Financial Statement Analysis of Amazon. com, Inc. Introduction The purpose of this essay is to perform financial statement analysis on Amazon. com, Inc. (NASDAQ: AMZN ). We start with an introduction of Amazon and its industry. We then evaluate the company’s financial position, liquidity, operating capability and financial flexibility using different ratios. To evaluate the financial performance of Amazon. com, Inc we disclose recurring NICO and do full ROE disaggregation. Amazon. com’s stock price increased from $44. 29 per share at the end of fiscal year 2004 to $134. 2 per share at the end of fiscal year 2009. Earnings per share increased from $0. 63 to $2. 06. The stock closed at $118. 87 on 02/01/2010. Recommendation Amazon. com is a fast growing E-Commerce company. Although facing the recent U. S. and global economic down turn and intense competitions from various industries, its sales increased 28% in 2009, diluted earnings per share increased 31%. Based on our analysis, we project the company to continue maintain the high growth rate. We project the two year target price range of Amazon’s stock to be $193 to $209.
The stock is currently undervalued. Consequently, our recommendation of Amazon. com is BUY. Industry Analysis Amazon. com, Inc. is an American-based multinational electronic commerce company. Headquartered in Seattle, Washington, Amazon was founded in 1994. As one of the largest online retailers in the world, Amazon claims to offer “Earth’s Biggest Selection”. In addition to online retailing, Amazon also offers programs that enables seller to sell their products on Amazon. com and to fulfill orders through Amazon. It earns fixed fees and revenue share fees etc. hough those transactions. Amazon turned its first profit in the fourth quarter of 2001 and maintained high growth rate since then. We believe that the below are the key factors important to the future success of Amazon. com: * Successful in efforts to expand into international market segments – Amazon needs to further expand internationally to maintain its sustainable growth. * Successful in optimizing fulfillment process and operating its fulfillment centers – Amazon needs to continue to expand and optimize the operation of its fulfillment centers. Successful in finding new revenue streams – Amazon needs to seek new ways to diversify revenue generation and drive its overall growth. * Manage growth effectively – Amazon’s global expansion increases the complexity of the business. Financial position, liquidity, operating capability and financial flexibility Financing structure of Amazon. com Table 1 summarizes how Amazon. com was financed as of each of the last 6 fiscal year ends. As of December 31:(in millions) | | | | | | | 2009| 2008| 2007| 2006| 2005| 2004|
Operating liabilities| $ 8,447 | $ 5,233 | $4,006 | $ 2,685 | $1,929 | $ 1,620 | Financing liabilities| 109 | 409 | 1,282 | 1,247 | 1,521 | 1,855 | Equity| 5,257 | 2,672 | 1,197 | 431 | 246 | (227)| Total Assets| $13,813 | $ 8,314 | $6,485 | $ 4,363 | $3,696 | $ 3,248 | | | | Table 1| | | | Amazon’s fixed assets additions steadily increased between fiscal year 2004 and 2009. Its possession of marketable securities increased each year other than 2007, which was due to the anticipation of an acquisition in 2008. At the same time, Amazon. om has been aggressively paying off its long term debt. Its debt continues to decrease between 2004 and 2009. The debt to total assets ratio dropped from 57% in 2004 to only 1% in 2009. Between 2006 and 2008, Amazon repurchased total 17 million shares of common stocks. Overall, Amazon. com shows good
The three liquidity ratios show Amazon has very good liquidity, which means it could easily satisfy current liabilities with current assets. Comparing to Amazon, Ebay is even more liquid as it could satisfy its short term liabilities purely by cash and cash equivalents. | | Amazon. com| | | eBay| | | 2009| 2008| 2007| 2006| 2005| 2004| 2009| 2008| Current Ratio (to one)| 1. 33| 1. 30| 1. 39| 1. 33| 1. 52| 1. 57| 2. 32| 1. 70| Quick Ratio (to one)| 1. 04| 1. 00| 1. 07| 0. 99| 1. 22| 1. 27| 2. 32| 1. 70| Cash Ratio (Acid Ratio) (to one)| 0. 86| 0. 79| 0. 84| 0. 80| 1. 04| 1. 10| 1. 10| 0. 86| | | Table 2| | | | | |
Financial Flexibility Financial flexibility (Solvency and leverage) is a company’s ability to adapt to unforeseen events and opportunities. Leverage means using debt (or other third party funds) to increase earnings for the owners. Table 3 presents some financial flexibility and leverage ratios of Amazon. com from 2005 to 2009 and for Ebay from 2008 to 2009. Amazon. com is a fast growing company and in the fiscal year ended 2004, they had a negative total equity, which could skew the ratios. Therefore, we did not present the ratios in 2004. From table 3 we can see that at the end of fiscal year 2009, both Amazon. om and eBay have high financial flexibility due to low or even zero long-term debt. Their usages of leverages are both low. Although a company should try to use leverage to increase earnings for the owner, in the current economical environment, have low or zero long-term debt is actually an advantage, which means they don’t need to rely on creditors to maintain their high growth rate. Overall, Amazon. com has good operating capability, high liquidity and high financial flexibility. One thing to note is that in the current economy environment, while a lot of companies are seeking for credit yet they could not find it, Amazon. om is using cash to paying off its debt. This shows that the company’s operation is healthy and the management team is confident about the future growth of the company. | | Amazon. com| | | eBay| | 2009| 2008| 2007| 2006| 2005| 2009| 2008| Financial Leverage| 2. 8| 3. 8| 6. 7| 11. 9| 365. 5| 1. 4| | Debt to Assets| 1%| 5%| 20%| 29%| 41%| 0%| 0%| Debt to Equity| 2%| 15%| 107%| 289%| 618%| 0%| 0%| Debt to Capital| 2%| 13%| 52%| 74%| 86%| 0%| 0%| Liabilities to Equity| 1. 63| 2. 11| 4. 42| 9. 12| 14. 02| 0. 34| 0. 41| Liabilities to Assets| 62%| 68%| 82%| 90%| 93%| 25%| 29%| | | | Table 3| | | | Operations and Profitability
As shown in Table 4, we reconciled Amazon’s NICO as reported to “recurring NICO” for 2004 – 2009. The diluted net earnings per common share – as reported and “recurring NICO” per common share are included too. We also included similar reconciliation for Ebay’s fiscal year 2009. Table 5 shows the complete disaggregation of profit margin and return on equity. From the ROE disaggregation we can see that between 2004 and 2009, Amazon. com maintained a gross profit margin between 22% and 24% and operating margin between 3. 6% and 6. 4%. Especially, since 2007, its operating margin stabilized at around 4. % with a slight increase in 2009. Its profit margin steadily increased 0. 2% each year from 3. 3% to 3. 7%. Amazon. com’s ROE decreased over the years due to their pay back of most of their debt. Overall, Amazon. com maintained stable operating efficiency in recent years. At the same time, its overall profit efficiency is in a slight uptrend. Amazon. com has negative operating cycle, which means Amazon doesn’t pay its suppliers until after it receives the payment of the sales. Therefore, Amazon doesn’t need to hold much inventory while it can hold the money for a longer period of time. This is the advantage of the online retailing.
Its operating cycle decreased from -27. 58 days in 2006 days to -37. 16 days in 2009, which shows improved operating efficiency over the years. Amazon. com’s operating margin and profit margin both were pretty stable with a slight increase in 2009. We expect its profitability continue to maintain at the same level or slightly increase. Amazon. com’s operating cycle and Asset Turn Over Rate both continue to drop in the past three years (annual rate around 20% and 5% separately), which shows its improvement in operating efficiency. We expect Amazon. com continue to improve its operating efficiency.
Table 4 Table 5 Business and Investment Risks As a result of our analysis, we discovered the following business and investment risks that could result in downgrading of Amazon’s stock. Intense competition – Amazon’s business is intensely competitive. It has many competitors in different industries, including retail, e-commerce services, digital content and digital media devices, and web services. The intense competition has corresponding negative impact on prices, which in turn would hurt profit margins. For example, to compete with Apple, Amazon has to lower the price of its Ebook reader – Kindle.
Weakening of the U. S. or global economies — A softening of demand caused by a weakening of the U. S. or global economies may result in decreased revenue or growth. Taxation Risks – Currently, Amazon doesn’t collect sales or other taxes on shipments of most of its goods into most states in the U. S. This situation could change in the future due to regulation changes. This could decrease its ability to compete with traditional retailers. Growth Potential and Recommendation As a fast growing company, Amazon. com has a diluted recurring NICO per common share CAGR of 27% over the past five years.
The diluted recurring NICO per common share increased 35% in 2009. The sustainable growth rate in 2009 was 23%. We expect Amazon to continue to maintain its growth rate. Therefore, we project the future growth rates of Amazon to be between 25% and 30%. The two year target diluted recurring NICO per common share would be between $3. 22 and $3. 48. We project Amazon’s P/E ration will be around 60. Therefore, the two year target price range for Amazon would be $193 to $209. The closing price of Amazon. com on 02/01/2010 was $118. 87. As the result of the above analysis, our recommendation of Amazon. com is BUY.