Amazon.com Valuation Exercise 15.402 Finance Theory II Prof. Kevin Rock 5/10/01
Nov 19, 2014
Amazon.com
Valuation Exercise
15.402 Finance Theory II
Prof. Kevin Rock
5/10/01
2
Contributors
Amy Rabatin Andre Caldas Oliveira Cristen Baca Lance DurhamAndreas Wold-Olsen Andres Trevino Jason Ottman Natalie Brain
Anne Bosser Anna Mitelman Dave Greenwood Chris PunBert-Jaap Djikstra Bill Behrman Eric Partlan Ed Tai
Tyler Rameson Bob Kelly Jason Escamilla Eric JanBransby Whitton Thomas Salopek
Jayne Tan Evan Lee Niall Corrigan Xiaoyu LiuJeff Winkler Grace Webber Rebecca Kirk Ralph Taylor-SmithJosh Burack Greg Chalker S. Andrew Hill Shannon O'Callaghan
Karen Loomis Jody Renna Sergio Delgado Jenny ZhongKen Yang Joe Skorski Tisha Young John Verberkmoes
Keyur Patel Juan Carlos Calderon Waymond Harris David KrauseLeslie Koenigs Ken TateLloyd Prophet Luis WongCaroline Chan Macarena DominguezMark deLaar Victor Pena
Michael Prazma Dany MakloufSean Hwang Bob PalazziSavina Eneva
Background: 1999 Analysis Market Analysis: 1999-Present
Financial Analysis Forward Looking
3
Agenda
Background: 1999 Analysis
Market Analysis: 1999-present
Financial Analysis
Forward Looking
4
Background: 1999 Analysis
A brief overview of the “ Amazon.com Valuation Exercise” submitted by 15.434 on December 8, 1999 1999 Valuation Historical Analysis Holdings Profile Valuation of Internet Companies
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
5
1999 Valuation
Key Assumptions Growing market share to 24% of a market growing at
8% per year Gross margins grow to 25% while marketing falls to
8% of Sales Capex and Depreciation offset (not true in 1999) Growth in free cash flows of 5% after 2010
Weighted Average Cost of Capital Comparables: Borders, Barnes & Noble and Wal-Mart Amazon.com Beta = 1.47 WACC = 17%
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
6
1999 Valuation (cont’d)
Results of the Analysis Share Price = $18.20 per share (= 1.47) Range: $27.50 per share (= 1) to $6.80 per
share (= 3)
Key Insights Increased gross margins and shrinking marketing
& selling expenses are key drivers of long-term value
Free Cash Flows projected to be positive starting in 2003
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
7
Historical Analysis
Expansion of Price/Revenue Multiple
100
2,100
4,100
2Q1997
3Q1997
4Q1997
1Q1998
2Q1998
3Q1998
4Q1998
1Q1999
2Q1999
3Q1999
revenue
price indexed
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
8
Historical Analysis (cont’d)
IPO date: May 15, 1997 Price per share: $1.50 (adjusted for stock splits)
Invested in other Internet retailers drugstore.com, gear.com, pets.com, etc.
Analyst forecasts are rosy $17B sales of on-line merchants in 1999 Web sales to consumers $108B in 2003 Sales growth is 59% CAGR
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
9
Holdings Profile
Insiders held 60% of the stockThe remaining 74 million shares (float) traded Janus funds = 22% of the float Short interest = 22% of float 56% of the float was actively traded
Average daily volume 12.9 million sharesExcluding Janus, and short shares, Amazon’s shareholder base turned over every 6 days!A stock with huge interest and very small float led to large volatility and BIG price swings!
Janus Capital
9%
Everyone else31%
Jeff Bezos34%
Other insiders
26%
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
10
Valuation of Internet Companies
Usually estimated using comparables P/E * estimated earnings P/S Breakup Value
Most stocks are overvalued “Nifty Fifty” study Value = current operating value + value of all future
growth opportunities
1999 Study of 20 internet companies concluded valuation implies a growth rate of 80%!Indeed, high P/S ratios led to overvaluation
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
11
Market Analysis
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
12
Lehman: “..investors should stay away
from the company's bonds because the extreme credit risk facing the company
has not been properly taken into
account.”
Merrill: “We believe that [AMZN] will go
down less and recover faster if a (first quarter)
pullback occurs”
GS: “We continue to believe that our four holiday favorites: ... Amazon.com
Inc. (AMZN), ... will continue to be well-positioned to maintain or increase
their leadership positions."
JP Morgan: Initiates coverage of Amazon.com with a "BUY" rating and a 12-month price target of
$160
Wall Street Sentiment
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
13
Amazon:Our sister kissing Buy Rating reflects our extreme caution in a difficult economic environment, while still recognizing the company’s enormous long term potential
SG Cowen, 5/2001Barnes and Nobel.com:We are encouraged by B&N progress…we continue to believe BNBN has a viable business long term given the strength of its brand
Goldman Sachs, 4/2001
Buy.com:We are discontinuing coverage of Buy.com. Our most recent rating was neutral and most recent suitability rating was speculative
US Bancorp Piper Jaffray, 3/2001
Wall Street Sentiment (cont’d)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
14
Comparables: Stock Performance
Source: http://finance.yahoo.com/
Legend: AMZN: Amazon; BNBN: Barnes And Noble; BUYX: Buy.com; EFTD: FTD.com
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
15
Source: http://finance.yahoo.com/
Comparables: Stock Profile
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
16
Institutional Holdings
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
LEGG M
ASON INC
LINCOLN
CAPIT
AL M
ANAGEMENT C
O
JANUS C
APITAL
CORP
MORGAN S
TANLEY D
EAN WIT
TER & C
O
CITIG
ROUP INC
BARCLAYS G
LOBAL
INVESTORS N
A /CA/
FMR C
ORP
AMERIN
DO INVESTM
ENT ADVIS
ORS INC
TCW G
ROUP INC
BRINSON P
ARTNERS INC/IL
STATE STREET C
ORP
OLD M
UTUAL ASSET M
ANAGERS UK L
TD
VANGUARD GROUP IN
C
TIAA C
REF INVESTM
ENT MANAGEM
ENT LLC
CALIFORNIA
PUBLI
C EM
PLOYEES R
ETIREM
E..
DRESDNER RCM
GLO
BAL IN
VESTORS LLC
/CA...
JOHO C
APITAL
LLC
STATE TREASURER S
TATE OF M
ICHIG
AN
HELLM
AN JORDAN M
ANAGEMENT C
O INC /M
A/
MUNDER C
APITAL
MANAGEM
ENT /ADV
This Qtr
Last Qtr
2 Qtrs Ago
3 Qtrs Ago
Institutional Holdings
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
Large institutional shareholders have continued to accumulate shares, others
are mostly flat to rising.
17
Top Insiders and Institutions (as of March 31, 2001)
Top Insiders Shr. Held % Held. Relation. BEZOS JEFFERY P 116,190.70 32.41 B KLEINER PERKINS C&BYERS VII LP
27,211.00 7.59 B
KAPHAN SHELDON J 13,008.00 3.63 VP COVEY JOY D 1,583.10 0.44 VP ALBERG THOMAS A 1,171.60 0.33 D RISHER JOHN DAVID 408 0.11 VP MOROUSE MARY E 360 0.1 VP SHRIRAM KAVITARK R 146.6 0.04 VP SPIEGEL JOEL R 100 0.03 VP APOSPOROS GEORGE 90 0.03 VP
Total 160,269.00 44.71
Top Institutions Shr. Held % Held. LEGG MASON INC 33,291 9.29 LINCOLN CAPITAL MANAGEMENT CO
30,517 8.51
JANUS CAPITAL CORPORATION
19,739 5.51
MSDW & COMPANY 6,510 1.82 CITIGROUP INC 5,085 1.42 BARCLAYS BANK PLC 4,031 1.12 FIDELITY MGMT & RESEARCH CO
3,379 0.94
AMERINDO INVESTMENT ADVR
3,077 0.86
TCW GROUP, INC. 2,903 0.81 BRINSON PARTNERS, INC. 2,060 0.58
Total 110,592 30.86359.2 million shares outstanding
60% owned by insiders
40% owned by institutions
*All share data in thousands
Institutional Holdings (cont’d)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
18
Insider Trades vs. Time
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000Ja
n-99
Feb
-99
Mar
-99
Apr
-99
May
-99
Jun-
99
Jul-9
9
Aug
-99
Sep
-99
Oct
-99
Nov
-99
Dec
-99
Jan-
00
Feb
-00
Mar
-00
Apr
-00
May
-00
Jun-
00
Jul-0
0
Aug
-00
Sep
-00
Oct
-00
Nov
-00
Dec
-00
Jan-
01
Feb
-01
Mar
-01
Time
$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
$350.00
# of Shares Sold
Average Sale Price of SoldShares
Insider Trading
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
Director John Doerr Sells most of stock
Bezos + Friends
Bezos
Bezos
TransCosmos
19
What the FY 2000 Numbers Show...
Revenue growth slowing From 298% (’98), 122% (’99), 30%(2000) Expanding revenue base limits growth rate Business conditions
- Market maturity
- General slowdown in consumer spending
$1.6B net loss $500M equity losses (permanent and temporary) $860M operating loss (before interest and other)
Amazon Financials
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
20
Amazon.com
Financial PerformanceRev Growth: 22%GM Growth: 26%OM Growth: -15%NI Growth: 24%
RatiosP/E: NAP/S: 2.23P/B: NA
FTD.com
Financial PerformanceRev Growth: 38%GM Growth:30%OM Growth: 7%NI Growth: NA
RatiosP/E: NAP/S: 2.41
P/B: 23.23
B&N.com
Financial PerformanceRev Growth: 38% GM Growth: 21%
OM Growth: -164%NI Growth: -4%
RatiosP/E: NAP/S: 0.96P/B: 3.31
Buy.com
Financial PerformanceRev Growth:NA GM Growth:7%
OM Growth: -17%NI Growth: NA
RatiosP/E: NAP/S: 0.09P/B: 0.78
Source: Bloomberg, Financial performance figures are expressed in percentage terms to compare the relative over last calendar year
Comparables: Financials
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
21
Sales: $1.00 COGS (0.76)
Gross profit 0.24 Marketing (0.22) Technology & content (0.10) SGA (0.04) Amortization (0.12) Impairment (0.18) Net interest expense (0.04) Unrealized gain/loss (0.05)
Loss per $1 revenue: ($0.51)(Based on FY 2000 Operating Results)
Flawed Business Model?
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
22
1999 Valuation Revisited
Good valuation but several incorrect assumptions Massive capital expenditures (supply chain,
warehousing, etc.) vs. forecast of equal CAPEX and depreciation
Operating expenses nearly 200% higher than forecast Lower gross margins than forecast Led to lower FCFs than forecast suggested
However, valuation said $18.20/share and the most recent closing price was $17.56/share.
So, if you bought the 1999 valuation…
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
23
Profits
-40
-20
0
20
40
60
80
8-Dec-99 17-Mar-00 25-Jun-00 3-Oct-00 11-Jan-01 21-Apr-01
$/s
ha
re Short Sell
Put Option
Short the Stock or Buy a Put (Put Strike at $80, $10 Option Price)
1999 Valuation Revisited (cont’d)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
24
Other Strategies
2:1 Reverse Hedge (Buy 2 Calls, Short 1 Share)
1:2 Hedge (Long 1 Share, Buy 2 Puts)
Bottom Straddle (Buy 1 Put, Buy 1 Call)
Protect yourself against the upside Why? The valuation showed massive overvaluation.
Save the option costs and just short the stock!!!
1999 Valuation Revisited (cont’d)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
25
Financial Analysis
BackgroundMarket Analysis
Financial Analysis
Forward Looking
26
Turnover Control
Accounts receivable turnover has been constant at approximately 1-3 days
Accounts payable turnover has averaged 60 days Over 50% of COGS financed w/ accts payable 1Q ‘01 - suppliers receive (request?) faster
payments (45 days)
Inventory turnover has decreased due to Amazon’s move from “just in time” to “leveled” inventory Reduced delays in filling customer orders More products carried in stock
BackgroundMarket Analysis
Financial Analysis
Forward Looking
27
Operating Cycle
Leveled inventory and decreased days payable have adversely impacted the operating cycle
Operating Cycle in Days
-70
-60
-50
-40
-30
-20
-10
0
Mar
-99
May
-99
Jul-
99
Sep-
99
Nov
-99
Jan-
00
Mar
-00
May
-00
Jul-
00
Sep-
00
Nov
-00
Jan-
01
Mar
-01
Day
s
BackgroundMarket Analysis
Financial Analysis
Forward Looking
28
Profitability
Return on assets has been consistently negative
Amazon has lost approximately 12 cents for each dollar tied up in the business
Return on Assets
-25%
-20%
-15%
-10%
-5%
0%
Jun-
97
Sep
-97
Dec
-97
Mar
-98
Jun-
98
Sep
-98
Dec
-98
Mar
-99
Jun-
99
Sep
-99
Dec
-99
Mar
-00
Jun-
00
Sep
-00
Dec
-00
Mar
-01
BackgroundMarket Analysis
Financial Analysis
Forward Looking
29
Short-term Liquidity
Current and acid test ratios have declinedsignificantly, indicating potentialdifficulties in meeting current obligations
Short-Term Liquidity Deteriation
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1999 Q1 1999 Q2 1999 Q3 1999 Q4 2000 Q1 2000 Q2 2000 Q3 2000 Q4 2001 Q1
Rat
io
Current Ratio
Acid Test Ratio
BackgroundMarket Analysis
Financial Analysis
Forward Looking
30
Long-term Solvency
Debt to assets ratio of greater than one is a concern for long-term solvency
Suggests that future capital needs will be funded through equity – are the markets open?
Long-Term Solvency Risk
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1999Q1
1999Q2
1999Q3
1999Q4
2000Q1
2000Q2
2000Q3
2000Q4
2001Q1
Rat
io
Debt to Assets
BackgroundMarket Analysis
Financial Analysis
Forward Looking
31
Assumptions: U.S. Books, Music, Video
Revenue: Industry CAGR growth = 32% (from Jupiter) AMZN market share declines from 47% in 2000 to 28% in
2005
Gross Margin % constant at 2000 level of 24.6%Operating expenses grow at two-thirds sales growth rate (historically consistent with AMZN operating expense growth)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
32
DCF Assumptions: U.S. Early Stage
Consumer Electronics and Home Products combined CAGR = 59% (Jupiter study ) Assume AMZN growth matches industry CAGR Gross margins: 21% (from CE retailer Best Buy)
Toysrus.com partner revenue growth = 27% (Jupiter projections for online Toys category) Assume AMZN growth matches industry CAGR
Other ACN (partner revenue) = 88% of toysrus.com revenue
Operating expenses grow at two-thirds sales growth rate
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
33
Assumptions: International
Revenue growth by segment United Kingdom – Books/Music/Video Industry CAGR
59% FY2001 declining to 20% FY2004-FY2006 (from Jupiter)
Germany – B/M/V Industry CAGR 54% FY2001 declining to 18% FY2004-FY2006 (from Jupiter)
France - B/M/V Industry CAGR 87% FY2001 declining to 31% FY2004-FY2006 (from Jupiter)
Japan - FY2000 AMZN sales grown by projected increase in Japan online spending
AMZN market share remains at 35% of total international market
BackgroundMarket Analysis
Strategic Analysis
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
34
Assumptions: International (cont’d)
Gross Margin constant at 21% (conservative and lower than U.S. B/M/V)
International operating expense growth modeled after U.S. expense growth (e.g. 2003 Int’l op. exp. % = 1999 U.S. op. exp. %)
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
35
Other Assumptions
Net WC grows at 61% of sales growth rate based on historical Net WC growth.
Tax rate = 0% through 2004 due to NOLs; 40% after 2004
Capital expenditures in 2001 fall to 35% of 2000 CapEx level (due to current warehouse overcapacity); after 2001 growth in single digits. CapEx is calculated assuming: Net PP&E decreases by 10% per year Depreciation constant at 2000 level
Terminal value: cash flows grow at 5% after 2005
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
36
Actual2000 2001 2002 2003 2004 2005
US Books, Music, Video 1,698 1,908 2,448 2,976 3,510 3,976Early-Stage Businesses 682 975 1,249 1,840 2,149 2,448International 381 601 767 959 1,170 1,404Total Revenue $2,761 $3,485 $4,464 $5,775 $6,829 $7,828
Actual2000 2001 2002 2003 2004 2005
Sales Growth 68% 26% 28% 29% 18% 15%
Gross Margin 24% 25% 25% 24% 24% 24%Operating Expense (as % of Sales) 35% 26% 23% 19% 18% 18%
Tax Rate 0% 0% 0% 0% 0% 40%
CapEx, Net PPE, Depreciation:Actual2000 2001 2002 2003 2004 2005
Capital Expenditures $135 $47 $51 $54 $57 $60Net PPE $366 $329 $296 $267 $240 $216Depreciation $84 $84 $84 $84 $84 $84
Change in NWCActual2000 2001 2002 2003 2004 2005
NWC $386 $448 $524 $618 $687 $749DeltaNWC ($113) ($62) ($77) ($94) ($69) ($61)
DCF Model Assumptions
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
37
Actual2000 2001 2002 2003 2004 2005
Net Sales $2,762 $3,485 $4,464 $5,775 $6,829 $7,828COGS 2,106 2,615 3,358 4,361 5,157 5,917Gross Profit 656 870 1,105 1,413 1,672 1,911
Operating Expenses 972 911 1,036 1,113 1,254 1,403
EBIT (316) (41) 69 300 418 508Income Tax Expense 0 0 0 0 0 203EBIAT (316) (41) 69 300 418 305
Depreciation Expense 84 84 84 84 84Capital Expenditures (47) (51) (54) (57) (60)Delta NWC (62) (77) (94) (69) (61)
FCF ($66) $26 $236 $375 $267
Projected Cash Flows
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
38
WACC - Determination of Beta
Average unlevered Beta = 0.92Average levered Beta = 1.24
Company BV of DebtMV of Equity
Total Cap % Debt u
Amazon.com 2,144 6,067 8,211 26.1% 2.55 1.89B&N.com 136 355 491 27.7% 0.64 0.46FTD.com 10 280 290 3.6% 0.68 0.66Stamps.com 29 152 181 16.3% 2.38 1.991-800 Contacts 12 245 258 4.7% 0.79 0.751-800 Flowers 66 514 579 11.3% 0.63 0.56Global Sports 44 133 177 24.8% 1.28 0.96Borders 1,201 1,543 2,744 43.8% 0.72 0.40Wal-Mart 45,647 237,024 282,671 16.1% 1.25 1.05Best-Buy 1,899 11,749 13,648 13.9% 1.51 1.30Cost-Co 4,285 16,142 20,427 21.0% 1.30 1.03
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
39
Amazon’s WACC
Market Risk-free Cost of Cost of Debt / Beta risk rate equity debt capital WACC1.25 8.8% 4.3% 15.3% 9.5% 26.0% 13.8%1.47 8.8% 4.3% 17.2% 9.5% 26.0% 15.2%2.00 8.8% 4.3% 21.9% 9.5% 26.0% 18.7%
2.55 8.8% 4.3% 26.7% 9.5% 26.0% 22.3%3.00 8.8% 4.3% 30.7% 9.5% 26.0% 25.2%
Cost of debt before tax = 15.9%Tax rate = 40%
Beta = 2.55 = Amazon’s current betaBeta = 1.25 = Average beta of the comparables, levered for AmazonBeta = 1.47 = beta in December 1999
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
40
(in millions, except per share data)
PV of PV of Total Debt Equity # of Per shareWACC FCF TV (1) Value Value Value S/O Value13.8% $486 $1,672 $2,157 $2,144 $13 350.9 $0.0418.7% $406 $871 $1,278 $2,144 ($866) 350.9 ($2.47)22.3% $358 $595 $953 $2,144 ($1,191) 350.9 ($3.39)25.2% $324 $452 $776 $2,144 ($1,368) 350.9 ($3.90)
(1) Perpetuity Growth 5%
Valuation using DCF
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
41
Valuation using Price/Sales
Company Revenues Earnings P/Sales P/E Price 52-week %declineHigh Low from high
Amazon.com 2,762 -1,411 2.2 -4.3 16.89 62.38 8.10 -72.9%B&N.com 320 -65 1.1 -5.4 2.18 11.06 0.97 -80.3%FTD.com 98 -35 2.8 -8.1 5.75 6.14 1.06 -6.4%Stamps.com 15 -213 9.9 -0.7 3.02 16.38 2.22 -81.6%1-800 Contacts 145 10 1.7 23.4 21.18 63.75 13.25 -66.8%1-800 Flowers 385 -67 1.3 -7.7 8 8.60 2.55 -7.0%Global Sports 43 -58 3.1 -2.3 4.6 11.13 2.38 -58.7%Borders 3,271 44 0.5 35.4 19.3 19.98 10.88 -3.4%Wal-Mart 191,329 6,295 1.2 37.7 53.02 62.94 41.44 -15.8%Best-Buy 15,327 395 0.8 29.7 56.55 81.19 21.00 -30.3%Cost-Co 32,164 631 0.5 25.6 35.87 52.50 25.94 -31.7%
Average Price/sales excluding min and max= 1.7 Value per share is = $13.29The difference with DCF proves that the market is still very optimistic about Amazon
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
42
Forward Looking
BackgroundMarket Analysis
Financial Analysis
Forward LookingBackgroundMarket Analysis
Financial Analysis
Forward Looking
43
Future: Makings of a Winner
The Space E-tailing Brokerages On-line Auctions
The Losers Insufficient demand Higher costs Negative profits
The Winners First mover advantage Superior customer service Strong name brand
BackgroundMarket Analysis
Financial Analysis
Forward Looking
44
E-tailing: Profit Reigns Supreme
The Story: “Virtual” stores face reality that retailing involves real goods
and real costs Many face the reality of negative profits
The Casualties: Kozmo (.com) Inc. – liquidation was delivered to its’ door
NY State of Mind: model only works in dense urban areas New orders = more hires to deliver more goods = higher costs
Pets.com – only the singing puppet remains Not a natural e-tailing market: Is it convenient to wait days to get dog food
that sells down the street? $82.5 million said “yes” in the 1998 IPO Negative gross margin in every quarter of operation said “no”
Webvan – needs to order some cash flow from the bread aisle Cash flows indicate a fast transition from start-up to liquidation From Dec99 to Dec00 (millions): CFO: (59) to (263), CFI: (641) to 247.5, CFF: 746 to (4.3)
BackgroundMarket Analysis
Financial Analysis
Forward Looking
45
E-tailing: Winning mix
Natural e-tailing market and product Commodities (Flowers, DVD’s, not luxury goods) that customers can
wait a few days to receive. Remember shipping charges (No Dog Food)!
Operational efficiency: ROA isn’t virtual Leverage assets across business lines and channels
Exceptional user interface and customer service Just because its online doesn’t make it convenient Generate repeat customers through a great experience, not fancy web
sites.
A brand that pays off: If you’re losing money on every sale, you can’t make it up in volume Forget the Super bowl ads
Current examples:Lands’ End, Staples, FTD
BackgroundMarket Analysis
Financial Analysis
Forward Looking
46
Online Brokerages
The Story: Trading at the speed of the net Increased competition from traditional brokerage houses Revenue growth through increased trading volume from existing
customers and new customers is difficult to achieve in current market
Major players: E-Trade
Current competitive advantage: leading brand name, proprietary technology
Growth opportunity: expanded products and service offerings—on-line and off-line brokerage and banking services, access to IPO
Datek Online and Ameritrade Current competitive advantage: low cost trading, relatively well-known
name, advanced technology Challenges: Hard to grow business in low volume market condition,
maybe targets for acquisition
BackgroundMarket Analysis
Financial Analysis
Forward Looking
47
Online Auction
The story: Competitive advantage: Internet is the largest auction site More and more people and business are going on line Auction house collecting fees, but do not carry inventory or ship
products Auction sites attract even more business in a slow economy
The winning player: E-Bay
First-mover advantage: world’s largest and most popular person-to-person online trading community—has customer loyalty
Low cost and scalable business model Established infrastructure
BackgroundMarket Analysis
Financial Analysis
Forward Looking
48
ISPs
Definition: company that provides access to the internet. In addition to serving individuals, they also serve companies, providing a direct connection from the company’s networks to the internet.
Winners: AOL, Earthlink
Losers: Free internet access providers, small players
Large subscriber base permits economies of scale that allow ISPs to increase e-commerce revenues and improve margins
High marketing & customer acquisition costs
High churn rates increase volatility in revenues
Broadband driving growth rates
Alliances with cable companies and computer manufacturers drive growth
BackgroundMarket Analysis
Financial Analysis
Forward Looking
49
Portal: One-stop Shop
What is a portal: Offers broad array of resources and services
Successful portals: Useful services - partnerships, free e-mails, search engine Large consumer base Ability to generate advertising revenue Example: Yahoo - first pure content web site to generate profit
Failed portals: Not enough useful service Not enough customer base Example: Go.com, Sloanspace
BackgroundMarket Analysis
Financial Analysis
Forward Looking
50
Other Net Models
Drkoop.com’s downfall
Failed alliances with partners (AOL, Go.com, etc.) Unable to build brand Acquisitions did not provide positive net return
BackgroundMarket Analysis
Financial Analysis
Forward Looking
51
Other Net Models: Monster.com
Has become the pre-eminent site in its sector 26.1 million unique visits last March
Capturing network effects Makes the sector attractive to online companies
Global presence and aggressive marketing Superbowl segments
Not overly dependent on advertising for revenue 60% from employers paying for job postings, 24% for access to resume
database, 16% from advertising
Has managed to become profitable 1st quarter revenues up 111% from last year Operating profit of $32.5 million. This has lead the owner (TMPW) to
exceed EPS predictions by 4 cents/share (EPS 18 cents)
May be immune as job seeker population increases
BackgroundMarket Analysis
Financial Analysis
Forward Looking
52
Contributors
Amy Rabatin Andre Caldas Oliveira Cristen Baca Lance DurhamAndreas Wold-Olsen Andres Trevino Jason Ottman Natalie Brain
Anne Bosser Anna Mitelman Dave Greenwood Chris PunBert-Jaap Djikstra Bill Behrman Eric Partlan Ed Tai
Tyler Rameson Bob Kelly Jason Escamilla Eric JanBransby Whitton Thomas Salopek
Jayne Tan Evan Lee Niall Corrigan Xiaoyu LiuJeff Winkler Grace Webber Rebecca Kirk Ralph Taylor-SmithJosh Burack Greg Chalker S. Andrew Hill Shannon O'Callaghan
Karen Loomis Jody Renna Sergio Delgado Jenny ZhongKen Yang Joe Skorski Tisha Young John Verberkmoes
Keyur Patel Juan Carlos Calderon Waymond Harris David KrauseLeslie Koenigs Ken TateLloyd Prophet Luis WongCaroline Chan Macarena DominguezMark deLaar Victor Pena
Michael Prazma Dany MakloufSean Hwang Bob PalazziSavina Eneva
Background: 1999 Analysis Market Analysis: 1999-Present
Financial Analysis Forward Looking