28.84
28.93
28.2
Operating Income %
Year over Year
10.21
-76.11
1154.49
87.46
-1.91
3-Year Average
-21.02
-44.04
48.93
77.78
184.66
5-Year Average
-1.85
-32.07
8.11
32.73
43.45
10-Year Average
10.65
-8.66
17.85
26.5
19.98
Net Income %
Year over Year
297.82
27.92
3-Year Average
-38.04
105.3
5-Year Average
-15.74
-12.35
30.31
10-Year Average
22.75
5.2
28.71
20.34
EPS %
Year over Year
292
25.51
3-Year Average
-38.45
102.51
5-Year Average
-16.91
-13.15
29.03
10-Year Average
22.12
4.06
26.97
18.57
Key Ratios -> Cash Flow
Cash Flow Ratios
2013-12
2014-12
2015-12
2016-12
2017-12
Operating Cash Flow Growth % YOY
30.98
24.97
74.22
37.94
12.11
Free Cash Flow Growth % YOY
414.18
-4.04
276.14
32.4
-33.25
Cap Ex as a % of Sales
4.63
5.5
4.29
4.95
6.72
Free Cash Flow/Sales %
2.73
2.19
6.85
7.14
3.64
Free Cash Flow/Net Income
7.41
-8.09
12.3
4.09
2.14
Key Ratios -> Financial Health
Balance Sheet Items (in %)
2013-12
2014-12
2015-12
2016-12
2017-12
Cash & Short-Term Investments
30.99
31.95
30.27
31.15
23.6
Accounts Receivable
11.87
10.3
9.81
10
10.03
Inventory
18.45
15.23
15.65
13.74
12.22
Other Current Assets
Total Current Assets
61.32
57.48
55.73
54.89
45.84
Net PP&E
27.26
31.13
33.37
34.91
37.21
Intangibles
8.22
7.49
6.91
5.56
12.73
Other Long-Term Assets
3.2
3.9
3.99
4.64
4.21
Total Assets
100
100
100
100
100
Accounts Payable
37.68
30.2
31.17
30.35
26.36
Short-Term Debt
Taxes Payable
Accrued Liabilities
16.65
17.99
15.87
16.47
13.84
Other Short-Term Liabilities
2.89
3.34
4.76
5.72
3.88
Total Current Liabilities
57.22
51.53
51.8
52.54
44.08
Long-Term Debt
7.95
15.16
12.58
9.23
18.84
Other Long-Term Liabilities
10.56
13.6
15.17
15.12
15.97
Total Liabilities
75.73
80.29
79.55
76.88
78.9
Total Stockholders’ Equity
24.27
19.71
20.45
23.12
21.1
Total Liabilities & Equity
100
100
100
100
100
Liquidity/Financial Health
2013-12
2014-12
2015-12
2016-12
2017-12
Current Ratio
1.07
1.12
1.08
1.04
1.04
Quick Ratio
0.75
0.82
0.77
0.78
0.76
Financial Leverage
4.12
5.07
4.89
4.32
4.74
Debt/Equity
0.53
1.16
1.06
0.79
1.37
Key Ratios -> Efficiency Ratios
Efficiency
2013-12
2014-12
2015-12
2016-12
2017-12
Days Sales Outstanding
19.93
21.29
20.53
19.81
22.06
Days Inventory
39.08
39
39.78
37.41
36.59
Payables Period
82.72
78.42
79.08
78.78
79.72
Cash Conversion Cycle
-23.71
-18.14
-18.77
-21.56
-21.06
Receivables Turnover
18.31
17.15
17.78
18.42
16.54
Inventory Turnover
9.34
9.36
9.18
9.76
9.97
Fixed Assets Turnover
8.27
6.38
5.52
5.34
4.56
Asset Turnover
2.05
1.88
1.78
1.83
1.66
Source: Amazon.com Inc. Morningstar Rating
For the benefit of this analysis, I decided to use the 2017-12 financial information to analyze the financial health of Amazon.com, Inc.
The gross margin of Amazon.com, Inc. is 22.9%. This means that the company will have more money to pay for operating expenses like salaries, utilities, and rent.
According to Investopedia, Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) is a good indicator of a company’s financial health status, as it assesses the performance of a company without having to take into account financial decisions, Accounting decisions or various fiscal environments. With a positive EBITDA of 2.14%, Amazon.com, Inc. is profitable at the operational level; which means that Amazon can sell its products higher than they cost. The Net Margin or Net Profit Margin in 2017-12 is 1.71%. This profit margin indicates that for every $1 of income Amazon.com gains $0.0171 in net earnings. The Return on Assets for the 2017-12 is 2.83%. There were some problems due to the fluctuation of ROA. In 2013-2012, the ROA was slightly higher and dropped to negative in 2014-2012. In 2015 and 2016 he appreciated and fell back in 2017-12. With a Current Ratio of 1.04%, investors should not worry much but should be cautious because if the current ratio that falls below 1.00%, the company will be unable to pay its current liabilities with its current assets. However, for now, with the 1.04% CR, Amazon.com is financially healthy for about 10 to 12 months. As you can see, Amazon.com Quick Ratio is 0.76%. This means the Amazon.com will be unable to pay off all of her current liabilities with quick assets they currently have available.
Is the stock price of Amazon overvalued or undervalued?
Amazon (AMZN) sells goods and products purchased for resale from suppliers and third parties through retail websites such as amazon.com. Shopping 1-Click, Kindle Direct Publishing, Kindle, Fire tablets, Fire TV, Amazon Echo, and Alexa are some of Amazon’s pioneering products and services.
Amazon earned $ 4.02 per share and generated $ 121 billion of sales in the 12 months ended June 30, 2016. It is expected that the company will increase its profits at a rate of 50% over the next three to five years, and a faster growth is expected for the next two years. However, at 193.6 times the current EPS (earnings per share), AMZN’s shares appear to be clearly overestimated because, according to zacks.com, conventional wisdom states that a PEG index of 1 or less is considered good (at par or underestimated). growth). A value greater than 1, in general, is not so good (overvalued at its growth rate).
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The use of the PEG report to determine whether an action is undervalued or overvalued provides a clear assessment of a growing stock. The PEG ratio is calculated by dividing the price/earnings ratio by the expected growth rate of earnings over the next five years. Based on the company’s current EPS and expected earnings growth (50% per year) over the next five years, the current AMZN PEG index is 3.87. However, if we look at Amazon’s future value within two years, the AMZN PEG is more reasonable than 1.98.
Pick one major competitor of your company. How is your company performing vs its one major competitor in the industry? (4 points).
Walmart is one major competitor to Amazon.com. Inc. According to Leo Sun of the TMF SunLion, Walmart (NYSE: WMT) was once considered the “Death Star” of the retail market, as its department stores knocked down small retailers with lower prices. But today that title belongs to Amazon (NASDAQ: AMZN), which has interrupted smaller retailers with its huge online market.
Conventional wisdom suggests that despite recent improvements in its e-commerce ecosystem, Walmart remains stuck in the past and Amazon represents the future. Walmart shares have increased by around 40% over the last decade, but Amazon has jumped to almost 2,200% (The Money Fool). Therefore, it may seem obvious that Amazon is a better long-term investment than Walmart.
Walmart currently operates 11,718 stores in 28 countries with 65 banners. Whereas, Amazon owns the largest e-commerce market in the world. Walmart also runs an e-commerce ecosystem that generates $ 4.8 billion in sales in the last quarter of 2018, but represents only 4% of its main lines, while Amazon holds its customers in its ecosystem with Prime Membership (your premium subscription), offering discounts, free shipping, streaming media and other benefits for $ 119 a year for $ 13 a month.
Would you recommend this stock to a new investor? (2 points).
According to Ian Bezek of InvestorPlace, at the end of 2016, Amazon stock traded around $750 per share. In less than half a year, Amazon’s stock price has now run up to $1,000 per share. That’s a 33% increase in a short period.
As of today, October 27, 2018, amazon.com stock is at $1,642.81. In 2015 her stock went up over 127%, in 2016, it went up over 10%, and in 2017 it went up over 55%. The three years change is about 330% increase. To date, the stock is at over 6%.
In consideration of the above, I will recommend Amazon stock to a new investor based on three reasons:
Dominance: not only is Amazon putting other stores out of business, but it has continued to dominate anyone who tries to challenge them online. A proven fact is that 2017 Black Friday sales and promotions have helped the company claim between 45% and 50% of all online Black Friday sales, according to a new report from GBH Insights.
Amazon is not just a one-trick pony (a person or thing with only one special feature, talent, or area of expertise). With the obvious dominance in online retail that directly affect physical store retail, cloud and Amazon web services that is in partnership with many big companies, video and prime videos that are in competition with other companies like Netflix and the aggressive expansion in the grocery business like whole foods and also into the pharmacy industries, Amazon is well position to expand in many directions and keep their growth moving upward.
Amazon is a long-term investment. This is a type of stock that you can hold for a longer time. Amazon is using all its profit to reinvest and keep growing and keep dominating over almost all its competitors and extending that gap even further. This makes Amazon a very difficult company to dethrone let alone to even compete with.
References
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