Team 4_AMAZON - AMAZON.COM A FINANCIAL ANALYSIS 1...

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AMAZON.COM: A FINANCIAL ANALYSIS 1 AMAZON.COM: A FINANCIAL ANALYSIS TEAM 4 FINANCIAL MANAGEMENT October 7, 2012 Professor Edward Kaplan
Amazon.com: A Financial Analysis 2
Amazon.com: A Financial Analysis 3 1. EXECUTIVE SUMMARY 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

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