Amazon.com: A Financial Analysis
Provide a one (1) page executive summary which summarizes your findings and provides a
recommendation whether to buy or not to buy the stock and the debt securities of the company
(two separate decisions).
Amazon.com, Inc. is an intriguing company. It has increasingly become the “go-to” shopping
mall when you find you’re in need of a new kitchen gadget or athletic socks. Selection is
unmatched, and fulfillment and expedient delivery is a breeze with Amazon Prime, which
provides almost-instant gratification, sort of. Do you need a new digital camera? Oh, check
Amazon. And you’ll get the best prices and delivered to your door by Tuesday, too.
All this convenience in one place is hard to pass by: for both investors and lenders. Amazon
provides a fantastic package of products: selection, service, Kindle, and software services.
What’s not to like if you’re a consumer? It appears to be a successful model and the revenue
growth confirms it. Interestingly, all is not as it may appear.
Keeping in mind that Amazon’s goal is to maximize the stock price and increase shareholder
wealth, an in depth analysis at Amazon’s financial statements and structure was revealing.
Revenue growth is strong, increasing by over 200 percent over the past 5 years, however,
operating costs are also increasing, attributed to their aggressive acquisition strategies. This
resulted in poor profit margins for Amazon and it is important for them to focus on managing
operating costs to increase profit margins and net income.
Free cash flow (FCF) is important to a firm’s investors, both shareholders and debtholders. FCF
is used to pay debt, dividends, as well as for short term investments and we observe that there is
a significant reduction in FCF from $5752M in 2010 to 867M in 2011, meaning there is less
available to pay debt and interest to debtholders and less to pay dividends and repurchase stock
from shareholders. FCF is especially important to Amazon, to support its strategy to make
acquisitions. In fact, it may have been that with the significant level of FCF available in the
previous year, Amazon may have made acquisitions aggressively that may not add value to the
organization and to the shareholders, or at least it is not apparent yet despite the expenditures.
Amazon’s beta was calculated to be 0.82, which indicates that it is a relatively low risk. Analysts
have a consensus rating on Amazon as a “Buy” stock, which supports a decision to invest,
however, despite the performance of the stock price demonstrating relatively steady increases
over a period of 24 months, its earnings per share (EPS) is low at $1.39, which was decreased
from $2.55 the previous year. Although many factors play a role in the changes in EPS, including
the degree of debt financing, the decreased and low EPS may be cause for concern for a potential