SECURITY ANALYSIS -

AMAZON.COM, INC.

DATE – 12-09-2021
PREPARED BY: VANSH KHANUJA
CONTACT: vanshkhanuja78@gmail.com
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Introduction:
Amazon.com, Inc is one of the most valuable (in terms of market cap)
company in the world with a market cap of 1.7 trillion USD as of 12 th
September, 2021 (current price: 3,469.15$). Founded by Jeff Bezos,
Amazon is the leading e-commerce company today.
Business:
The company’s main business is its e-commerce platform Amazon.com
through which it sells products and earns a fixed commission. Through
Amazon Prime Video, the company operates its media business
(Amazon Prime Video is an online streaming platform competing with
Netflix) which is subscription based, and the company also offers
advertising through these platforms. Amazon also offers the Kindle, to
read and publish books and the company also competes with
Microsoft’s Azure through Amazon Web Services (AWS).
The valuation is difficult because there can be a lot of possibilities. The
AWS business needs a lot of expenditure to maintain the competition
with Microsoft’s Azure. The e-commerce business needs constant
innovation to compete with Walmart and other e-commerce giants.
Future:
Amazon has been really good in retaining consumers and I believe it
will continue to do so. For the overall revenue growth (inclusive of all
businesses), I'm assigning a growth rate of 6% for first 5 years and 4%
for the next 5 because there is a lot of room for growth in the overall
market. The e-commerce and media markets are expected to grow at
much higher rates and thus, 6% seems appropriate. The reinvestment
portion is the essential metric of our valuation because of AWS.
Amazon is surely not going to sit back and let Microsoft capture the
market, I expect heavy reinvestments to be made in the future (R&D).
In my valuation, I will expect a sales-to-capital ratio of 3 [It has been
more than 4 for the past years but I’m going with 3 because (1)
Conservatism and (2) Competition from Google, Microsoft, Netflix and
Walmart]. For the operating income margin, I’m expecting 10% for the
first 5 years and 12% for the next 5. The average for the past years has
been 5% but I’m expecting Amazon to focus more on profits now (as it
is a mature company). Amazon’s management has been really good in
the past and the company’s culture promotes consumer-centric
behavior.
Other assumptions:
I will be using 6% as the discount rate, the reason for using 6% is
because of the risk of failure. Although the company has a strong
capital base and will not go bankrupt, still the competition is tough and
Amazon will probably enter a lot of new markets. The only competitive
advantage for Amazon is capital.
I’m going with 30% as the tax rate and 2% as the perpetual growth
rate. Anything higher than 2% seems unreasonably high considering
how big the company already is.
Valuation:

THE STORY
Amazon will continue to grow at a healthy rate with the overall
economy and will also maintain the margins. The company's
reinvestments will increase relative to the increase in sales.
CASH FLOWS ($ in millions)
Operating
Revenues Net Income Reinvestment FCFF
Margin
1 $ 4,09,228 10% $ 28,646 $ ( 7 721) $ 20,925
2 $ 4,33,782 10% $ 30,365 $ ( 8 185) $ 22,180
3 $ 4,59,808 10% $ 32,187 $ ( 8 676) $ 23,511
4 $ 4,87,397 10% $ 34,118 $ ( 9 196) $ 24,922
5 $ 5,16,641 10% $ 36,165 $ ( 9 748) $ 26,417
6 $ 5,37,306 12% $ 45,134 $ ( 6 889) $ 38,245
7 $ 5,58,799 12% $ 46,939 $ ( 7 164) $ 39,775
8 $ 5,81,151 12% $ 48,817 $ ( 7 451) $ 41,366
9 $ 6,04,397 12% $ 50,769 $ ( 7 749) $ 43,021
10 $ 6,28,572 12% $ 52,800 $ ( 8 059) $ 44,741
Terminal Year $ 6,53,715 12% $ 54,912 $ ( 4 358) $ 50,554
THE VALUE
Terminal Value 842 566
PV( TV) 470 485
PV ( FCFFs) 228 516
Value 699 001
Total shares 506
Value/share $ 1 381 Amazon was trading at 3,469.15 at
the time of valuation

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