Valuation Amazon

Topics: Weighted average cost of capital, Generally Accepted Accounting Principles, Corporate finance Pages: 5 (1071 words) Published: April 13, 2014
US Company

I - BUSINESS SUMMARY, Inc. (Amazon), incorporated on May 28, 1996, is an American company listed on the Nasdaq. It operates retail web sites and provides programs that enable third parties (3P) to sell products on its web sites. The Company sources and sells a range of products to its customers and also manufactures and sells Kindle devices. It operates in two segments: North America and International. In May 2012, Amazon acquired Kiva Systems, Inc.


Business Plan
We based our business plan on the past annual reports of Amazon and on the Market/Equity research of JP Morgan and Bloomberg as well as their forecasts. 2011 was an important tipping point in the evolution of Amazon: “Our millions of third-party sellers had a tremendous holiday season with 65% unit growth and now represent 36% of total units sold.” - Jeff Bezos (Amazon CEO), that same year. The mix shift to 3P continues today to change the Company from a retailer to a technology company and marketplace operator. Big investments were made to do so. Capital expenditure increased by 85% in 2011 and 109% in 2012 as you can see in Appendix 4, which can possibly explain the important D&A in 2011-2012.

The decrease in EBIT must therefore be put into perspective. Whereas Wall Street reacted to the 2011 Q4 results of Amazon, sending the shares down 10-12%, the stable 40% growth of Gross Profit in 2012 led to a stock appreciation of 45% (vs. +9% for the S&P 500). Moreover, 3P units grew 50% and 3P-FBA units grew a huge 78%. This shows the popularity of the FBA (Fulfillment By Amazon) program with sellers, fueled by strong consumerist buyers, and therefore justifying the FBA investment. On the other hand, analysts estimate that 3P sales should stabilize (moderate growth in 3P sales from 51% in 2012 to 37% in 2013), first-party margins could compress on greater international mix and more devices and finally Amazon could face tougher comps.

We are lowering the Revenue and Gross Profit growth rates to be more in line with consensus and we believe that by doing so we limit upside to our estimates. We continue to believe that Amazon will gain share of overall E-Commerce and become a much bigger company over time. However, we think that the risk/reward at current levels is more balanced given slower unit trends and what we believe will be the effective Gross Profit growth rate in 2013. We estimate a 2013 Revenue growth of 24%, a modest deceleration from 27% growth in 2012. However, we expect Gross Profit to decelerate more significantly to 31% in 2013 from 40% growth in 2012. Here are our yearly estimates and our Business Plan:

As the growth in Revenues is very high (27% in 2012), we faded the growth until 2020 (three-stage growth) to reach a long-term 4% growth rate which takes into account the inflation rate in the US in 2017 according to the IMF and the fact that Amazon outperforms its industry. Furthermore, as described before, this shift in activity can suggest a solid future growth as Amazon evolves even though the Company is of a considerable size. That is why the fading period is done on 8 years. The Gross Profit margin is stabilized at 30% from 2016 onwards. We consider that 3P services are less costly and that consequently COGS will decrease compared to the sales. EBIT should have a first stage of positive growth until 2015 as the investment expenses decrease, and should reach its previous margin (i.e. 4-6% of sales). The EBIT is then stabilized at 5,4%. Net Profit estimates are provided by Thomson Reuters.

Depreciation & Amortization and Capital Expenditure are estimated by Bloomberg and adjusted in order to consider the cyclical aspect of the investments:

Finally, when a company is mature, it doesn't need as much growth Capex to continue on its current path as it did when it was less mature. It only needs enough to offset how much they're losing through...
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