Amazon.com Valuation Exercise 15.402 Finance Theory II Prof. Kevin Rock 5/10/01
Contributors
Agenda <ul><li>Background: 1999 Analysis </li></ul><ul><li>Market Analysis: 1999-present </li></ul><ul><li>Financial Analy...
Background: 1999 Analysis <ul><li>A brief overview of the “ Amazon.com Valuation Exercise” submitted by 15.434 on December...
1999 Valuation <ul><li>Key Assumptions </li></ul><ul><ul><li>Growing market share to 24% of a market growing at 8% per yea...
1999 Valuation (cont’d) <ul><li>Results of the Analysis </li></ul><ul><ul><li>Share Price =  $18.20 per share  (  = 1.47...
Historical Analysis <ul><li>Expansion of Price/Revenue Multiple </li></ul>Background Market Analysis Financial Analysis Fo...
Historical Analysis (cont’d) <ul><li>IPO date: May 15, 1997 </li></ul><ul><ul><li>Price per share: $1.50 (adjusted for sto...
Holdings Profile <ul><li>Insiders held 60% of the stock </li></ul><ul><li>The remaining 74 million shares (float) traded <...
Valuation of Internet Companies <ul><li>Usually estimated using comparables </li></ul><ul><ul><li>P/E * estimated earnings...
<ul><li>Market Analysis </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis...
Lehman : “..investors should  stay away  from the company's bonds because the extreme credit risk facing the company has n...
Amazon: Our sister kissing Buy Rating reflects our extreme caution in a difficult economic environment, while still recogn...
Comparables: Stock Performance Source: http://finance.yahoo.com/ Legend:  AMZN: Amazon; BNBN: Barnes And Noble; BUYX: Buy....
Source: http://finance.yahoo.com/ Comparables: Stock Profile Background Market Analysis Financial Analysis Forward Looking...
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 MASON INC LINCOL...
Top Insiders and Institutions (as of March 31, 2001) 359.2 million shares outstanding 60% owned by insiders 40% owned by i...
Insider Trading Director John Doerr Sells most of stock Bezos + Friends Bezos Bezos TransCosmos Background Market Analysis...
What the FY 2000 Numbers Show... <ul><li>Revenue growth slowing </li></ul><ul><ul><li>From 298% (’98), 122% (’99), 30%(200...
Amazon.com Financial Performance Rev Growth: 22% GM Growth: 26% OM Growth: -15% NI Growth: 24% Ratios P/E: NA P/S: 2.23 P/...
<ul><li>Sales:   $1.00 </li></ul><ul><ul><li>COGS   ( 0.76) </li></ul></ul><ul><ul><ul><li>Gross profit   0.24 </li></ul><...
1999 Valuation Revisited <ul><li>Good valuation but several incorrect assumptions </li></ul><ul><ul><li>Massive capital ex...
Short the Stock or Buy a Put (Put Strike at $80, $10 Option Price) 1999 Valuation Revisited (cont’d) Background Market Ana...
<ul><li>Other Strategies </li></ul><ul><li>2:1 Reverse Hedge (Buy 2 Calls, Short 1 Share) </li></ul><ul><li>1:2 Hedge (Lon...
<ul><li>Financial Analysis </li></ul>Background Market Analysis Financial Analysis Forward Looking
Turnover Control <ul><li>Accounts receivable turnover has been constant at approximately 1-3 days </li></ul><ul><li>Accoun...
Operating Cycle <ul><li>Leveled inventory and decreased days payable have adversely impacted the operating cycle </li></ul...
Profitability <ul><li>Return on assets has been consistently negative </li></ul><ul><li>Amazon has lost approximately 12 c...
Short-term Liquidity <ul><li>Current and acid test ratios have declined significantly, indicating potential difficulties i...
Long-term Solvency <ul><li>Debt to assets ratio of greater than one is a concern for long-term solvency </li></ul><ul><li>...
Assumptions: U.S. Books, Music, Video <ul><li>Revenue: </li></ul><ul><ul><li>Industry CAGR growth = 32% (from Jupiter) </l...
DCF Assumptions: U.S. Early Stage <ul><li>Consumer Electronics and Home Products combined CAGR = 59% (Jupiter study ) </li...
Assumptions: International <ul><li>Revenue growth by segment </li></ul><ul><ul><ul><li>United Kingdom – Books/Music/Video ...
Assumptions: International (cont’d) <ul><li>Gross Margin constant at 21%  (conservative and lower than U.S. B/M/V) </li></...
Other Assumptions <ul><li>Net WC grows at 61% of sales growth rate based on historical Net WC growth.  </li></ul><ul><li>T...
DCF Model Assumptions Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial A...
Projected Cash Flows Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial An...
WACC - Determination of Beta Average unlevered Beta = 0.92 Average levered Beta = 1.24 Background Market Analysis Financia...
Amazon’s WACC Cost of debt before tax = 15.9% Tax rate = 40% Beta = 2.55 = Amazon’s current beta Beta = 1.25 = Average bet...
Valuation using DCF Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Ana...
Valuation using Price/Sales Average Price/sales excluding min and max= 1.7     Value per share is = $13.29 The difference...
<ul><li>Forward Looking </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis...
Future: Makings of a Winner <ul><li>The Space </li></ul><ul><ul><li>E-tailing </li></ul></ul><ul><ul><li>Brokerages </li><...
E-tailing: Profit Reigns Supreme <ul><li>The Story:  </li></ul><ul><ul><li>“ Virtual” stores face reality that retailing i...
E-tailing: Winning mix <ul><li>Natural e-tailing market and product </li></ul><ul><ul><li>Commodities (Flowers, DVD’s, not...
Online Brokerages <ul><li>The Story: Trading at the speed of the net </li></ul><ul><ul><li>Increased competition from trad...
Online Auction <ul><li>The story:  </li></ul><ul><ul><li>Competitive advantage: Internet is the largest auction site </li>...
ISPs <ul><li>Definition :  company that provides access to the internet.  In addition to serving individuals, they also se...
Portal: One-stop Shop <ul><li>What is a portal :  </li></ul><ul><ul><li>Offers broad array of resources and services </li>...
Other Net Models <ul><li>Drkoop.com’s downfall </li></ul><ul><ul><li>Failed alliances with partners (AOL, Go.com, etc.) </...
Other Net Models: Monster.com <ul><li>Has become the pre-eminent site in its sector  </li></ul><ul><ul><li>26.1 million un...
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Amazon.com Valuation Exercise 15.402 Finance Theory II

  1. 1. Amazon.com Valuation Exercise 15.402 Finance Theory II Prof. Kevin Rock 5/10/01
  2. 2. Contributors
  3. 3. Agenda <ul><li>Background: 1999 Analysis </li></ul><ul><li>Market Analysis: 1999-present </li></ul><ul><li>Financial Analysis </li></ul><ul><li>Forward Looking </li></ul>
  4. 4. Background: 1999 Analysis <ul><li>A brief overview of the “ Amazon.com Valuation Exercise” submitted by 15.434 on December 8, 1999 </li></ul><ul><ul><li>1999 Valuation </li></ul></ul><ul><ul><li>Historical Analysis </li></ul></ul><ul><ul><li>Holdings Profile </li></ul></ul><ul><ul><li>Valuation of Internet Companies </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  5. 5. 1999 Valuation <ul><li>Key Assumptions </li></ul><ul><ul><li>Growing market share to 24% of a market growing at 8% per year </li></ul></ul><ul><ul><li>Gross margins grow to 25% while marketing falls to 8% of Sales </li></ul></ul><ul><ul><li>Capex and Depreciation offset (not true in 1999) </li></ul></ul><ul><ul><li>Growth in free cash flows of 5% after 2010 </li></ul></ul><ul><li>Weighted Average Cost of Capital </li></ul><ul><ul><li>Comparables: Borders, Barnes & Noble and Wal-Mart </li></ul></ul><ul><ul><li>Amazon.com Beta = 1.47 </li></ul></ul><ul><ul><li>WACC = 17% </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  6. 6. 1999 Valuation (cont’d) <ul><li>Results of the Analysis </li></ul><ul><ul><li>Share Price = $18.20 per share (  = 1.47) </li></ul></ul><ul><ul><li>Range: $27.50 per share (  = 1) to $6.80 per share (  = 3) </li></ul></ul><ul><li>Key Insights </li></ul><ul><ul><li>Increased gross margins and shrinking marketing & selling expenses are key drivers of long-term value </li></ul></ul><ul><ul><li>Free Cash Flows projected to be positive starting in 2003 </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  7. 7. Historical Analysis <ul><li>Expansion of Price/Revenue Multiple </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  8. 8. Historical Analysis (cont’d) <ul><li>IPO date: May 15, 1997 </li></ul><ul><ul><li>Price per share: $1.50 (adjusted for stock splits) </li></ul></ul><ul><li>Invested in other Internet retailers </li></ul><ul><ul><li>drugstore.com, gear.com, pets.com, etc. </li></ul></ul><ul><li>Analyst forecasts are rosy </li></ul><ul><ul><li>$17B sales of on-line merchants in 1999 </li></ul></ul><ul><ul><li>Web sales to consumers $108B in 2003 </li></ul></ul><ul><ul><li>Sales growth is 59% CAGR </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  9. 9. Holdings Profile <ul><li>Insiders held 60% of the stock </li></ul><ul><li>The remaining 74 million shares (float) traded </li></ul><ul><ul><li>Janus funds = 22% of the float </li></ul></ul><ul><ul><li>Short interest = 22% of float </li></ul></ul><ul><ul><li>56% of the float was actively traded </li></ul></ul><ul><li>Average daily volume 12.9 million shares </li></ul><ul><li>Excluding Janus, and short shares, Amazon’s shareholder base turned over every 6 days! </li></ul><ul><li>A stock with huge interest and very small float led to large volatility and BIG price swings! </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  10. 10. Valuation of Internet Companies <ul><li>Usually estimated using comparables </li></ul><ul><ul><li>P/E * estimated earnings </li></ul></ul><ul><ul><li>P/S </li></ul></ul><ul><ul><li>Breakup Value </li></ul></ul><ul><li>Most stocks are overvalued </li></ul><ul><ul><li>“ Nifty Fifty” study </li></ul></ul><ul><ul><li>Value = current operating value + value of all future growth opportunities </li></ul></ul><ul><li>1999 Study of 20 internet companies concluded valuation implies a growth rate of 80%! </li></ul><ul><li>Indeed, high P/S ratios led to overvaluation </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  11. 11. <ul><li>Market Analysis </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  12. 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 .&quot; JP Morgan : Initiates coverage of Amazon.com with a &quot;BUY&quot; rating and a 12-month price target of $160 Wall Street Sentiment Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  13. 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, 5/2001 Barnes 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) Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  14. 14. Comparables: Stock Performance Source: http://finance.yahoo.com/ Legend: AMZN: Amazon; BNBN: Barnes And Noble; BUYX: Buy.com; EFTD: FTD.com Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  15. 15. Source: http://finance.yahoo.com/ Comparables: Stock Profile Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  16. 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 MASON INC LINCOLN CAPITAL MANAGEMENT CO JANUS CAPITAL CORP MORGAN STANLEY DEAN WITTER & CO CITIGROUP INC BARCLAYS GLOBAL INVESTORS NA /CA/ FMR CORP AMERINDO INVESTMENT ADVISORS INC TCW GROUP INC BRINSON PARTNERS INC/IL STATE STREET CORP OLD MUTUAL ASSET MANAGERS UK LTD VANGUARD GROUP INC TIAA CREF INVESTMENT MANAGEMENT LLC CALIFORNIA PUBLIC EMPLOYEES RETIREME.. DRESDNER RCM GLOBAL INVESTORS LLC /CA... JOHO CAPITAL LLC STATE TREASURER STATE OF MICHIGAN HELLMAN JORDAN MANAGEMENT CO INC /MA/ MUNDER CAPITAL MANAGEMENT /ADV This Qtr Last Qtr 2 Qtrs Ago 3 Qtrs Ago Institutional Holdings Large institutional shareholders have continued to accumulate shares, others are mostly flat to rising. Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  17. 17. Top Insiders and Institutions (as of March 31, 2001) 359.2 million shares outstanding 60% owned by insiders 40% owned by institutions *All share data in thousands Institutional Holdings (cont’d) Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  18. 18. Insider Trading Director John Doerr Sells most of stock Bezos + Friends Bezos Bezos TransCosmos Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  19. 19. What the FY 2000 Numbers Show... <ul><li>Revenue growth slowing </li></ul><ul><ul><li>From 298% (’98), 122% (’99), 30%(2000) </li></ul></ul><ul><ul><li>Expanding revenue base limits growth rate </li></ul></ul><ul><ul><li>Business conditions </li></ul></ul><ul><ul><ul><li>- Market maturity </li></ul></ul></ul><ul><ul><ul><li>- General slowdown in consumer spending </li></ul></ul></ul><ul><li>$1.6B net loss </li></ul><ul><ul><li>$500M equity losses (permanent and temporary) </li></ul></ul><ul><ul><li>$860M operating loss (before interest and other) </li></ul></ul>Amazon Financials Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  20. 20. Amazon.com Financial Performance Rev Growth: 22% GM Growth: 26% OM Growth: -15% NI Growth: 24% Ratios P/E: NA P/S: 2.23 P/B: NA FTD.com Financial Performance Rev Growth: 38% GM Growth:30% OM Growth: 7% NI Growth: NA Ratios P/E: NA P/S: 2.41 P/B: 23.23 B&N.com Financial Performance Rev Growth: 38% GM Growth: 21% OM Growth: -164% NI Growth: -4% Ratios P/E: NA P/S: 0.96 P/B: 3.31 Buy.com Financial Performance Rev Growth:NA GM Growth:7% OM Growth: -17% NI Growth: NA Ratios P/E: NA P/S: 0.09 P/B: 0.78 Source: Bloomberg, Financial performance figures are expressed in percentage terms to compare the relative over last calendar year Comparables: Financials Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  21. 21. <ul><li>Sales: $1.00 </li></ul><ul><ul><li>COGS ( 0.76) </li></ul></ul><ul><ul><ul><li>Gross profit 0.24 </li></ul></ul></ul><ul><ul><li>Marketing (0.22) </li></ul></ul><ul><ul><li>Technology & content (0.10) </li></ul></ul><ul><ul><li>SGA (0.04) </li></ul></ul><ul><ul><li>Amortization (0.12) </li></ul></ul><ul><ul><li>Impairment (0.18) </li></ul></ul><ul><ul><li>Net interest expense (0.04) </li></ul></ul><ul><ul><li>Unrealized gain/loss ( 0.05) </li></ul></ul><ul><li>Loss per $1 revenue: ($0.51) </li></ul>(Based on FY 2000 Operating Results) Flawed Business Model? Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  22. 22. 1999 Valuation Revisited <ul><li>Good valuation but several incorrect assumptions </li></ul><ul><ul><li>Massive capital expenditures (supply chain, warehousing, etc.) vs. forecast of equal CAPEX and depreciation </li></ul></ul><ul><ul><li>Operating expenses nearly 200% higher than forecast </li></ul></ul><ul><ul><li>Lower gross margins than forecast </li></ul></ul><ul><ul><li>Led to lower FCFs than forecast suggested </li></ul></ul><ul><li>However, valuation said $18.20/share and the most recent closing price was $17.56/share. </li></ul><ul><li>So, if you bought the 1999 valuation… </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  23. 23. Short the Stock or Buy a Put (Put Strike at $80, $10 Option Price) 1999 Valuation Revisited (cont’d) Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  24. 24. <ul><li>Other Strategies </li></ul><ul><li>2:1 Reverse Hedge (Buy 2 Calls, Short 1 Share) </li></ul><ul><li>1:2 Hedge (Long 1 Share, Buy 2 Puts) </li></ul><ul><li>Bottom Straddle (Buy 1 Put, Buy 1 Call) </li></ul><ul><li>Protect yourself against the upside </li></ul><ul><ul><li>Why? The valuation showed massive overvaluation. Save the option costs and just short the stock!!! </li></ul></ul>1999 Valuation Revisited (cont’d) Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  25. 25. <ul><li>Financial Analysis </li></ul>Background Market Analysis Financial Analysis Forward Looking
  26. 26. Turnover Control <ul><li>Accounts receivable turnover has been constant at approximately 1-3 days </li></ul><ul><li>Accounts payable turnover has averaged 60 days </li></ul><ul><ul><li>Over 50% of COGS financed w/ accts payable </li></ul></ul><ul><ul><li>1Q ‘01 - suppliers receive (request?) faster payments (45 days) </li></ul></ul><ul><li>Inventory turnover has decreased due to Amazon’s move from “just in time” to “leveled” inventory </li></ul><ul><ul><li>Reduced delays in filling customer orders </li></ul></ul><ul><ul><li>More products carried in stock </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  27. 27. Operating Cycle <ul><li>Leveled inventory and decreased days payable have adversely impacted the operating cycle </li></ul>Background Market Analysis Financial Analysis Forward Looking
  28. 28. Profitability <ul><li>Return on assets has been consistently negative </li></ul><ul><li>Amazon has lost approximately 12 cents for each dollar tied up in the business </li></ul>Background Market Analysis Financial Analysis Forward Looking
  29. 29. Short-term Liquidity <ul><li>Current and acid test ratios have declined significantly, indicating potential difficulties in meeting current obligations </li></ul>Background Market Analysis Financial Analysis Forward Looking
  30. 30. Long-term Solvency <ul><li>Debt to assets ratio of greater than one is a concern for long-term solvency </li></ul><ul><li>Suggests that future capital needs will be funded through equity – are the markets open? </li></ul>Background Market Analysis Financial Analysis Forward Looking
  31. 31. Assumptions: U.S. Books, Music, Video <ul><li>Revenue: </li></ul><ul><ul><li>Industry CAGR growth = 32% (from Jupiter) </li></ul></ul><ul><ul><li>AMZN market share declines from 47% in 2000 to 28% in 2005 </li></ul></ul><ul><li>Gross Margin % constant at 2000 level of 24.6% </li></ul><ul><li>Operating expenses grow at two-thirds sales growth rate (historically consistent with AMZN operating expense growth) </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  32. 32. DCF Assumptions: U.S. Early Stage <ul><li>Consumer Electronics and Home Products combined CAGR = 59% (Jupiter study ) </li></ul><ul><ul><li>Assume AMZN growth matches industry CAGR </li></ul></ul><ul><ul><li>Gross margins: 21% (from CE retailer Best Buy) </li></ul></ul><ul><li>Toysrus.com partner revenue growth = 27% (Jupiter projections for online Toys category) </li></ul><ul><ul><li>Assume AMZN growth matches industry CAGR </li></ul></ul><ul><li>Other ACN (partner revenue) = 88% of toysrus.com revenue </li></ul><ul><li>Operating expenses grow at two-thirds sales growth rate </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  33. 33. Assumptions: International <ul><li>Revenue growth by segment </li></ul><ul><ul><ul><li>United Kingdom – Books/Music/Video Industry CAGR 59% FY2001 declining to 20% FY2004-FY2006 (from Jupiter) </li></ul></ul></ul><ul><ul><ul><li>Germany – B/M/V Industry CAGR 54% FY2001 declining to 18% FY2004-FY2006 (from Jupiter) </li></ul></ul></ul><ul><ul><ul><li>France - B/M/V Industry CAGR 87% FY2001 declining to 31% FY2004-FY2006 (from Jupiter) </li></ul></ul></ul><ul><ul><ul><li>Japan - FY2000 AMZN sales grown by projected increase in Japan online spending </li></ul></ul></ul><ul><li>AMZN market share remains at 35% of total international market </li></ul>Background Market Analysis Strategic Analysis Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  34. 34. Assumptions: International (cont’d) <ul><li>Gross Margin constant at 21% (conservative and lower than U.S. B/M/V) </li></ul><ul><li>International operating expense growth modeled after U.S. expense growth (e.g. 2003 Int’l op. exp. % = 1999 U.S. op. exp. %) </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  35. 35. Other Assumptions <ul><li>Net WC grows at 61% of sales growth rate based on historical Net WC growth. </li></ul><ul><li>Tax rate = 0% through 2004 due to NOLs; 40% after 2004 </li></ul><ul><li>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: </li></ul><ul><ul><li>Net PP&E decreases by 10% per year </li></ul></ul><ul><ul><li>Depreciation constant at 2000 level </li></ul></ul><ul><li>Terminal value: cash flows grow at 5% after 2005 </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  36. 36. DCF Model Assumptions Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  37. 37. Projected Cash Flows Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  38. 38. WACC - Determination of Beta Average unlevered Beta = 0.92 Average levered Beta = 1.24 Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  39. 39. Amazon’s WACC Cost of debt before tax = 15.9% Tax rate = 40% Beta = 2.55 = Amazon’s current beta Beta = 1.25 = Average beta of the comparables, levered for Amazon Beta = 1.47 = beta in December 1999 Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  40. 40. Valuation using DCF Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  41. 41. Valuation using Price/Sales Average Price/sales excluding min and max= 1.7  Value per share is = $13.29 The difference with DCF proves that the market is still very optimistic about Amazon Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  42. 42. <ul><li>Forward Looking </li></ul>Background Market Analysis Financial Analysis Forward Looking Background Market Analysis Financial Analysis Forward Looking
  43. 43. Future: Makings of a Winner <ul><li>The Space </li></ul><ul><ul><li>E-tailing </li></ul></ul><ul><ul><li>Brokerages </li></ul></ul><ul><ul><li>On-line Auctions </li></ul></ul><ul><li>The Losers </li></ul><ul><ul><li>Insufficient demand </li></ul></ul><ul><ul><li>Higher costs </li></ul></ul><ul><ul><li>Negative profits </li></ul></ul><ul><li>The Winners </li></ul><ul><ul><li>First mover advantage </li></ul></ul><ul><ul><li>Superior customer service </li></ul></ul><ul><ul><li>Strong name brand </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  44. 44. E-tailing: Profit Reigns Supreme <ul><li>The Story: </li></ul><ul><ul><li>“ Virtual” stores face reality that retailing involves real goods and real costs </li></ul></ul><ul><ul><li>Many face the reality of negative profits </li></ul></ul><ul><li>The Casualties: </li></ul><ul><ul><li>Kozmo (.com) Inc. – liquidation was delivered to its’ door </li></ul></ul><ul><ul><ul><li>NY State of Mind: model only works in dense urban areas </li></ul></ul></ul><ul><ul><ul><li>New orders = more hires to deliver more goods = higher costs </li></ul></ul></ul><ul><ul><li>Pets.com – only the singing puppet remains </li></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul><ul><ul><ul><li>Negative gross margin in every quarter of operation said “no” </li></ul></ul></ul><ul><ul><li>Webvan – needs to order some cash flow from the bread aisle </li></ul></ul><ul><ul><ul><li>Cash flows indicate a fast transition from start-up to liquidation </li></ul></ul></ul><ul><ul><ul><li>From Dec99 to Dec00 (millions): </li></ul></ul></ul><ul><ul><ul><li>CFO: (59) to (263) , CFI: (641) to 247.5, CFF: 746 to (4.3) </li></ul></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  45. 45. E-tailing: Winning mix <ul><li>Natural e-tailing market and product </li></ul><ul><ul><li>Commodities (Flowers, DVD’s, not luxury goods) that customers can wait a few days to receive. Remember shipping charges (No Dog Food)! </li></ul></ul><ul><li>Operational efficiency: ROA isn’t virtual </li></ul><ul><ul><li>Leverage assets across business lines and channels </li></ul></ul><ul><li>Exceptional user interface and customer service </li></ul><ul><ul><li>Just because its online doesn’t make it convenient </li></ul></ul><ul><ul><li>Generate repeat customers through a great experience, not fancy web sites. </li></ul></ul><ul><li>A brand that pays off: </li></ul><ul><ul><li>If you’re losing money on every sale, you can’t make it up in volume </li></ul></ul><ul><ul><li>Forget the Super bowl ads </li></ul></ul><ul><li>Current examples:Lands’ End, Staples, FTD </li></ul>Background Market Analysis Financial Analysis Forward Looking
  46. 46. Online Brokerages <ul><li>The Story: Trading at the speed of the net </li></ul><ul><ul><li>Increased competition from traditional brokerage houses </li></ul></ul><ul><ul><li>Revenue growth through increased trading volume from existing customers and new customers is difficult to achieve in current market </li></ul></ul><ul><li>Major players: </li></ul><ul><ul><li>E-Trade </li></ul></ul><ul><ul><ul><li>Current competitive advantage: leading brand name, proprietary technology </li></ul></ul></ul><ul><ul><ul><li>Growth opportunity: expanded products and service offerings—on-line and off-line brokerage and banking services, access to IPO </li></ul></ul></ul><ul><ul><li>Datek Online and Ameritrade </li></ul></ul><ul><ul><ul><li>Current competitive advantage: low cost trading, relatively well-known name, advanced technology </li></ul></ul></ul><ul><ul><ul><li>Challenges: Hard to grow business in low volume market condition, maybe targets for acquisition </li></ul></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  47. 47. Online Auction <ul><li>The story: </li></ul><ul><ul><li>Competitive advantage: Internet is the largest auction site </li></ul></ul><ul><ul><li>More and more people and business are going on line </li></ul></ul><ul><ul><li>Auction house collecting fees, but do not carry inventory or ship products </li></ul></ul><ul><ul><li>Auction sites attract even more business in a slow economy </li></ul></ul><ul><li>The winning player: </li></ul><ul><ul><li>E-Bay </li></ul></ul><ul><ul><ul><li>First-mover advantage: world’s largest and most popular person-to-person online trading community—has customer loyalty </li></ul></ul></ul><ul><ul><ul><li>Low cost and scalable business model </li></ul></ul></ul><ul><ul><ul><li>Established infrastructure </li></ul></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  48. 48. ISPs <ul><li>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. </li></ul><ul><li>Winners : AOL, Earthlink </li></ul><ul><li>Losers : Free internet access providers, small players </li></ul><ul><li>Large subscriber base permits economies of scale that allow ISPs to increase e-commerce revenues and improve margins </li></ul><ul><li>High marketing & customer acquisition costs </li></ul><ul><li>High churn rates increase volatility in revenues </li></ul><ul><li>Broadband driving growth rates </li></ul><ul><li>Alliances with cable companies and computer manufacturers drive growth </li></ul>Background Market Analysis Financial Analysis Forward Looking
  49. 49. Portal: One-stop Shop <ul><li>What is a portal : </li></ul><ul><ul><li>Offers broad array of resources and services </li></ul></ul><ul><li>Successful portals: </li></ul><ul><ul><li>Useful services - partnerships, free e-mails, search engine </li></ul></ul><ul><ul><li>Large consumer base </li></ul></ul><ul><ul><li>Ability to generate advertising revenue </li></ul></ul><ul><ul><li>Example: Yahoo - first pure content web site to generate profit </li></ul></ul><ul><li>Failed portals: </li></ul><ul><ul><li>Not enough useful service </li></ul></ul><ul><ul><li>Not enough customer base </li></ul></ul><ul><ul><li>Example: Go.com, Sloanspace </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  50. 50. Other Net Models <ul><li>Drkoop.com’s downfall </li></ul><ul><ul><li>Failed alliances with partners (AOL, Go.com, etc.) </li></ul></ul><ul><ul><li>Unable to build brand </li></ul></ul><ul><ul><li>Acquisitions did not provide positive net return </li></ul></ul>Background Market Analysis Financial Analysis Forward Looking
  51. 51. Other Net Models: Monster.com <ul><li>Has become the pre-eminent site in its sector </li></ul><ul><ul><li>26.1 million unique visits last March </li></ul></ul><ul><li>Capturing network effects </li></ul><ul><ul><li>Makes the sector attractive to online companies </li></ul></ul><ul><li>Global presence and aggressive marketing </li></ul><ul><ul><li>Superbowl segments </li></ul></ul><ul><li>Not overly dependent on advertising for revenue </li></ul><ul><ul><li>60% from employers paying for job postings, 24% for access to resume database, 16% from advertising </li></ul></ul><ul><li>Has managed to become profitable </li></ul><ul><ul><li>1st quarter revenues up 111% from last year </li></ul></ul><ul><ul><li>Operating profit of $32.5 million. This has lead the owner (TMPW) to exceed EPS predictions by 4 cents/share (EPS 18 cents) </li></ul></ul><ul><li>May be immune as job seeker population increases </li></ul>Background Market Analysis Financial Analysis Forward Looking
  52. 52. Contributors
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