Final Project I 1

Southern New Hampshire University

FIN 330

Final Project I: Corporate Valuation Report

Sarai Sternzis
Final Project I 2

Amazon, Inc

Amazon, Inc (AMZN), founded by Jeff Bezos in 1994, is a world-leading online retailer

that offers an extensive line of goods and services using its prominent, convenient platform.

Amazon offers an unmatched broad selection of products from home goods, to streaming

services, jewelry, office supplies, and the list goes on. As part of its venture to new e-commerce

marketplaces, Amazon began manufacturing its own line of consumer electronic devices

including Kindle e-readers, Fire Tablets, Echo devices, and more. Among its broad line of

services, Amazon also offers TV and music streaming services to its customers. The most recent

development by Amazon to further grow its world-wide domination is the expansion to

pharmaceuticals.

Market

Among Amazon’s top competitors are industry giants Walmart, eBay, Google and Apple.

Amazon’s industry market share of U.S e-commerce retailers had reached a high of 45% in 2019

and is expected to increase by numerous forecasts (Statista, 2020.)

There are several key challenges Amazon is facing against its competitors. First,

Amazon’s successful model of third-party sellers also comes with its own set of problems;

counterfeit and unsafe products. With nearly 60% of its inventory sold in 2018 by third-party

sellers (The Street, 2019), Amazon is struggling to completely stamp out such products out of the

platform. Customers’ dissatisfaction and high costs of returns are two negative outcomes derived

from such issue. A second challenge to Amazon is its solely-online business model. Such model

is of a drawback to some consumers, particularly of older age, that prefer a brick-and-mortar

Final Project I 3

concept for their shopping experience, and may choose to shop at a physical local store for many

of the items that are also offered by Amazon.

Customer Base

The exceptionally wide range of products and services offered by Amazon allows for an

extensive market base, from individuals of all ages and income-classes, to independently owned

businesses and large corporations. Further to having a convenient platform and a broad selection

of goods and services, Amazon distinguishes itself from competitors by creating a culture of

listening to consumers and valuing their opinion. This customer-focused approach was a strong

force for Amazon in getting ahead of the market. A key characteristic to Amazon is its Prime

membership offering, that grants its paying subscribers with free, fast shipping and returns on

millions of products, exclusive deals and benefits, unlimited readings and more. The remarkable

revenue of 19.21 Billion in 2019 solely from Prime membership fees (Wikipedia, 2020) isn’t the

only gain for this particular offering; the consumer retention and habitual consumption that is

derived from the membership allows Amazon to stay a leading diversified online retailer against

its competitors.

Resources

The exceptionally broad array of goods and services offered by Amazon also requires a great

deal of resources. The third-party model Amazon is using requires it to carefully evaluate each

product that will be sold through Amazon’s platform. Amazon developed a methodic process in

which sellers have to present certain documents and forms prior to starting their own Amazon

store. Amazon fulfillment centers will handle the packing and shipping of products for third-

party sellers. This allows Amazon to inspect the items, and the sellers to sell in high volumes
Final Project I 4

they otherwise would not be able to. Another vital resource for Amazon that allows for fast

shipping is its broad physical presence. Amazon has 175 fulfillment centers around the U.S and

Europe with more than 150 million square feet of space. Having such a wide spread of

warehouses, Amazon is able to provide quick shipping and convenient returns for its customers.

Amazon also have retail stores in which customers can drop off returned items and. receive face-

to-face customer service assistance.

Market Trends

The biggest market trend and issue for Amazon is its lack of physical presence for

consumers to shop at in a traditional brick-and-mortar store. This risk is expected to minimize

with time, as there is a substantial market trend of shifting from traditional retail to e-commerce.

“Ecommerce sales are projected to increase from 1.3 trillion in 2014 to 4.5 trillion in 2021 This

would mean a threefold growth over a 7-year span. Ecommerce penetration rates are forecast to

increase from 15 percent in 2020 to 25 percent in 2025” (Oberlo, 2020.) The Coronavirus

pandemic in 2020 has undoubtedly hurried the shift from physical to online retail. Many

consumers around the world who never shopped online before were exposed for the first time to

this new way convenient (and safe) way of shopping. This is a highly advantageous trend for

Amazon that will further contribute to its market domination.

Financial Highlights

To assess the performance and financial health of Amazon, Inc, an analysis of the enclosed

financial evaluation will be conducted. The evaluation includes fiscal year 2017-2019. Overall,

Amazon has demonstrated good financial stability with continuous revenue and income growth.

From 2017 to 2019, it has grown its revenue by 50% and its net operating income by over 60%.
Final Project I 5

This is a highly favorable trend to every corporation, but considering the large volume Amazon

has- this growth pace is truly astonishing.

Another assessment metric that demonstrates Amazon’s profitability is its Return on

Equity ratio. Such ratio evaluates how well a company uses its investment assets to generate

profits. From a low 2.6% in 2017, to 30.2% in 2018 and a high 54.1% in 2019- Amazon

demonstrated significant profits to after all expenses have been met.

EPS ratio is an indicator to a company’s profitability computed by dividing net income

with number of outstanding share. With a most recent year-end EPS of 22.9% in 2019, Amazon

shareholders saw a growth of 241% in EPS since 2017 (with a 6.1% EPS.). This growth in EPS

is a favorable trend indicates a higher profitability to shareholders per each share owned.

Capital Structure: Dividend Policy

Currently, Amazon does not distribute dividends to its stakeholders. Rather, the company

focuses on business growth from its free cash flow. Amazon, Inc is still in its growing phase (as

dominant as it is), and lacks consistent profits; therefore, it chooses to reinvest its available

capital back in the business for development and expansion. Although it had a positive flow of

income for years, the company chose to use the money to repay debt, build growth programs and

build its balance sheet. Although there is no debating that Amazon has reached a high level of

domination in its industry and extremely profitable operations, it does not seem as if it intends on

changing their dividend policy anytime soon. Rather, the new markets Amazon is working its

way in to (such as pharmaceuticals) require heavy amount of capital; the free cash flow will be

utilized for such investments before dividends will go out to the investors.
Final Project I 6

Capital Structure

Capital Structure refers to the way in which a company uses its own assets to finance operations

and growth. Although Amazon, Inc has demonstrated high profits in its recent years of

operations, the capital structure of the e-commerce giant consists a high level of debt. In

comparison with its equity of approximately $6.4 Billion, Amazon’s 2019 10-k report shows the

company to have over $15.1 Billion in debt, which makes nearly 70% of its total capital structure

of $21.5 Billion. The company’s debt consists of bank loans, leases debt and other miscellaneous

loans.

Cost of Capital are the expenses and costs incurred from obtaining capital for growth or

operations. As organizations borrow money, the funds typically have a payable interest rate in

addition to its principle. Companies may also raise capital by selling shares in exchange for

capital, this form of equity financing is shareholders’ equity. In reviewing the weight average

cost of capital (WACC), investors can evaluate the amount of risk associated with investing in a

company. Amazon’s current WACC is 8.27%. That is, for every dollar Amazon owes it has to

pay back its investors an additional $0.082. Investors may view this as a risk imposed with

investing in Amazon as a high WACC is not favorable.

While a high amount of debt as this can be alarming to shareholders, it is only a hazard if

the company is not able to pay the debt off. In the unlikely scenario in which it had to pay off its

entire debt tomorrow, it appears as Amazon has the ability to use its own cash flow ($21 billion

in 2019), or easily raise capital to pay back its creditors. Additionally, although its weighted

average cost of capital is a relatively high rate; Amazon profit’s generation is great than its cost

of capital, lowering the financial risk for investors.

Final Project I 7

Maximizing Corporate Value

The main objective of corporations is to build and sustain corporate value by maximizing

shareholders profits. A good example of a measure taken by Amazon, Inc to maximize its

organization’s value is its current dividends policy. Rather than paying dividends to its

stakeholders, Amazon’s main focus is building corporate value through growth and expansion.

The lack of dividend payments to Amazon’s investors has benefited them greatly from a long-

term financial standpoint. The company’s massive revenue growth thanks to its calculated

distribution of assets resulted in Amazon’s stock (AMZN) to be a premier growth stock that has

provided outstanding earnings per share to its stockholders (a high of 23% in 2019.) The broad

array of goods and services Amazon offers, in-house production to keep costs down, its

innovative methods of delivering products, the extensive market base it has and the unmatched

customer retention – are all high-value characteristics that keep Amazon the profitable industry-

leader it is.

Valuation

To determine Amazon’s market value, Amazon’s outstanding shares will be multiplied

by its current market price, indicating a market share of $928 Billion. Amazon’s growth rate in

2018 and 2019 averaged 25.7%. Since Amazon had a decreasing growth rate in each consecutive

year between 2017-2019, we will assume that the growth rate in each year will be 74.3% of the

previous year of operations. Based on these forecasted figures, although Amazon has seen a

decreasing growth rate- it will generate a high volume of revenues that will nearly double in this

5-year period.
Final Project I 8

Many corporations around the world are struggling to keep their doors open amid the

Coronavirus pandemic, and the global economy is sinking. With that said, it seems as if the

health crisis will contribute to Amazon’s raising revenues, a stark contrast to most U.S

companies during a recession. Amazon operated as an essential business since the beginning of

the pandemic and hasn’t ceased operations. The new long-term customer base Amazon gained

during the lockdown will lead to a strike in profits for years to come. With an average increase in

profits between 2018-2019 of 32.4%, it is safe to assume that the tech giant will see a further

jump in profits in upcoming years of at least 35% increase in each fiscal year, starting 2020.
Final Project I 9

References

Gurufocus (2020.) AMAZON.Com WACC %. Retrieved on October 3, 2020 from

https://www.gurufocus.com/term/wacc/NAS:AMZN/WACC-/Amazoncom#:~:text=As
%20of%20today%2C%20Amazon.com's%20weighted%20average%20cost%20of
%20capital,capital%20needed%20for%20that%20investment.

Mergent Online. (2020.) Amazon Retrieved September 13, 2020 from: https://www-
mergentonline-com.ezproxy.snhu.edu/companyfinancials.php?
pagetype=asreported&compnumber=91098&period=Annuals&dataarea=PL&range=3&
currency=AsRep&scale=AsRep&Submit=Refresh

Oberlo (2020.) Retrieved on September 12, 2020 from

https://www.oberlo.com/blog/ecommerce-trends#:~:text=Summary%3A%20Ecommerce
%20Trends,-Here's%20a%20summary&text=Ecommerce%20sales%20are%20projected
%20to,to%2025%20percent%20in%202025.

Statista (2019.) Amazon Retail Market Share, Clement. Retrieved on September 12, 2020 from
https://www.statista.com/statistics/788109/amazon-retail-market-share-usa/

The Street (2019.) Amazon's 3 Biggest Challenges for 2020, Gaus. Retrieved on September 12,
2020 from https://www.thestreet.com/investing/amazons-biggest-challenges-for-2020