Amazon (AMZN) Company Analysis

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Oct 29, 2013 (3 years and 9 months ago)

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Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Amazon (AMZN) Company Analysis



Amazon.com was
founded in 1994

by a man named Jeff Bezos. The reasoning for establishing
the corporation was because Bezos was in regret for not getting into the internet gold rush earlier. He
called this “regret minimization framework”. While he might not have gotten into the internet

gold rush
early, his company is now one of the top
online retailers

in the world
.


Amazon started off by selling only books, but has grown into selling a wide range of products,
akin to a virtual Wal
-
Mart or Target.

Though it might seem like their main co
mpetitors are general brick
and mortar shops like the ones listed above, this is far from the truth. Amazon.com does not actually sell
all these products on their website. However, they enlist merchants who use Amazon as a middleman to
sell the products. T
his brings up an interesting point: Who are Amazon’s competitors? Well, Amazon
does actually still sell, keep inventory, and stock many books
. This has le
d their company to be placed
within the service sector, but specifically in the ‘Catalog & Mail Order
Houses’ industry.
Thus, their main
competitors are actually Barnes & Nobel, Columbia House Company, and Ebay.

Three years after its birth, on May 15
th
, 1997,
the company went pub
lic on the NASDAQ market
under the symbol AMZN with an initial public offering

of $18.00/share. Over twelve ye
ars later,

Jeff
Bezos is still the CEO, President, and a Chairman of the company, and Amazon.com shares are valued at
over $130/share.

Amazon is solely based online with no real stores (e
-
commerce).

To give a good perspectiv
e;
Complete.com states that Amazon.com received over 615 million visitors in 2008, double that of
walmart.com.

Currently their headquarters are

based out of Seattle, Washington. Though they have
employees based worldwide such as Cape Town, Dublin, Beijing,

among other locations. And of course,
they also have warehouses placed worldwide to store their products; the closest one to Iowa being in
Coffeyville, Kansas.

They sell music, movies, consumer electronics, kitchen items, garden items, toys,
clothes, and
even food. Basically, anything you would find at Wal
-
Mart plus more. With this being
said

their customers are anyone who has internet access and have money to purchase products.

The rest of this report
will delve into Amazon.com’s financial standing for th
e last couple of
years, and explore how they have been doing as a whole, as well as comparing them to Ebay, one of
their main competitors. Each ratio calculated will have its own section
that includes: the calculated
result for the current year and two pre
vious years,
an analysi
s of
the
ratio that will explain what it
means and compare it to Ebay

(this year and two previous years)

and the Industry average.

*All numbers are expressed as th
ousands unless stated otherwise, NOW values from 11/15/2009*

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Current R
atio

The current ratio is a liquidity ratio that measures a
company’s ability to pay short
-
term obligations, basically a
company’s ability to pay debt/payables with its cash,
inventory, and receivables. Generally, a ratio above one is
good because it shows a co
mpany’s ability to turn its
products into cash.

The table near the right shows
Amazon’s and Ebay’s current ratio statistics.

To calculate this, it was only
a matter of taking the company’s current assets divided by its current liabilities for the specifi
ed year.
So, for 2008 Amazon

had $6,157,000
in current assets and $4,746,000

in liabilities. The result was 1.38.
The same procedure was done for the other years, as well as for Ebay given the right specified year.
Across the board, Ebay has a higher curre
nt ratio, even well above the industry average. Amazon stays
right below the industry average. I suspect that Amazon has a lower ratio because it is a fast growing
company that is always taking on new business ventures. This results in higher liabilities.
If Amazon
slowed down their growth or stopped emerging into so many markets, I am sure that their liabilities
would go down, thus increasing their current ratio.

Though I am surprised, even through the recession
their ratio has remained consistent.

Quick R
atio

This is essentially the same thing as the current ratio, but
this ratio takes out inventories from the current assets. It is
used to measure a company’s ability to meet its short term
obligations as well. The reason it excludes inventories is
because some
companies find it difficult to convert
inventory into cash.

For Amazon in 2006 I took their current
assets (3,373,000) minus inventory (877,000) and divided that answer by current liabilities (2,532,000).
Resulting in a quick ratio of 0.99.

Now we see to
the right that Amazon has a lower quick ratio than its current ratio. This is to be
expected. Amazon hovers around the 1
mark;

this suggest
s

that even with taking its inventory out, it
would have enough current assets to cover its short
-
term costs. If you
compare this to Ebay, you will
notice their quick ratio is exactly the same as their current ratio; this is because Ebay carries no
inventory!
However, I calculated the industry average by hand, and it is actually distorted. Most of the
companies had a rat
io very close to 1, but a few companies had a ratio of 5.04, 7.81, and 3.39

this
threw off the average quite a bit. But, A
mazon could indeed improve their quick ratio by keeping less
inventory. This comes down to inventory efficiency and Amazon is actually

very good at it, which we will
see later on.

Current Ratio

AMZN

EBAY

2006

1.33

1.97

2007

1.39

2.30

2008

1.30

1.70

NOW

1.38


Industry Avg

1.42

Quick R
atio

AMZN

EBAY

2006

0.99

1.97

2007

1.07

2.30

2008

1.00

1.70

NOW

1.05


Industry Avg

1.95

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009






Inventory Turnover

This equation shows how many times a company’s inventory is sold and replaced over a
period. In
comparison to an industry average, a low ratio means the company has bad sales and keeps their
inventory.

For this equation it is simply sales divided by
inventory. In 2006 Amazon had sales of $10,711,000 and an
inventory of $877,000. Divide th
ose two numbers and you
get 12.21x. It took 12.21 days to get a product sold on
average. Compare this to the industry average of 29.28x and
Amazon has stayed well below the industry over the past 3
years. Remember how I talked about inventory efficiency?
Y
ou see here that Amazon is very good at it, so compared to Ebay (who has no inventory, thus no
inventory turnover) Amazon would have to match their sales exactly with their inventory which is not
possible unless they ordered inventory based off the sales t
hey get.

Days
Sales Outstanding

DSO is how many days it takes to get money from a sale of a product. A low DSO is often
good;

a high
DSO means the company is selling on credit which can be a bad thing as it makes you less liquid.

This
equation has you take annual sales divided by 365, then
take receivables and divide your previous answer by the
receivables. For AMZN 2008 it was
$1,031,000/($19,166,000/365) = 19.63

days. It might make
sense that their ratio had been increasing because more
people were using credit until the recession, now people
aren’t using it as much so that ripples through and lowers this ratio for Amazon to it
s now 12.58 days.
The industry average is still near 30, which suggest that many may have a 30 day payment grace period.
In comparison to Ebay, they may have a different policy, but the fact remains that Amazon is able to
convert their sales into cash quic
ker.




Inv. Turnovr

AMZN

EBAY

2006

12.21

-

2007

12.36

-

2008

13.70

-

NOW

11.72

-

Industry Avg

29.28

DSO

AMZN

EBAY

2006

15.68

48.45

2007

20.96

43.19

2008

19.63

86.92

NOW

12.58

-

Industry Avg

2
8.71

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Fixed Assets Turnover

This ratio calculates how well a company is using its fixed
assets to generate sales. A low ratio might say that the
company has too much money put into their fixed assets
like plant, property, and equipment. This is calculated by
taking sales divi
ded by net fixed assets (PP&E). In 2008
Amazon had sales of $19,166,000 and net fixed assets of
$854,000. Thus 19,166,000/854
,000 = 22.44. A higher ratio is generally better. However, this is generally
used in manufacturing so the relation may not hold up so well. But based on the industry averages,
Amazon is right with the other companies. To improve this

Amazon could up their
sales or lower their
net fixed assets. If they up their sales that means they will need the same or more fixed assets to hold
those sales (unless they are non
-
material items).

Total Asset Turnover

This is almost the same as above, except you are using all your assets here. The equation is sales divided
by total assets. This includes things like cash, receivables,
and current

assets. Thus, a lower ratio will probably be
found in the case of Amazon because there are a lot more
current assets than fixed assets.

For 2008, Amazon had sales
(19,166,000) and total assets of (8,314,000). Divide those
and get 2.31. The higher the rati
o, the better here because
it establishes how well you are using ALL of your assets. A company with a low profit margin (but a large
number of products sold) will have a lower
ratio.
This makes sense with Ebay, because they make little
money on each of the
ir “sales” but have a lot of them, thus a lower ratio than Amazon who has actual
material products, thus a higher asset cost because of the materials. As far as these three years ago,
there is no real trend with Amazon’s ratio.

Total Debt to Assets

Simply take your total debts divided by your total assets. In 2008 Amazon had a total debt of $460,000
and total assets of $8,314,000. Divide those two numbers
respectively

and get 6%. This shows that Amazon’s assets
are financed by 6% debt. Compared to Ebay, Amazon has
had a much larger percentage in 06’ and 07’. That is
because Amazon had a large amount of debt in those years
and finally brought it down in 20
08 to get back

into Ebay’s
ballpark and much lower than the industry average
. Amazon can lower t
his by bringing down their debt.

F
-
A Turnovr

AMZN

EBAY

2006

23.44

7.53

2007

27.32

6.85

2008

22.44

7.13

NOW

20.07

-

Industry Avg

2
8.71

T
-
A Turnovr

AMZN

EBAY

2006

2.45

0.44

2007

2.29

0.50

2008

2.31

0.55

NOW

2.72

-

Industry Avg

2.24

Total D
-
A

AMZN

EBAY

2006

29%

0%

2007

20%

1%

2008

6%

6%

NOW

6
%

-

Industry Avg

22.71%

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Times Interest
Earned

(TIE)

This ratio is how well a company can meet its debt payments. You take the company’s EBIT and divide it
by the interest charges.
For 2008, 972000/71000 = 13.69.
It indicates how many times a company can
cover its interest charges before taxes.

Amazon is on
an

upward

trend the last th
ree years, this is because their
interest expense has stayed close to the same, but their
EBIT has increased monumentally the last few years.
Compared to Ebay they are way behind, because Ebay has
essentially no interest expenses

and their EBIT is huge.

Amazon simply needs to increase its EBIT because the interest expense is already pretty low.

Operating Margin

This ratio is used to get a feel of the efficiency used by the company in terms of their operating income
and their total sales. Calculated by taking the operating income divided by the net sales results in how
much of the sales
are

left after production c
osts.

In 2008
Amazon had $842,000 for an operating income and
$19,166,000 in sales. Divide those two respectively and get
an operating margin of 4.39%. This means that for every
dollar they make they get $.049. Amazons margin has been
increasing, which is

a very good sign. However, Ebay has
blown Amazon out of the water because their operating income is much larger, but their sales don’t
have a big as margin. Amazon can afford to stay below industry average (though they should strive for
better) because th
ey sell so many products, so their operating margin is expected to be rather low.

Profit Margin

The profit margin of a company represents how
much a company ke
eps after every dollar in sales. The
difference between operating margin and this is that the profit ratio uses all the money in sales instead
of just the operating income. Calculated by taking net
income divided by sales. In 2008 Amazon h
ad a net income
of $645,000 and sales of $19,166,000. 645000/19166000 =
3.37%. This means that they make 3.37% off their sale. Over
the last three years Amazon has increased this, which is
good, but they could improve by having a higher net
income. Again,
this is lower because than the industry average because Amazon makes more sales at
less of a profit, rather than less sales at more of a profit.


TIE

AMZN

EBAY

2006

5.83

262.50

2007

9.57

46.23

2008

13.69

272.69

NOW

38.57

-

Industry Avg

7
.64

Oper. Margin

AMZN

EBAY

2006

3.63%

23.84%

2007

4.42%

7.99%

2008

4.39%

24.30%

NOW

4.50%

-

Industry Avg

7.80%

Profit Margin

AMZN

EBAY

2006

1.77%

3.18%

2007

3.21%

6.20%

2008

3.37%

7.55%

NOW

3.65%

-

Industry Avg

7.
99%

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Return on Assets

This ratio indicates how well a company is using its assets to make revenue. This is found by dividing net
income by total assets. The higher the number the better, because they are earning more (via net
income
) and using less assets to make
revenue
. In 2008
Amazon had a net income of $645,000 and total assets of
$8,314,000.
645000/8314000 = 7.76%. The industry average
is 3.38% so that means that Amazon is utilizing their assets
better than the others. On the other hand, Ebay is right
around t
he industry average. Amazon could improve this
ratio by reducing their assets while keeping the income the same, or bringing in
a higher

net income
while keeping assets the same. The best of both worlds would be to have a higher net income while
bringing t
otal assets down.

Basic Earning Power

This ratio compares the company’s earnings without the influence of debt or taxes to the assets of the
company.
This is another way to show how effectively
assets are used to generate earnings. This is done by taking
earnings before interest and taxes (EBIT) and dividing them
by your total assets.

For example, in 2008 Amazon’s EBIT
was $972,000 and total assets were

$8,314,000.
972000/8314000 = 11.69%
.
To improve this Amazon could
lower their total assets or increase their EBIT. Both of these are tough to do, but increasing their total
assets is logical because they are always growing into new ventures.

Return on Com
mon Equity

This ratio tells the amount of net income returned as a percentage of shareholder equity. The higher the
better in this case because the more percentage you get
back

means how much money was made
through shareholders. If you make more money through
shareho
lders, they will want to invest more money.
Calculate ROE by

taking
net income and dividing it by
shareholder

equity. In 2008 Amazon had a net
income of
$645,000 and
shareholder

equity of
$2,672,000.
645000/2672000 = 24%. They need t
o up that amount to
the return they were getting in 2006 and 2007. They could do this by increasing shareholder equity
because net income is hard to increase substantially.


ROA

AMZN

EBAY

2006

4.35%

1.41%

2007

7.34%

3.10%

2008

7.76%

4.14%

NOW

9.30%

-

Industry
Avg

3.38%

BEP

AMZN

EBAY

2006

10.43%

11.51%

2007

11.36%

4.99%

2008

11.69%

14.06%

NOW

3.2%

-

Industry Avg

7.54%

ROE

AMZN

EBAY

2006

44%

2%

2007

40%

4%

2008

2
4
%

6%

NOW

5.5%

-

Industry Avg

12.4%

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009





Price/Earnings

The Price
-
Earnings ratio values a company’s share price compared to its earnings per share. The
equation involves taking your price of the share and dividing
it by the earnings per share to get the E/P ratio. Since the
price
updates frequently, the price may go up or down
drastically compared to the earnings per share (which are
often updated quarterly). From this you can assume that a
very high P/E could mean that people think the company
will be doing well because the price
will be higher. Since this
equation is often a “snapshot” and not used for average stock price over the course of a certain amount
of time, I used the

December average stock price for

each of the companies to compare them. In 2008,
Amazon had an averag
e sh
are price of $51.28, and a
earning per share of $1.49 at the time. 51.28/1.49 =
$34.42 P/E.

However, 2006 and 2007 were huge years for Amazon as they nearly tripled their 2008 P/E.
Why? Well in 2006 they had an extremely low EPS, and their stock price was

decent at $39.46/share.
Also in 2007 their stock price skyrocketed to $92.64 and had an EPS of 1.12. 2008 seemed bad to them
because of their low stock price and high EPS. They seem to making a comeback now, even above
industry standards.

Cash Conversion
Cycle

The cash conversion cycle measures
the length of time it takes for an organization to convert resource
inputs into cash flows. Basically, how long it takes from selling your product, to getting a purchaser, to
getting cash for that purchase. For this

equation you add/subject three things together: inventory
conversion period + receivables collection period


payables deferral period. The inventory conversion
period is simply 365/inventory turnover, the receivables collection period is equal to days sa
les
outstanding, and payables deferral period is 30 days for this specific industry. With that said, the
calculated cash conversion cycle of Amazon in 2008 is: 26.64 + 19.63


30 = 16.27 days. Ebay

s CCC is
56.92 days. This is very good for Amazon because
it keeps them very liquid in case of any emergencies,
while keeping integrity with the organization, its suppliers, and shareholders.





P/E

AMZN

EBAY

2006

$87.69

$38.06

2007

$82.71

$132.76

2008

$34.42

$10.26

NOW

$78.55

-

Industry Avg

$55.22

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




Market/Book

Also
called the Price/Book formula, this ratio compares a stock’s “market” or trading value to its book
value. The book value is calculated by the balance sheet to assess the stock’s valu
e from an accounting
standpoint. Simply put, it is the most recent stock p
rice per
share divided by the most recent book value per share.

You
can find the book value by taking (Stockholder Equity


Preferred Equity)/Total Outstanding shares. Then you can
find the market price by looking at the price it was sold at
closing time t
hat day. Finally, you take your market
price/book price and you get the M/B ratio, otherwise called
the P/B ratio. Besides 2008, Amazon has
well above the industry average, and their competitor EBAY is far below the industry average. To get a
better market
/book ratio, Amazon could put up a higher market value, or a lower book value. A lower
book value would be easier to do potentially because the market price is already well (what I think)
above what it should be.


Summary of Findings

Overall, if I was to grade Amazon purely based off these last three years, I would say they are doing very
well. It seems as if 2006 was a rough year compared to 2007 and 2008. Especially because their total
debt to asset ratio was high, and their return o
n assets and profit margin was low. Yet they are still
above industry averages, and maintained a great return on equity during those low times which meant
that their shareholders stuck with them, and Amazon used the money invested into them wisely. If
Amaz
on has started off at $18/share,
come to $130/share, and have been able to become the largest
online retailer in the world, then I think they are doing something right.

T
he company is extremely stable
with a huge market cap, large current assets (giving th
em liquidity),
and a low amount of debt (but not too low of course, some debt is good!). Many analysts see Amazon as
being worth too much right now at $130/share, and I would agree. From 2007 to 2009, the company’s
stock basically stayed within the $40
-
80
range with a few exceptions. But in 2009 alone, Amazon has
kept an upward surge. At the beginning of the year they started out at $54.36 and closed Nov. 16
th

at
$131.59

a 240% increase this year alone. This is why I agree with analysts; it was too much gro
wth at
one time and will go back down. With that being said, I would say to sell AMZN now, especially if you
bought it a month or earlier ago.


However, with a low amount of debt you have to wonder what their cash looks like. In 2006 Amazon
had a cash amou
nt of $1,022,000,000. But the next year in 2007 they doubled that amount to
$2,539,000,000, and in 2008 it was a slight increase to $2,769,000,000.
Ebay had a 2008 cash amount of
M/B

AMZN

EBAY

2006

37.71

3.84

2007

32.13

3.84

2008

8.23

1.61

NOW

18.42


Industry Avg

13.88

Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009




$3,188,928,000 and over $4 billion in 2007. The other companies in the indus
try had a much lower cash
amount, but I believe this is due to their much lower market capitalization. Typically Amazon doesn’t
issue dividends, so this leads me to believe that Amazon might be saving up for an investment in a new
business venture.

Regardl
ess, the company is still going extremely strong and staying within the 90
th

percentile
when
comparing them to their industry in the valuation department. The industry is largely dominated by
Amazon.com’s wide variety of products, but the rest of the organ
izations are finding ways to battle the
giant by offering specialty products, cheap pricing, and heavy advertising. However, it is my personal
opinion that they can’t stop Amazon at this point simply because they have so much market cap that
they have the
money to invest into different ventures and grow even more, which I believe they will do.
The result is the industry as a whole growing, but mostly because of a few large dogs like 1
-
800 Flowers,
EBay, Amazon, and the popularity of online shopping growing.

Finally, I would love to invest in Amazon as soon as the stock price drops again (possibly a split?) and
they fix a few things like bringing their profit margin up a little bit, stabilizing their P/E ratio so it isn’t so
wild
, and of course keeping that r
eturn on common equity up to make investors happy. Amazon
continues to venture into more and more markets, only making them more versatile. My only doubt is
that I hope they don’t bite off more than they can chew because they do have a history with bad
inv
estments that led to nothing.

Recommendation

There are two ways to look at it from my point of view: If

you

just bought stock within the past few
months, then hold onto it for a little while longer and see if you can squeeze out anything extra from it,
if
it starts going down more than 10% or so, then sell.
Secondly, i
f you have owned stock before this
year, sell it now and make your profit. The reasoning for this is because I believe the stock price will drop
significantly over the next few months. They’ve

grown way too fast in the last few months for their own
good, and I think it’s coming to an end soon.

Even multiple analysts have said that stocks in general are
overpriced right now at this point, and I don’t think Amazon is an exception here.


Jacobi Zakrzewski

Intro to Fi nancial Management

Professor Keyes

11/15/2009







Source
s



http://biz.yahoo.com/p/739mktd.html



http://eresearch.fidelity.com/eresearch/evaluate/fundamentals/keyStatistics.jhtml?sto
ckspage=keyStatistics&symbols=AMZN



http://www.finviz.com/screene
r.ashx?v=152&f=exch_nasd,ind_catalogmailorderhouses
&o=company



http://finance.yahoo.com/q/is?s=AMZN&annual



http://www.google.co
m/finance?q=NASDAQ:AMZN&fstype=ii