Amazon
Fundamental Valuation:
Amazon Inc.
Latest Results:
Country:
Sector:
RIC (Ticker):
Q2 2014
USA
Internet / Retail
AMZN.OQ
$220
Indigo View:
Industry View:
Downside Risk
Attractive
N. Landell-Mills CFA
Company Rating:
Risk
LOW MED. HIGH
Indigo Equity Research Limited
0
0
1
Quality
0
0
1
Valuation
0
0
1
www.indigo-equity-research.com
28 Jul 2014
Share Price - Last 10 Years
Company Profile - Still no profits in sight
450
400
Mixed Q2 2014 Results - Strong growth but now an operating loss
350
Q2 saw continued strong revenue growth of 23%, which was flat from last Q. EBIT
collapsed by $94 m to a small loss of $15 m. GAAP EPS deteriorated $0.26 to -$0.27,
restricted 1% by additional share issued.
-- In the core business, Product Revenue growth of 20% was mostly driven by 16% more
accounts (customers), and secondly by each customer spending slightly more this Q.
In addition, Services Revenue rose +39%.
-- EBIT collapsed mostly due to higher corporate costs; presumably due additional costs
related to the new smartphone launch, AWS, tablets, …., and 37% higher headcount.
Amazon continued to provide little detail and transparency of its operations in these results.
250
USD
300
200
150
100
Amazon
2014
2013
2011
2012
2010
2009
2008
2007
2006
2005
0
2004
50
S&P 500 rebased
Fundamental Valuation
(See Page 34)
At least Amazon is honest as it emphasized to investors that their strategy is focused on
growth not profits; meaning that they probably will never generate a reasonable profit.
Q3 guidance was for the operating loss to widen. Consensus EPS forecasts have also
collapsed in the last 6 months; to a small profit for 2014 and to $2.22 a share in 2015.
(12 month outlook)
Bear
Base
Bull
Forecast Share Price
$181
$220
$261
Return (incl. Div.)
-44%
Our low fundamental valuation is based on an expected further decline in valuation
multiples with slower growth due to a weakening economy and consumer spending.
We are highly skeptical of Amazon's profit potential given its very poor profit track record.
In addition, we believe that the equity markets are significantly overvalued, mostly due to
low interest rates and QE (money printing). We expect a significant market correction.
Current Share Price
Capital Structure
Number of Shares
0.5
149.4
Net Cash / (Debt)
Enterprise Value (EV)
y/e 31 Dec
Revenue
2013
2014e
2015e
($ Bn)
($ Bn)
($ Bn)
74.5
90.9
109.3
EBIT*
0.7
0.2
1.6
Net Income*
0.3
0.1
1.1
Share Capital
9.7
9.9
11.0
40.2
42.9
47.2
2.0
0.7
1.2
0.59
0.30
2.22
Total Assets
FCF
EPS*
($)
DPS
($)
-
-
-
BV per share
($)
20.96
21.07
22.72
2013
2014e
2015e
EBIT* Margin
1.0 %
0.2 %
1.5 %
Net Income* Margin
0.4 %
0.2 %
1.0 %
Asset Turnover
185 %
212 %
231 %
Total Assets / Equity
412 %
433 %
431 %
ROE*
2.8 %
1.4 %
9.8 %
2013
2014e
2015e
Revenue
21.9 %
22.1 %
EBIT*
10.2 %
Growth Analysis
Opportunities
- Continued growth of ecommerce.
- Increased purchases by each customer.
- 3rd party sales.
Threats
- Pursuit of too many projects; risking
a loss of focus & excessive costs.
- A write-off for Kindles needed?
--
20.2 %
>300%
Net Income*
112.4 %
-48.0 %
>300%
EPS*
106.9 %
-48.5 %
>300%
2013
2014e
2015e
2.0
1.6
1.4
>50
30.0
20.4
Valuation Ratios
Weaknesses
- Weak FCF as sales growth slows.
- Loss of online tax exemptions.
- EPS & free cash flow are volatile.
7.2
142.1
Jeff Bezos c. 18%
P / Sales
Strengths
- Largest online retailer.
- Strong brand & large size.
- Excellent customer service.
15.7
308.3
Consensus Estimates
Efficiency Analysis
SWOT analysis - Key current drivers & catalysts
($ Bn)
(bn)
Financial Results
Despite its enormous size, Amazon has the profile & valuation ratios of a growth stock.
The stellar valuation is based on the view (not given by Amazon itself) that economies of
scale, brand & dominant market position will generate higher margins & profit in future.
We are very skeptical of Amazon's ability to leverage higher profit margins on this basis.
Profits are limited by continued heavy investments to promote growth, by adding fulfilment
centres, data centres (cloud services), video content, new services (eg. same day delivery &
groceries), new products (eg. Kindles, smartphones) ….. None of these costs look likely to fall.
In addition, this is a highly competitive and price sensitive industry; limiting any margin potential.
($)
Market Capitalization
Main Shareholder:
Investment thesis - Profits will be harder to achieve than expected
Amazon has an impressive track record of growing revenues, but generates little profit.
Its sales are driven by its low prices, free shipping, superior online services & wide selection.
US e-commerce continues to grow rapidly (c. 18%) and still has considerable potential
(still c. 6% of US retail sales); International e-commerce growth also has much potential.
-20%
Total
$324.0
Note: Comparisons (eg. change in margins & growth rates) are stated on a Year-on-Year (YoY) basis.
Significant recent events
- Amazon launched its first smartphone handset called Fire.
- A EU tax inquiry widens to include Amazon's European operations.
-32%
Per Share
EV / EBITDA
P / EBIT*
PE*
>50
>50
>50
>100
>100
>100
PEG*
5.1
--
0.2
P / BV
15.5
15.4
14.3
P / FCF
>50
>50
>50
Dividend Yield
--
--
--
Pay-Out Ratio
--
--
--
Net Debt / EBITDA
--
--
--
Valuation Ratios are based on the current share price.
* = Excluding Unusual Items
Page 1 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Contents
Description
Page
Investment Thesis & SWOT Analysis
………………………………………………………………………………………………………………
Page 1
Contents
…………………………………………………………………………………………………………………………………………
Page 2
News Flow - Significant Recent Events
………………………………………………………………………………………………………………
Page 3
Company Analysis
e-commerce Industry Overview & Key Themes for 2014
…………………………………………………………………………………………
Page 4
Strategy & Business Model
…………………………………………………………………………………………………………………………
Page 5
Management, Executive Compensation, Board & Other Issues
………………………………………………………………………………
Page 6
Business Activities
………………………………………………………………………………………………………………………………………
Page 7
Business Activities - Other Services
………………………………………………………………………………………………………………
Page 8
Business Model - Snapshot of the last 12 Months
……………………………………………………………………………………………………
Page 9
Net Revenue & Net EBIT Margin Analysis ………………………………………………………………………………………………………………
Page 10
SWOT Analysis …………………………………………………………………………………………………………………………………………
Page 11
Additional Comments on Investment Issues ………………………………………………………………………………………………………………
Page 12
Income Tax Considerations
…………………………………………………………………………………………………………………………
Page 14
Key Fundamental Drivers
…………………………………………………………………………………………………………………………
Page 15
Historical Financial Results - Quarterly Analysis since 2004
Profit & Loss Summary
………………………………………………………………………………………………………………………………………
Page 19
Industry & Net Revenue Analysis
………………………………………………………………………………………………………………………………………
Page 20
GAAP Revenue Analysis by Division
………………………………………………………………………………………………………………
Page 21
GAAP Revenue Analysis by Region
………………………………………………………………………………………………………………
Page 22
EBIT Analysis by Region
…………………………………………………………………………………………………………………………
Page 23
Operational Analysis
………………………………………………………………………………………………………………………………………
Page 24
Operational v. Product Revenue Analysis
………………………………………………………………………………………………………………
Page 25
Cost Analysis
…………………………………………………………………………………………………………………………………………
Page 26
Cash Flow Analysis
………………………………………………………………………………………………………………………………………
Page 27
Working Capital Analysis ………………………………………………………………………………………………………………………………………
Page 28
Balance Sheet Analysis
………………………………………………………………………………………………………………………………………
Page 29
Return Analysis …………………………………………………………………………………………………………………………………………
Page 30
Unusual Items
…………………………………………………………………………………………………………………………………………
Page 31
Valuation
Fundamental Valuation of Amazon
………………………………………………………………………………………………………………
Page 34
DCF Valuation & Reality Check
…………………………………………………………………………………………………………………………
Page 35
Historical Valuation Multiples
…………………………………………………………………………………………………………………………
Page 36
Consensus Forecasts & Valuation Multiples ………………………………………………………………………………………………………………
Page 37
Industry Analysis
US e-commerce Industry Overview
………………………………………………………………………………………………………………
Page 39
Mobile Commerce & Payments Industry Overview
……………………………………………………………………………………………………
Page 40
Tables of Historical Financial Results
Quarterly & Annual Financial Accounts
………………………………………………………………………………………………………………
Page 42
Revenue Data
…………………………………………………………………………………………………………………………………………
Page 43
Revenue & EBIT by Region
…………………………………………………………………………………………………………………………
Page 44
Cost & Expenses Data
………………………………………………………………………………………………………………………………………
Page 45
Explanations, Legal and Important Information
Page 2 of 47
CONFIDENTIAL
……………………………………………………………………………………………………
Page 47
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
News Flow - Significant Recent Events
2014
July -
Amazon presses on with drone plans.
A EU tax inquiry widens to include Amazon's European operations, which are based in Luxembourg.
Amazon pays almost no EU taxes due to the accounting methods used to structure its operations.
The investigation is focused on transfer-pricing arrangements, where profits are redistributed
within companies via internal charges between subsidiaries located in different countries.
Apr - June
Amazon launched its first smartphone handset called Fire.
The key differentiating features include a 3D display, infrared cameras to track a user’s head position, and
a visual search function called Firefly that lets users point their phone at a book, barcode or phone number
and pull out information they can save or use to buy an item from Amazon. This gives customers a better
ability to comparison-shop. The smartphones is sold with a free year's subscription to Amazon Prime,
which usually costs $99, Amazon's strategy is based on selling Kindle devices cheaply and hoping that
consumers will then buy more Amazon content. Reviews of the smartphone indicate that it was had good
technological gimmicks but lacked basic things, like a reasonable battery life.
Amazon said the selection in its Amazon app store has almost tripled in the past year to c. 240,000.
This remains much lower than the c. 1 m apps available on each Apple and Google's Android.
Amazon unveiled a music-streaming service for its U.S.-based Prime membership customers that competes
with Spotify & Pandora; but has a much more limited playlist.
At its Q3 results, Amazon emphasized that it was investing "very heavily" in Spain, Italy and China.
This had depressed profits from its international operations.
Amazon is testing its own delivery network for taking its products to consumers' doorsteps.
This will replace using the UPS, the postal service, FedEx and regional providers; by extending its logistics
services. It is hard to see how Amazon can compete with the efficiency of its existing delivery providers.
This represents a major development for Amazon in the US.
Amazon announced a content licensing agreement with HBO.
Amazon introduced Prime Instant Video for the U.K. and Germany
CEO Jeff Bezos, sold $351m in Amazon shares in February, taking his total sales to more than $1bn in just
six months – more than three times the amount he had raised in the previous year. He still holds c. 18% of
the equity (worth c. $30 bn).
Renewed rumors that Amazon is preparing to release a smartphone.
Amazon said its Prime Instant Video service downloads nearly tripled year-over-year; following its heavy
spending on original shows and new content.
Amazon announces its $99 Fire TV set-top box for streaming videos (TV & film) and games to TV;
It provides access to Netflix, Amazon Prime, Fox, Hulu Plus, WatchESPN, HBO Go and others.
It has a voice activated command function and will compete with devices: $50 Roku, $35 Google
Chromecast, $99 Apple TV, cable companies, TiVo, Xbox, and others. Amazon also sees TV as
a route to drive e-commerce sales eventually.
A price war over cloud services intensifies between Google Compute Engine, Amazon Web Services,
Microsoft Azure, ….
Amazon is reported to reduce the rate of adding new streaming video content to compete with Netflix.
Cisco plans to offer "cloud" computing service to corporate customers, to compete with Amazon.
Major bricks-and-motor retailers continue to report weak sales and increase $planned shop closures.
Sources: International & financial press, Amazon.
Page 3 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
e-commerce Industry Overview & Key Themes for 2014
USA Retail E-commerce (Seasonally Adjusted )
USA Retail E-commerce
100
40%
75
30%
50
20%
25
10%
0
0%
60%
50%
Growth
USD (bn)
40%
30%
20%
USA Retail E-commerce Growth
USA Retail E-commerce Growth
2014
2013
2012
2011
2010
2009
2008
2007
2006
-10%
-10%
USA Retail E-commerce
USA Retail Sales
2005
-25
0%
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
10%
Amazon N. American Revenue Growth
Source: US Census Bureau, Indigo
Sources: USA Census Bureau , Indigo Equity Research
Data for the latest Q is not yet available.
Key industry themes for 2014
Continued strong e-commerce growth; Mobile payments & commerce is taking-off; ending of online tax
benefits.
The next stage of online development is the on-going evolution from the desktop to mobile devices.
Mobile services are still at an early stage of development but are growing quickly. They generate
relatively few revenues, much hype and constant speculation that they are about to become critical.
- Mobile payments; transforming smartphones into payment devices.
- Mobile commerce; shopping via mobile devices.
Overview of the USA
e-commerce market:
(the basics)
Since 1990, e-commerce has grown rapidly, but still accounts for just 6% of all US retail sales. This suggests
that much growth potential remains; but it is uncertain what percentage of commerce will ultimately shift online.
- E-commerce growth has been helped by faster data transmission speeds (broadband), improving
technology, increasing economies of scale; falling transaction prices, better service quality, more
available goods online, better ease of online trading, greater consumer acceptance (and trust) ….
- Favourable tax treatment on online sales has also helped, but these are being slowly phased out.
- Whereas, the key disadvantages of retail e-commerce are that customers are unable to touch the
goods, physical (non-digital) goods are delivered by post (incurring extra costs and delayed consumer
satisfaction); and increased risk or faulty / damaged goods and fraud.
- Internet and Broadband growth are slowing in the OECD as markets become saturated. Conversely,
internet & e-commerce growth is strongest outside OECD (eg. China) where penetration is lowest.
- Note that estimates of the e-commerce market size and growth vary somewhat between analysts.
Debit and credit cards remain the main method of payment for online transactions (e-commerce) in the US.
PayPal dominates the alternative online payments, accounting for c. 16-8% of USA e-commerce in 2012.
USA Internet Penetration
USA E-commerce % of all Retail Sales
100%
10%
80%
8%
60%
6%
40%
4%
20%
Internet Penetration (%)
2014
2013
2012
2011
2010
2009
2008
2007
2006
Broadband Penetration (%)
Sources: Nielsen Online, ITU, Internet World Stats
Page 4 of 47
2005
0%
2004
4.00
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2%
2004
0%
CONFIDENTIAL
For illustration purposes only.
Sources: USA Census Bureau, Indigo Equity Research
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Strategy & Business Model
Revenue by Region - Last 12 Months
EBIT by Region - Last 12 Months
Total EBIT
0.1%
0.5
0.0
0
Last 12 Months
4.1%
1.0
Corporate Costs
1.5
International
20
2.0
USD (bn)
40
Total Revenue
27.1%
22.3%
International
60
N America
USD (bn)
80
15.7%
N America
2.5
100
Revenue by Region
Growth (%)
2014 Q2
Last 12 Months
0.8%
EBIT by Region
Margin (%)
.
le.
Business description
Amazon's core business is as an online retail merchant. It is by far the largest US online retailer and has a
significant international presence elsewhere. It is also expanding into related online services and products.
Amazon manages the sale transaction from purchase to delivery. It has established large distribution centres
(warehouses) to manage the inventory. But it does not own the payment or actually delivery process itself.
Corporate strategy
& business model
Amazon's basic retail strategy is to sell a wide selection of products and services online conveniently & at low
prices, control the sale process from transaction to delivery, raise customer loyalty and develop new services.
The core strategy is also to focus exclusively on sales growth at low margins to build size and reach to gain
economies of scale. In theory this should give ultimately it market power and the ability to raise margins.
The nature of Amazon’s core business is that of a discount retailer which limits this margin upside.
Key executives' compensation is based primarily on share price performance and is paid in shares.
The strategy is to control the entire sales process, from sales point, customer service, to delivery of the goods.
To keep costs low by building fulfilment centres close to customers. Amazon has been spending heavily on
building new fulfilment centres, especially internationally; there were c. 88 of these centres at Q3 2012.
Low costs also depend on negative working capital and an efficient inventory & supply chain systems.
There is a strong focus on customer satisfaction & loyalty; for example with products like Amazon Prime.
Amazon aims to benefit from a 'virtuous circle'; where higher sales volumes lead to economies of scale, lower
prices, greater selection & choice, better customer experiences and thus higher sales volumes; and so forth ….
Amazon is pursuing a number of different projects that are closely related to its core online retail operations:
- Allow third parties to sell goods on its website and use its distribution centres; leveraging its online
& warehouse assets and skills to boost sales. Ie. Amazon Web Stores (AWS). These fees are
at higher margins than Amazon earns on its core products, and helps boost economies of scale.
- There are moves towards providing same-day delivery in some of the largest U.S. markets.
- Selling its own tablet / e-reader devices (Kindle) at cost, and aiming to make a profit on media sales.
Given weak media sales this strategy looks dubious. Amazon does not disclose Kindle sales.
This follows the media industry's shift from physical to digital formats. ie. From paperback books to
eBooks and from CDs to music & video downloads (video on demand & digital streaming services).
- Amazon spends heavily on "technology & content" which includes its online streaming services.
- Cloud services; leveraging its large computing power and data centres, to boost revenues.
- To expand into related areas, such as book publishing.
Amazon has a policy of limited transparency; to tell investors relatively little about what they are doing or
what is going on in the operations. Only high level data is provided and management say little on results
announcements or calls with investment analysts. This makes it difficult to understand its business dynamics.
Revenues
by Region
EBIT
by Division
International
1%
International
39%
Charts relate to the last 12 months.
Page 5 of 47
Revenues
by Source
Estimated USA E-commerce
Market Share - 2011
Other (AWS)
15%
Amazon
13%
Amazon
Products
48%
N America
61%
N America
99%
CONFIDENTIAL
3rd Party
Products
37%
For illustration purposes only.
Others
87%
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Management, Executive Compensation, Board & Other Issues
Management:
(CEO)
Jeff Bezos (born 1964) is the founder, CEO & Chairman of Amazon.com. Mr. Bezos is one of the few
surviving internet CEOs from the 1990's dotcom boom. He is considered critical to the business' success and
dominates the company. He is a graduate of Princeton University (1986) and founded Amazon.com in 1994.
His dual role (CEO & Chairman) and strong personality is cause for concern for corporate governance.
Executive compensation
Key executives' compensation is based primarily on share price performance and is paid in shares.
However, the SEC filings on compensation are very vague on exactly how equity awards are determined.
The executive compensation plan is directed at the most senior executives, including the COO, CFO…
Compensation in consists primarily of stock-based compensation (via RSUs) and relatively low base salaries.
RSUs (Restricted Stock Units) vest over a period of four to six years. Amazon generally gives no cash bonuses.
In 2013, the CEO received a total pay of just c. $1.7 m, flat from $1.7 m in 2012, and flat from 2011.
His substantial stock ownership (18%), is believed to provide sufficient alignment with shareholders' interests.
2013 executive
compensation
In 2013, the compensation for the 4 senior executives (excluding the CEO) included:
- An average compensation of c. $0.2 m, down 98% on 2012.
- In 2013 no new equity awards were given. In 2012, on average each received share options worth c. $12 m.
- At end 2013, each senior executive had an unvested RSUs with a value in the range of c. $38 m - $54 m.
- In 2013, each senior executive had RSUs that vested with a value in the range of c. $9 m - $13 m.
In 2014, the Board consisted of 9 directors, 8 of whom were independent. The Board met 4 times in 2013.
There appear to have been no meetings without the CEO present; indicating poor corporate governance.
Additional considerations & corporate governance issues:
- The only management on the Board are the CEO & Chairman.
- The Chairman & CEO positions are held by same person, representing a corporate governance risk.
- Directors receive no cash compensation, but are given equity awards (RSUs) which vest over 3 years.
- In 2012 3 directors were given equity awards worth $0.6m.
- The independent directors are from a variety of backgrounds; private equity, academic, venture
capital, legal, industrial operations, non-profit organizations t, have much direct experience (if any) or
background in Amazon's industry.
- In 2014, 7 of the 9 directors had been on the Board for over 5 years. Their average age was 63 yrs.
Board
In our opinion, the Board represents a serious corporate governance risk as it does not appear to be
sufficiently independent from management influence.
Independent auditors
Ernst & Young have served as independent auditors since 1997. Their work is primarily audit & tax related.
Source: Amazon Proxy Form, DEF 14A (SEC) report.
Brief history
In 1995, Amazon was one of the first retailers to establish itself online; it started by selling books. Since then
it diversified into a wide range of goods, to things such as from electronic goods, DVDs, toys, apparel etc…..
Amazon's IPO was in 1997, on NASDAQ, at $18 per share (adjusted to $1.50 after three stock splits).
It started operations in the US but has expanded aggressively internationally, especially in Western Europe.
Balance Sheet
Amazon has relatively few assets for a retail business as well as significant net cash due to its negative cash
conversion cycle. Intangible assets are small and related mostly to the few acquisitions hat have been made.
Fixed assets consist primarily of fulfillment centres (warehouses) and technology infrastructure (data centres).
Total Assets
Current Other
Assets
0%
28%
Balance Sheet
Intangibles
7%
Share Capital
28%
Fixed Assets
44%
Other
14%
Cash
21%
Page 6 of 47
Liabilities and
Share Capital & Reserves
LT. Debt
8%
CONFIDENTIAL
For illustration purposes only.
Current
Liabilities
50%
ST. Debt
0%
Charts relate to the latest quarter.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Business Activities
Revenues by Division - Last 12 Months
EGM
USD (bn)
60
40
49.5%
22.3%
Total Revenue
26.3%
80
Other (AWS)
100
Revenues
by Division
Other (AWS)
6%
Media
27%
0
Media
9.7%
20
Last 12 Months
EGM
67%
Revenues by Division
Growth (%)
EGM = Electronic & General Merchandise
Amazon's retail
business model
Charts relate to the last 12 months.
Amazon's is a substantial online retail merchant, where it manages the sales process from order to delivery.
The concept is to provide a wide variety of choice of goods at low prices, online, that are delivered by post.
This saves consumers' the need to go to shops, convenience and allows easy product price comparisons.
The key problems are customers are unable to touch the goods, extra costs of delivery & delayed satisfaction.
In a manner, Amazon is an online version of Wal-Mart (at just c. 20% the revenues of Wal-Mart).
- The distribution centres are in USA, UK, Germany, France, Japan, China, India, & Costa Rica.
- The headquarters are in Seattle, Washington and it has over 32,000 employees worldwide.
- Amazon provides little detailed analysis of its sales; making financial & operational analysis difficult.
- Amazon provides a range of payment services; but does not manage the payment itself.
Amazon's successfully evolved from a first generation internet company (that only sold books), by:
- Widening the product range from books and electronic goods.
- Selling private label business (eg. Amazon branded products); using its large size to procure goods at
a discount. ie. Amazon is starting to compete with its own customers; similar to what Wal-Mart does.
- Expanding internationally outside the US; setting up distribution centres in new countries.
Negative working capital due to a short sales cycle.
- Amazon can predict sales sufficiently accurately that it can sell products before it has to pay suppliers
for the goods (ie. within 65 days). This allows for low capital charges for buying and storing inventory.
3rd party retail
services
Amazon also provides online retail services for 3rd parties - effectively renting out its expertise:
- Amazon allows 3rd parties to advertise and sell new & used goods via its main website. Customers include
companies like Target. Services provided include the warehousing and distribution of goods (ie. fulfilment).
- An estimated 40% of Amazon's retail revenue are from 3rd party retailers (via its website); on which Amazon
takes c. 15% fee of the sales price as a commission. These sellers frequently compete with Amazon's products.
- By allowing 3rd parties to sell second-hand goods on its websites this competes more directly with eBay.
This positions Amazon strategically to grow well beyond the limits of its own online store, as an
enabler of e-commerce for other merchants.
Amazon
WebStores
- Amazon WebStores allows businesses to create e-commerce websites which it then hosts on its servers.
Services include managing retail websites for third parties; such as for Target, Sears, Mothercare & Lacoste.
Other products and
services include:
(see details on next page)
-
Key competitors
Amazon Prime
Kindle e-readers & Kindle Fire (tablet PC)
Amazon Web Services (AWS)
Other online services (eg. VoD storage, Apps store, search, digital book library, digital book store ….)
Competitors include physical-world retailers, publishers, vendors, distributors, manufacturers and producers of
similar products sold by Amazon eg. department stores (eg. Wal-Mart), bookstores (eg. Barnes & Noble), ….
Competitors also include other online e-commerce (retail) websites, eg. Staples, ShopRunner, eBay etc …….
Amazon indirectly competes with comparison shopping websites and web search engines (eg. Google), as well
as numerous other companies such as Apple, Netflix for video or music streaming and cloud storage services.
r.
Page 7 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Business Activities - Other Services
Other products and services include:
Amazon Prime
Amazon Prime is a customer loyalty program which offers free or discounted shipping for purchases, for a flat
annual fee. It also provides subscribers with access to Amazon's video streaming and digital book library.
The ultimate objective of Amazon Prime is to get consumers to spend more on its website.
Prime is considered to be a critical service that builds customer loyalty and differentiates it from competitors.
This service is estimated to be a "loss-leader"; in hat Amazon looses money on the service, but generates
sufficient additional sales (via cross category shopping) on its more profitable services, that it is worthwhile.
In 2011, Amazon added services to Prime (such as VoD and book library) while keeping the price unchanged.
Prime is part of Amazon's transition from an online retailer to a seller of digital goods and its own devices.
Membership is estimated to have almost doubled in 2011, to c. 10m subscribers, on which it loses about $10
per subscriber. ie. Amazon loses about $100m a year on Amazon Prime. It is also estimated that of the $90
annual subscription fee per subscriber, c. $55 pays for shipping costs and $35 pays for digital video content
and book-lending services.
s.
Kindle e-readers
Amazon doesn't provide data on how many units or apps are sold, but e-reader sales are believed to be limited.
It is estimated that Kindles are sold at a low profits (ie. low price) and are essentially used to promote
sales of other Amazon products and services; such as digital media (eg. eBooks, VoD) and other purchases
on the Amazon website. Kindle e-readers (for eBooks) & tablet PCs are only available in the US and Europe.
Kindle Fire
The Kindle Fire (tablet PC) was first launched in Nov 2011, based on a customized version of the Android OS.
Some analysts have forecasted that Kindle Fire will become the second best selling tablet PC, after the iPad.
Kindles are differentiated by having similar features but much lower prices than the iPad; with $159 for an
entry-level Kindle Fire (v. c.$ 500 for an iPad); as well as the content, apps & services (eg. Prime's shipping
services & streaming movie content) from Amazon. Amazon breaks even or perhaps loses money on Kindles.
Amazon Web
Services (AWS) :
AWS offers cloud computing services. This includes large computing power, data storage, as well as software
& content delivery on-demand. These services are delivered using its data centres, sharing computing power.
That is to say, Amazon is leveraging its significant online assets to further develop its business operations.
VoD
Amazon has been developing its Video on Demand (VoD) streaming services as another digital product.
and a way to develop its online services. But to an extent, this cannibalizes sales of CDs via its website.
Amazon provides VoD streaming of >13,000 movies and TV shows, only to customers of Amazon Prime.
Since 2010, Amazon has signed agreements in the US with CBS, NBC, ABC, Walt Disney, 20th Century Fox
and PBS to provide their video libraries of TV and movies online. Deals frequently do not include all videos,
especially the latest hit TV series or films. This service competes with Netflix, Wal-Mart, iTunes and Hulu.
The video streaming market leader in the US, Netflix, is believed to have >20,000 films & shows (at Q3 2011).
Other online services:
Amazon is providing a variety of different online services (mostly directed at consumers):
Online storage
- Online storage services (locker services) for digital media (eg. music). eg. Cloud Drive & Player.
Apps store
- Apps Store for Android (SmartPhone & tablet PC) applications.
Online product search
- Online search for products (competing with Google).
Digital book library
- Digital book library was launched at end 2011, which is available only to owners of its Kindle
e-readers and Kindle Fire devices who are also subscribers to its Amazon Prime program.
Digital bookstore
- U.S. Kindle ebook store now had a library of >900,000 books at Q2 2011.
Sales of eBooks for Kindle have overtook paperback books sales in 2011.
Amazon Publishing
- Amazon publishes bestselling books, in competition with the publishers who sell via its website.
The book publishing business model is archaic and inefficient. While the overall book market is
estimated to be flat, physical book sales are declining in the US while ebooks sales are growing.
By pursuing authors directly, Amazon can cut out the middleman (publishers) and pass on the
savings to authors in higher advances & royalties and to readers in the form of lower book prices.
This is a fractious industry and many books shops & chains are heading towards bankruptcy.
Page 8 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Business Model - Snapshot of the last 12 Months
Net Income Breakdown - Excluding Cost of Sales
--
Current Amazon accounting policies:
Revenues includes sales of goods on the Amazon website and of
--
third party goods that it sells.
Cost of Sales represents the cost of goods its own items sold by
Amazon (via its websites). This does not include the cost of any
Net Income
20
Tax
OPEX
40
EBIT
--
168.7%
---
third party goods that helps to sell.
Gross Profits (net Revenues ) is a better measure of actual sales.
Notes
0
Net Income
0
See Page 31 for more details of Unusual Items.
---
Growth (%)
.
OPEX = Operating Expenses
Growth rates and changes in margins are stated on a YoY basis.
Earnings are compared to prior period earnings* (ex-Unusual Items).
* = Excluding Unusual Items
# Shares = Share Repurchase / (Issues)
Net Income Drivers
EPS Breakdown
-3.3%
-0.2
1.00
0.50
0.00
168.7%
-3%
-1.00E-02
2014 Q2
Last 12 Months
Net Income
Other & Interest
EBIT
USD
Net Income
22.8%
1.50
2014 Q2
Growth (%)
52%
23%
169%
Last 12 Months
"Other" = Other Income & Expenses
* = Excluding Unusual Items
Last 12 Months
FCF
"Other Items" includes non-cash charges.
Growth (%)
2014 Q2
Net CAPEX = Depreciation - CAPEX
Assets
Debt
Equity
CF Pre-Capital
Other
M&A
Last 12 Months
-1%
Total Cash Flow
Growth (%)
LT = Long Term
Liabilities and Capital & Reserves
50
50
54%
2014 Q2
Assets
30%
10
0
28%
Growth (%)
CONFIDENTIAL
27%
2014 Q2
.
For illustration purposes only.
21%
Liabilities and Capital
Total - 2014 Q2
Share Capital
Other
LT. Debt
20
ST. Debt
USD (bn)
Cash
7%
30
Current Liabilities
0
40
Total Assets - 2014 Q2
10
Other
Intangibles
20
Fixed Assets
30
Current Assets
40
USD (bn)
-61%
Equity = Share Issues / (Repurchases)
ST = Short Term;
Intangible Assets are mostly goodwill from acquisitions.
Page 9 of 47
Dividends
216% 40%
-0.5
-1.E-01
2014 Q2
Interest
294%
0.5
0.0
0.0
-77%
FCF (ex-Interest)
-68%
USD (bn)
FCF
Profits
Working Capital
1.0
Net CAPEX
1.0
-3%
"Other" = Other Income & Expenses
Total Cash Flows
1.5
Other Items
USD (bn)
Free Cash Flows (FCF)
-0.5
Growth (%)
Data is stated on a per share basis.
1.5
0.5
171%
EPS
.
°° = Impact on EBIT
EPS
0.0
Tax
Other & Interest
0.2
EBIT
0.4
Margin Change °°
EBIT*
USD (bn)
0.6
Revenue Growth °°
0.8
2.00
Thousands
1.0
1.00E+07
Total CF
Last 12 Months
# Shares
2014 Q2
No Unusual Items arose at the Net Income level in the last 12 months.
EPS §
-20
-3.3%
Tax
22.3% 18.5%
Pre-Tax Profit
USD (bn)
60
Interest & Other
Revenue
80
Cost of Sales
100
28%
Growth (%)
.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Net Revenue & Net EBIT Margin Analysis
Net Revenues & Net EBIT Margins
20%
5
10%
0
0%
2012
Growth
10
2014
30%
2013
better to report revenues excluding all cost of goods sold.
15
2011
40%
2010
20
2009
Summary: In our opinion, Amazon's revenue accounting policies do not
provide an accurate reflection of its operating performance. It would be
2008
50%
2007
25
2006
60%
2005
30
2004
USD (bn)
Net Revenues
Current Amazon revenue accounting policies:
Amazon, like other retail stores, reports its Product Revenues (ie. sales of goods
via its website) on a GROSS basis, which includes the price of the goods its sells.
This is normal for retail shops. BUT it reports sales of third party goods on its
website (ie.. Service Revenues) on a NET basis which includes only Amazon's
fee for enabling the transaction; and excludes the price of the goods sold.
Therefore, this treatment is inconsistent and distorts amazon's accounts
Net Revenues
Cost Of Sales
Revenue Growth
Net Revenue Growth
and it is now becoming a significant issue as Service Revenues have
grown faster than Product Revenues
s)
By comparison, unlike Amazon, eBay accounts for its revenues on a NET basis
(excluding the price of any goods sold on its website.) This is to say that
Amazon's reported revenues are more similar to eBay's Gross Merchandise
EBIT & EBIT Margin
600
30%
400
20%
200
10%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
-200
Description of Net Revenues
The estimate of Amazon's Net Revenue (shown in the graph) is reported
revenues after deducting cost of sales; ie. Net Revenues = Gross Profit.
Note: Shipping fees are included as revenues, while shipping costs are
included in cost of sales.
Margin
USD (m)
Value (GMV) than eBay's reported revenues.
0%
Changing Product Revenues from a gross to a net basis would:
-10%
EBIT
EBIT Margin
s
(i)
(ii)
EBIT Margin §
EBIT Margins § = EBIT / Net Revenues
(iii)
Loss on Shipping
% Revenues
2014
Revenues
from Sales for
3rd parties
37%
Page 10 of 47
(v)
% Net Revenues
Estimated Sources of Net Revenues
Last 12 months
Other
Revenues
(eg. AWS)
15%
(iv)
% Sales
0%
2013
0.0
2012
5%
2011
0.5
2010
10%
2009
1.0
2008
15%
2007
1.5
2006
20%
2005
2.0
2004
USD ((bn)
Losses on Shipping
Net Product
Revenues on
Amazon
Sales
48%
CONFIDENTIAL
Revenues would be much smaller; about 67% less.
Revenue growth since 2011 would be higher.
As Service (3rd Party) Revenues are growing faster than Product
Revenues; giving Service Revenues greater relative weight would
boost overall reported revenue growth.
EBIT margins would be higher.
This is simply as Net Revenues are lower than reported revenues.
The decline in EBIT margins since 2009 would be more
dramatic than currently shown. (see graph)
Amazon's reported EBIT or EPS amounts would not change.
This analysis indicates or highlights that:
(i) It will be much harder for Amazon to raise its profits & margins
than the "little tweaks" currently expected. ie. Big Tweaks to the
business model will be needed.
Or put another way; many analysts estimate that if Amazon could
achieve a slightly higher EBIT margin, it would generate significant
profits in absolute terms. BUT this analysis shows that this is unrealistic
as it ignores the fundamentals of Amazon's business model.
(ii) 3rd Party sales are an important revenue driver for Amazon,
relative to sales of goods by Amazon. This element of Amazon's
business model is under-appreciated at present.
(iii) Amazon's margins are very low; especially compared to eBay which
achieves 40% EBIT margins on facilitating sales of second hand goods.
This analysis questions the viability of Amazon's business model.
The Indigo view on Amazon's revenue accounting policies:
Amazon is not a normal retail outlet as it does not add value to the goods it
sells nor (physically) displays them. It warehouses, packages & ships them.
Consequently, as a re-seller Amazon could report all of its revenues on a net
basis which excludes the price (and cost) of goods that it sells.
Reasoning for this approach is:
- Consistent accounting between Amazon's Product & Service revenue.
- The financial accounts would better reflect commercial reality.
- This would be similar to how online travel agents account for revenues,
which excludes the price of the flights & holidays sold.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
SWOT Analysis
Strengths
- A dominant market position and brand.
- It is the largest & best known online global retailer.
- It has an estimated c. 15% of US e-commerce and
is gaining market share.
- No significant competitors.
- Amazon has about 3 times the revenues of the next
largest online retailer in the US; Staples.
- Wide product selection, low prices, and convenience.
- Low cost business model, derived from:
- Large size (and economies of scale) which provide
purchasing power over suppliers & delivery.
- Tight control of the warehousing & distribution
of goods; allowed by its ownership of warehouses.
- Efficient inventory control & supply chain systems.
- The online business model requires relatively few assets for a
retail business - only physical assets are warehouses & servers.
Also, online sales frequently benefit from lower sales taxes.
- Highly competent management with successful track record.
- CEO Jeff Bezos is one of the few internet CEOs who
have remained since the dotcom bust in 2001.
- Appropriate strategies (?)
- Strong focus on customer satisfaction & loyalty.
- A 'virtuous circle'; where higher sales volumes lead to economies
of scale, lower prices, greater selection & choice, better customer
experiences and thus higher sales volumes.
- Negative working capital due to a short sales cycle,
- Control of the sales process from transaction to delivery.
- Reputation as a leader in Cloud Computing services.
- Amazon is a more popular destination for online product
searches or shopping than Google.
- Investors are familiar with and like Amazon.
Opportunities
- Continued e-commerce growth.
In 2010 US e-commerce transactions grew by 18% to 6% of
total US retail purchases, according to Javelin Research.
Whereas, the US Census Bureau estimates 2010 ecommerce
grew by c. 15% to c.4% of total US retail sales, based on
different criteria. Both estimates indicate plenty of room to
future growth as consumers continue to shift purchasing online.
But e-commerce is maturing and growth rates are slowing.
- Continue to expand the core business:
- Increased purchases by each customer.
- International expansion.
- Build more distribution centres to enhance reach
of services control distribution and limit costs.
- Amazon Prime; Marketing & shipping initiatives.
- Sales of 2nd hand goods (competing with eBay).
- Selling private label goods.
- Sales of 3rd party goods on Amazon's websites.
- Warehousing & distribution services for 3rd parties.
- Amazon benefits from consumers 'show-rooming'.
- Continue to new digital services.
- Web Stores; Website & e-commerce hosting & services.
- Cloud computing & Amazon Web Services.
- Book, music & video streaming & locker services.
- Kindle Fire (tablet PC).
- Internet search revenues for online purchases.
However, digital / online services currently generate few revenues.
Page 11 of 47
CONFIDENTIAL
-
-
-
-
Weaknesses
Online retail is a highly competitive industry.
EBIT margins are very low, seasonal and volatile.
EPS is highly sensitive to changes in sales and costs.
Poor financial results; Declining margins, slowing
revenue growth and deteriorating since 2010.
Declining employee productivity, inventory turnover,
and ROIC.
Free cash flow is volatile due to seasonal revenues
and is dependent on tight working capital controls.
Headcount and costs have increased faster than revenues.
No dividend is paid.
Amazon lacks a proprietary online payment solution.
Amazon lags in music & video downloaded.
NPD analysts estimate that Amazon has just 12% of the US
digital music market, well behind iTunes with 69% in 2011.
Poor disclosure of operations and results. Ie. Lack
of Transparency.
Forex exposure due to significant international sales.
Amazon mitigates its exposure to a fluctuating USD by
sourcing its products locally in the different countries.
Strong balance sheet and significant amounts of cash.
However, at end 2011, $2.0 bn cash was located overseas,
on which Amazon would incur US taxes if repatriated.
Much of this net cash position is due to a negative working
capital which will reverse if sales growth slows.
Low returns (interest) on its invested cash balances.
Conflicts of interest with 3rd party sellers on its websites.
Inventory risk, but this is relatively limited.
Higher sales is not leading to higher margins.
But it is hard to be certain due to poor disclosure and
heavy spending on investments and expansion.
Threats
- Management are pursuing too many & diverse projects.
which may raise costs and reduce focus on the core business.
- High growth will be hard to sustain.
The law of large numbers means that growth gets
harder as the company becomes larger.
Similar to what happened to Wal-Mart in 2000's.
- When growth slows, working capital will come under much
pressure as the negative working capital cycle reverses.
- Changes to the favourable tax regulation of internet
sales is inevitable as online sales grow.
- Increasing competition for Kindle e-readers from iPad and
Google's eBook service.
- Key person risk - dependence on the CEO.
The strong, dynamic and dominant CEO (and Chairman)
is always a high risk, especially as the CEO is a founder and
the largest shareholder.
- Corporate governance risk as it is doubtful that
Amazon's Board is truly independent or has much
influence.
- A competitive threat from new specialised shopping websites.
and comparison shopping websites.
- Growth of mobile commerce and digital media & ecommerce,
where Amazon has a relatively weaker market position.
- Dis-economies of scale in fulfilment? ie. After a certain
size, larger scale provides little additional benefits.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Additional Comments on Investment Issues
Additional Comments on Investment Issues
-
Low margins and
slowing revenue growth
Low margins and slowing revenue growth
Online internet tax laws & Amazon
Poor disclosure of operations and results.
Online shopping-related searches
Show-rooming
Kindle market share
Conflicts of interest with 3rd party sellers
LivingSocial and acquisitions
Margins and EPS has suffered to support high revenue growth via investment in new areas (video streaming,
distributing content, new Kindle Fire, website re-design etc….) and building new warehouses / fulfilment
centres (which is expensive - especially in countries where Amazon does not already present; eg. China).
Since 2011, Free cash flow growth has slowed to a standstill and creditor days have been increasing. Also,
revenue growth has slowed; though much of this is due to its size and the macro economic slowdown.
Amazon's gross and operating margins should improve as more fulfilment centers are completed (which
then reduces shipping costs), a greater proportion of higher-margin 3rd party sales, and as other activities
gain scale (eg. video streaming, Kindle sales and AWS). Alternatively, if Kindles are being sold at a loss, then
fewer Kindles sales would also translate into higher margins in the short term.
Online internet tax laws
& Amazon
Tax laws on internet sales are complex and vary enormously by country and typically favour online sales (via
lower taxes) over 'bricks & mortar' retail shops. eg. In US, online purchases at Amazon frequently avoid sales
taxes as these taxes are only paid in the states where it has a physical presence (eg. distribution center).
It is estimated that this tax benefit has provided online sales with an important competitive price advantage.
The ending of this tax benefit in the US is expected to have a negative overall effect on Amazon's sales, but
it may benefit from offering to collect & manage these taxes for its small online business customers (for a fee).
Amazon has dropped its opposition to US sales tax collection. In April 2012, Amazon collected US
sales taxes in five states. This is expected to rise to 12 states by 2016, or c. 40% of the U.S. population.
Poor disclosure of
operations and results.
Amazon provides little detailed operational information on its activities, investments nor its operating results.
For example, No data on numbers of Kindle sold or how much it cost to develop, few details of new distribution
centres, Web Services ….. This makes it hard to assess how well Amazon is performing and thus its valuation.
Online shopping-related
searches
Industry estimates that eBay dominates online shopping related searches, with Amazon a distant second, and
Google in third place. The research firm comScore estimates that in the US in April 2012, U.S. there were
c. 80 m searches using Google's shopping-search site, c. 335 m searches on Amazon and c. 900 m on eBay.
Show-rooming
"Show-rooming" is when shoppers who scope out merchandise in stores but buy on rivals' websites, usually
at a lower price. This benefits the pure online retailers such as Amazon who can avoid some sales taxes
(at least for now), and have lower overhead costs (ie. no physical stores). Offline retailers (eg. Best-Buy)
attempts to match offline prices during shopping seasons in the US has not worked well.
Kindle market share
Amazon provides little disclosure on the numbers of Kindles that it sells. IDC estimates that in 2012, Amazon
had a 12% global market share with 6 m tablets shipped. This was up 28% from the 4.7 m kindle shipments in
2011 (a 16% market share). IDC estimates that the global tablet market expanded 75% to 52.5 m in 2012.
Page 12 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Additional Comments on Investment Issues (continued)
Conflicts of interest
with 3rd party sellers
Amazon has a fundamental conflict of interest with its 3rd party sellers, who are both customers & competitors.
3rd party sellers are typically small or medium sized businesses who outsource their e-commerce to Amazon.
Conflicts arise in areas such as price competition, promotions, how & where products are displayed etc ….
Amazon has a competitive edge it terms of technology and access to information. ie. It has the capacity to
monitor & alter products prices quickly & frequently to under-cut the 3rd party sellers using automated
processes, which 3rd party sellers do not have access to. Also, Amazon has proprietary access to what
products are selling well across its platform, allowing it to focus attention on selling these products as well.
With this information Amazon can adjust its own product offerings to undercut or out-smart these competitors.
Smaller merchants struggle to compete against Amazon's: size (economies of scale in purchasing), ability to
offer no or low delivery costs, focus on revenue growth, making it willing to accept low margins (low prices),
and Amazon's frequent price changes. However, Amazon claims that these third party sellers report an
average 50% sales increases when they join Amazon's marketplace and use its storage & shipping services.
Many 3rd party sellers see Amazon as a necessary evil when e-commerce operations are relatively small
scale, but then migrate to independent platforms when they reach a critical mass.
LivingSocial
and acquisitions
Page 13 of 47
Amazon has a 31% stake in LivingSocial the daily deal site; which had a book value of $94m at Q3 2012, but
is potentially worth much more. Amazon tends to only make small add-on, complementary acquisitions.
eg. In 2009, Amazon acquired Zappos.com in softline retail (eg. shoes and apparel), for $1.1 bn in shares.
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Income Tax Considerations
2014
2013
2012
2011
2010
0
2009
-100
Tax*
Comment on Income Tax:
1) The income tax rate declined 2007-11;
This was achieved mostly by recording profits abroad in low tax
jurisdictions, and not repatriating profits (or cash) to the US.
Tax Rate
20%
2008
100
2007
40%
2006
200
2005
60%
2004
USD (m)
Amazon - Income Taxes & Tax Rates
300
2) In 2013, Amazon disclosed that most of its cash was located
overseas; and that an $2.5 bn additional taxes would arise if
all these overseas profits were repatriated to the US.
0%
This is an unrecognized deferred tax liability.
-20%
Tax - Unusual Items
Tax Rate
3) This subject generates negative press comments, but the financial
threat is muted as Amazon's profits have disappeared.
Tax Rate (TTM)
* = Excluding estimated Tax on Unusual Items,.
Income Tax
considerations
Falling corporate tax rates & large Govt. deficits raise concerns of tax avoidance by multinationals.
Multinationals say they applying all laws correctly while meeting their obligation to maximize profits.
Any tax solutions may not be simple; changes to tax systems may be difficult and will take time to implement.
Nonetheless, the economic reality means that tax changes are likely to happen. These are likely to lead
to higher corporate taxes, a stricter tax code and greater disclosure of tax details by companies.
Background
This tax problem is partly as the world’s tax rules have not evolved sufficiently with the global economy, tax
loopholes and "tax competition" between countries to attract investment & jobs. Instead of treating them
as integrated companies, tax systems seek to disaggregate them into collections of separate entities.
Corporate tax rates well below the standard US 35% tax rate are achieved by many multinationals primarily by:
not repatriating profits made abroad in low tax environments (and not taxed in the US), use of tax incentives
& exemptions abroad, and aggressive accounting by companies to fully benefit from tax regulations available.
One problem of this is that tax cash & profits are likely to be subject to additional US taxes if
repatriated back to the US; for example, to pay for dividends, share repurchases or to fund operations.
The aggressive tax planning which is coming under scrutiny primarily includes: Locating holding companies
and assets, such as IPR, in countries with low tax regimes. Then shifting large profits to those entities by
using “transfer pricing” between the different parts of multinationals, interest on inter-company loans, or
legal loopholes. This is also called "profit stripping." For example, a multinational will record sales of goods
& services in one country and profits in another lower tax regime country to minimize corporate taxes.
- This involves claiming that transactions are "arms length" and not just for tax planning, and often
changing the corporate structure, commercial agreements organisation, as the areas where profits
are generated within the company changes.
- Frequently many of the locations where sales or income are recorded, there are very few employees,
assets and limited physical presence; which questions the commercial validity of the structure.
Internet & software companies often have greater scope to use of off-shore vehicles in low tax regimes to record
sales of online products as they can easily move their IPR & assets to the best locations for tax.
Amazon - Income Tax
Amazon has achieved relatively very low tax rates, well below the standard US corporate tax rate of 35%.
In 2011, the U.S. Internal Revenue Service (IRS) was trying to claim $1.5 bn from Amazon in back taxes.
Tax authorities are questioning Amazon's tax accounting; which could lead to a substantial tax bill.
In 2000, Amazon had accumulated large losses in the US. Amazon minimized taxes by repatriating foreign
profits to the US, to offset them against its U.S. losses, which also avoided any tax on overseas profits.
This altered in 2003, as these accumulated losses had been utilized and it was making more profit in the US.
Amazon then established a corporate structure with European profits being recorded in Luxembourg (where
taxes are low) which helped it pay an estimated tax rate of c. 5% on overseas income in the period 2006-11.
European profits are then returned to the US via beneficial transfer prices and interest on inter-company
loans paid by Luxembourg, which are not treated as a taxable dividend under US tax law.
Page 14 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Key Fundamental Drivers
Key Fundamental Drivers
Putting it all together
Page 15 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Key Fundamental Drivers
Key long-term, fundamental share price drivers:
(Graph)
i, ii
Share price performance is driven primarily by revenue growth.
The P/Sales valuation ratio has been relatively stable since 2009.
Analysis of fundamentals & EPS drivers:
-- EBIT margins are at low levels; indicating upside potential.
Any margin increases will have a substantial impact on EPS.
Share
Price
é
iii - v
EPS* growth has been driven primarily by revenue growth;
Share repurchases / issues and tax rates have minimal impact.
vi
-- Conclusion: Amazon remains an anomaly, delivering high
revenue growth but few earings due to razor thin margins.
Revenue
Growth
EBIT* growth has been driven primarily by revenue growth,
despite contracting EBIT margins.
Amazon has yet to demonstrate what sustainable margins
its business model can generate.
(see also analysis on next page)
* = Excludes Unusual Items
Historical Valuation Multiples
ii
P / Sales
800
600
è
400
4
20
3
15
2
10
1
5
0
0
Share Price
.
P / Sales
PE*
* = Excludes Unusual Items
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2014
2013
EPS* (TTM)
§ = On a constant per share basis from Q4 2003.
iii
2012
2011
2010
2009
2008
2007
2006
0
2005
200
2004
Index Q1 2004 = 100
1,000
P / BV
Share Price, EPS & PE
i
.
P / BV
.
TTM = Trailing 12 months
iv
EBIT* & EPS* (TTM)
EBIT* & EPS* (TTM) Growth
125%
4
100%
75%
50%
2
2014
2013
2012
2011
2010
2009
2008
2007
2006
2014
2013
2012
2011
2010
2009
2008
2007
-75%
EBIT* §
EPS* §
EPS*
.
.
EBIT* Growth
.
ê
EPS* Growth
î
EPS* § (TTM) Drivers
v
EBIT* § (TTM) Drivers
vi
-1
-2
Other
.
Tax
Share Issues
EBIT*
Unusual Items
CONFIDENTIAL
2014
2013
2012
2011
2010
2009
2008
2007
2006
-2
-1
-4
-4
-2
-6
-6
EPS*
Other = Interest & Other Income
Page 16 of 47
-2
2005
0
0
è
2004
0
0
($) Per Share
2
1
($) Per Share
2
1
2014
4
2013
4
2012
2
2011
2
2010
6
2009
3
2008
3
2007
8
6
2006
8
2005
4
2004
4
($) Per Share
2006
2005
-50%
EBIT - Q4 2003
.
For illustration purposes only.
Revenue Growth
EBIT* Margin Expansion
($) Per Share
-1
-25%
2005
0
0%
2004
25%
1
2004
($) Per Share
3
EBIT*
Key EBIT drivers since Q4 2003.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Key Fundamental Drivers
EBIT* § (TTM) Growth Drivers
0
0
EBIT - Q4 2003
Revenue Growth
EBIT* Margin Expansion
.
2014
2013
2012
2011
2010
2009
-6
-20%
2008
-6
0%
2007
-4
20%
2006
-4
è
2005
-2
40%
2004
2012
2010
-2
($) Per Share
2
2014
2
2013
4
2011
60%
4
2009
6
2008
6
2007
80%
2006
8
2005
8
2004
($) Per Share
EBIT* § (TTM) Drivers
-40%
EBIT*
Key EBIT drivers since Q4 2003.
EBIT* Growth
EBIT* Margin Expansion
Revenue Growth
.
Profit Margins
10%
Notes on EBIT Drivers
-- The cumulative change in EBIT due to revenue growth
and margin expansion is displayed from Q4 2003.
8%
6%
-- EBIT Margin Expansion = EBIT Growth due to changes
in EBIT margins.
4%
Key:
* = Excludes Unusual Items
§ = On a constant per share basis from Q4 2003.
TTM = Trailing 12 months
EBIT* § (TTM) = Trailing 12 Months EBIT excluding Unusual Items
2014
2013
2012
2011
2010
2009
2008
2007
-2%
2006
2004
0%
2005
2%
-4%
EBIT* Margin
on a constant per share basis from Q4 2003. ie. The underlying EBIT.
Net Income* Margin
.
Return Analysis
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
ROCE
2014
2013
2012
2011
ROIC (TTM)
* = Excludes Unusual Items
TTM = Trailing 12 months
§ = On a constant per share basis from Q4 2003.
Tax*
Tax - Unusual Items
Tax Rate
0.0
0%
-0.2
Tax Rate (TTM)
* = Excluding estimated Tax on Unusual Items,.
Page 17 of 47
CONFIDENTIAL
For illustration purposes only.
# Shares in issue
2014
5%
2013
0.2
2012
10%
2011
0.4
2010
15%
2007
0.6
2006
-10%
20%
2005
-50
0.8
2004
0%
Tax Rate
0
2014
10%
2013
50
2012
20%
2011
100
2010
30%
2009
150
2008
40%
2007
200
2006
50%
2005
250
Shares (bn)
Shares in Issue
60%
2004
USD (m)
Taxes & Tax Rates
300
2009
2010
2009
2008
ROA
-10%
2008
ROE
2007
2006
2005
-10%
2004
This space is intentionally left blank.
-5%
# Shares Growth
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Historical Financial Results - Quarterly Analysis since 2004
Historical Financial Results
Quarterly Analysis since 2004
Key:
* = Excludes Unusual Items.
** = Revenue growth adjusted for major M&A.
TTM = Trailing 12 Months
Explanation of Unusual Items & M&A
- Indigo analysis highlights the performance of the
core business by identifying the "Unusual Items" and
major mergers & acquisitions that impact the results.
- Unusual Items' includes costs or income that are
truly one-off, exceptional & extraordinary events.
eg. Gains or losses related to assets disposals,
(non-recurring) restructurings costs, litigation etc….
- See Page 31 of 47 for more details of Unusual Items.
EPS* & EPS* Growth
0.00
0%
-0.20
-0.40
-0.50
EPS
EPS*
2014
50%
2013
0.20
2012
100%
2011
0.40
2010
150%
2009
0.60
2008
200%
2007
0.80
2006
USD
2014
2013
2012
2011
2010
2009
2008
2007
-0.25
2006
0.00
2005
0.25
2004
USD
0.50
250%
2005
0.75
1.00
2004
1.00
Growth
EPS* v. EPS
-50%
-100%
EPS*
EPS* Growth
* = Excluding Unusual Items
Page 18 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Profit & Loss Summary
Growth Rates (TTM)
30%
10
20%
0%
5
10%
-25%
0
0%
-50%
Revenue
2012
Revenue Growth (Constant Currency)
Growth
15
2014
50%
2013
40%
2011
20
2010
75%
2009
50%
2008
25
2007
100%
2006
60%
2005
30
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
25%
2004
USD (bn)
Revenue & Revenue Growth
-75%
EBIT (TTM)
Revenue Growth
Net Income* (TTM)
Revenue (TTM)
TTM = Trailing 12 months
Profit Margins
Growth Analysis
CAGR
30%
5 Years
7 Years
25%
Revenue
EBIT*
Net Income*
EPS*
EPS
DPS
BV Per Share
FCF Per Share
20%
15%
10%
Gross Margin
EBIT Margin §
EBIT Margin
2014
2013
2012
2011
2010
2009
2008
2007
-5%
2006
2004
0%
2005
5%
31.2%
-2.4%
-15.7%
-17.0%
-17.0%
-27.6%
6.7%
31.9%
9.7%
5.4%
4.0%
4.0%
-54.1%
21.1%
Growth above is stated to the last financial year, 2013.
* = Excluding Unusual Items
TTM = Trailing 12 months
Net Income Margin*
* = Excluding Unusual Items
EBIT & EBIT Margin
600
Key Unusual Items, acquisitions & disposals:
Amazon has reported relatively very few Unusual terms
and has made no major acquisitions or disposals.
30%
2014
2013
2012
-200
2004 Q4 results include an unusual income of a $244 m
deferred tax benefit.
Margin
2)
Notes
TTM = Trailing 12 Months
"Net" Revenue & EBIT Margins § excludes the cost of goods sold.
* = excludes Unusual Items.
"Unusual" includes one-off, exceptional and extraordinary items.
Most Unusual Items relate to acquisitions, disposals or restructurings.
See Page 31 for more details of Unusual Items.
0%
-10%
EBIT Margin
EBIT Margin §
EBIT Margins § = EBIT / Net Revenues
* = Excluding Unusual Items
EPS* & EPS* Growth
-400
EBIT*
Other & Interest
Unusual
CONFIDENTIAL
50%
0.00
0%
-0.20
-0.40
2014
0.20
2013
100%
2012
0.40
2011
150%
2010
0.60
2009
200%
2006
USD
250%
0.80
2005
-200
1.00
2004
0
-400
Tax*
"Other" includes Interest and non-operating items
Page 19 of 47
2014
2013
2012
2011
2010
-200
2009
0
2008
200
2007
200
2006
400
2005
400
USD (m)
600
2004
USD (m)
600
Growth
Net Income Analysis
2008
EBIT
2007
2011
2010
2004
0
2009
10%
2008
200
2007
20%
2006
400
2005
USD (m)
1)
-50%
-100%
Net Income*
EPS*
For illustration purposes only.
Unusual Items
EPS* Growth
EPS* Growth (TTM)
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Industry & Net Revenue Analysis
USA Retail E-commerce
Amazon US Market Share of Retail E-Commerce
20%
60%
50%
15%
40%
30%
10%
20%
USA Retail E-commerce Growth
2014
2013
2012
2011
2010
2009
2008
2007
Amazon N. American Revenue Growth
Source: US Census Bureau, Indigo
Amazon US Market Share
4 per. Mov. Avg. (Amazon US Market Share)
"Net" Revenue excludes the cost of goods sold (ie. Gross Profit).
Revenue Growth Drivers
20%
20%
5
10%
10%
0
0%
0%
Growth
10
2014
2013
2012
2011
2010
2009
2008
2006
2005
30%
2004
2014
30%
2013
15
2012
40%
2011
40%
2010
20
2009
50%
2008
50%
2007
25
2006
60%
2005
30
60%
2004
USD (bn)
Net Revenues
2007
hs
2006
0%
2005
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-10%
2004
0%
2004
5%
10%
Net Revenues
Cost Of Sales
Net Revenues Growth
Total Unit Growth
Revenue Growth
Net Revenue Growth
Account Growth
Units per Account Growth
Net Revenues (Gross Profit) = Reported GAAP Revenues - Cost of Sales
Estimated Net Revenue Growth
80%
Growth
60%
40%
2014
2013
2012
2011
2010
2009
2008
2007
2006
0%
0%
2005
20%
2004
Amazon Products
3rd Party Products
Amazon Products
3rd Party Products
Other (AWS)
Net Revenues Growth
Other (AWS)
Net Revenues
Source for Net Revenue analysis: Indigo Equity Research
Reported Revenue is the GAAP Revenues, which includes Cost of Sales.
Media
Page 20 of 47
EGM
Total
CONFIDENTIAL
N America
For illustration purposes only.
International
2014
2013
2012
2011
2010
2009
2008
2007
2014
2013
0%
2012
0%
2011
20%
2010
20%
2009
40%
2008
40%
2007
60%
2006
60%
2005
80%
2004
80%
2006
GAAP Revenue Growth by Region
2004
GAAP Revenue Growth by Division
2005
-
2014
10%
2013
2
2012
20%
2011
4
2010
30%
2009
6
2008
40%
2007
8
2006
50%
2005
10
2004
USD (bn)
Estimated Net Revenue (Gross Profit) by Type
Total
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
GAAP Revenue Analysis by Division
Group GAAP Revenue Growth by Division
Media
EGM
Revenue Growth
Media
EGM
2014
2013
2012
2011
2010
2009
2008
2012
Other (AWS)
0%
2007
0%
20%
2006
0
40%
2005
10%
60%
2004
5
80%
Growth
20%
2014
10
2013
30%
2011
15
2010
40%
2009
20
2008
50%
2007
25
2006
60%
2005
30
2004
USD (bn)
Group GAAP Revenue by Division
Total
Reported Revenue is the GAAP Revenues, which includes Cost of Sales.
EGM = Electronic & General Merchandise
Revenue Growth - EGM Division
60%
40%
0
0%
2014
2013
2012
2010
2009
2008
2011
Total
30%
20%
Revenue Growth
N America
This space is intentionally left blank.
CONFIDENTIAL
International
2014
2013
2012
2011
2010
2009
2008
0%
-10%
2007
10%
2006
Growth
40%
2004
2014
10%
2013
2
2012
20%
2011
4
2010
30%
2009
6
2008
50%
2007
40%
2006
8
2005
60%
2004
USD (bn)
50%
Page 21 of 47
International
Revenue Growth - Media Division
10
International
2007
N America
Revenue Growth
Revenue - Media Division
N America
2006
0%
2005
20%
2004
2012
International
80%
2005
N America
100%
Growth
0%
2014
0
2013
20%
2011
5
2010
40%
2009
10
2008
60%
2007
15
2006
80%
2005
20
2004
USD (bn)
Revenue - EGM Division
Total
This space is intentionally left blank.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
GAAP Revenue Analysis by Region
Group GAAP Revenues by Region
Group GAAP Revenue Growth by Region
30
60%
25
50%
20
40%
15
30%
10
20%
5
10%
0
0%
80%
Growth
USD (bn)
60%
40%
N America
International
N America
Revenue Growth
International
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0%
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
20%
Total
Reported Revenue is the GAAP Revenues, which includes Cost of Sales.
Group Revenue Growth - Currency Impact
International Revenue Growth - Currency Impact
60%
80%
50%
60%
40%
40%
30%
20%
20%
Growth at constant forex
Total Revenue Growth
International Growth at constant currency
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2004
0%
2005
10%
International Revenue Growth
EGM = Electronic & General Merchandise
International Revenue Growth
Media
Growth
CONFIDENTIAL
2014
2013
2012
2011
2010
2009
40%
Media
Growth
For illustration purposes only.
EGM
2014
2013
2012
2011
2010
0%
2009
20%
2008
2012
Media
60%
2005
0%
80%
2004
0
Page 22 of 47
Total
100%
Growth
10%
2014
3
2013
20%
2011
6
2010
30%
2009
9
2008
40%
2007
12
2006
50%
2005
15
EGM
EGM
N America Revenue Growth
60%
2004
USD (bn)
N America Revenue
18
Other
2008
2012
Media
-20%
2007
EGM
0%
2006
Other
20%
2007
0%
40%
2006
0
60%
2005
10%
80%
2004
2
100%
Growth
20%
2014
30%
4
2013
6
2011
40%
2010
8
2009
50%
2008
10
2007
60%
2006
12
2005
70%
2004
USD (bn)
International Revenue
14
Total
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
EBIT Analysis by Region
EBIT by Region
EBIT Margins by Region
10%
10%
0%
4%
Corporate Costs
EBIT Margin
N America
2014
2013
2012
2011
2010
2009
2008
2007
2006
-200
2005
2014
2013
0%
-100
-5%
2014
0
2013
0%
2%
2012
0
200
2011
5%
4%
2010
100
400
2009
10%
6%
2008
200
600
2006
15%
8%
2005
300
800
2004
20%
USD (m)
400
2004
Total
Corporate Costs
Margin
USD (bn)
EBIT - International Division
EBIT
2012
International
2007
International
2011
-2%
N America
2010
-6%
2009
-600
2008
0%
2007
-4%
2006
-400
2005
2%
-2%
2004
2012
-200
Margin
0
2014
2%
2013
6%
200
2011
4%
2010
400
2009
8%
2008
6%
2007
600
2006
8%
2005
800
2004
USD (m)
1,000
-2%
-400
-4%
-600
-6%
Corporate Costs
EBIT Margin
Corporate Costs / Net Revenues
Net Revenues (Gross Profit) = Reported GAAP Revenues - Cost of Sales
-200
2014
Margin
0%
2013
0
2012
5%
2011
200
2010
10%
2009
400
2008
15%
2007
600
2006
20%
2005
800
2004
USD (bn)
EBIT - N America Division
Comments on EBIT Analysis
-- Amazon does not disclose sufficient data to calculate
EBIT Margins by Region based on Net Revenues.
-- Amazon does not disclose EBIT by Product / Division.
-- Corporate costs represent unallocated costs; and the difference
between EBIT reported for the regions, and total company
EBIT (operating profit).
-5%
EBIT
EBIT Margin
This space is intentionally left blank.
Page 23 of 47
CONFIDENTIAL
This space is intentionally left blank.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Operational Analysis
Revenue
Active Customer Accounts
Retail Units
Active Customer Accounts
Units per Account
2014
2013
2012
2011
2010
2009
2008
0%
2007
0%
2006
10%
2014
10%
2013
20%
2012
20%
2011
30%
2010
30%
2009
40%
2008
40%
2007
50%
2006
50%
2005
60%
2004
60%
2005
Key Operating Metrics Compared - Growth Rates
2004
Key Operating Metrics Growth Rates
Retail Units
Source: Amazon, Indigo Equity Research estimates
3rd Party
Amazon
Active Customer Accounts
Retail Units Growth
2014
2013
2012
2011
2010
2004
0
2009
0%
2008
0.0
2007
10%
2006
100
2005
20%
Accounts (m)
0.4
Growth
20%
2014
200
2013
40%
2012
0.8
2011
30%
2010
300
2009
60%
2008
1.2
2007
40%
2006
400
2005
80%
Growth
Active Customer Accounts
1.6
2004
Units (bn)
Retail Units Sold
0%
Growth
Note: Some of the operational data disclosed by Amazon does not reconcile. ie. Some data trends are not consistent across all metrics.
Units Sold per Active Account
Amazon
3rd Party
0%
Units per Active Account
Total
2014
0
2013
5%
2012
2
2011
10%
2010
4
2009
15%
2008
20%
6
2007
8
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0%
2004
20%
25%
2006
40%
10
2005
60%
30%
2004
(Units per Account)
80%
12
Growth
Retail Units Sales Growth
Growth
% of Retail Units Sales by 3rd Party Sellers
50%
40%
30%
This space is intentionally left blank.
20%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0%
2004
10%
% of Unit Sales accounted for by Third Party Sellers
Page 24 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Operational v. Product Revenue Analysis
Key Operating Metrics Growth Rates
Growth of Product Revenue per Retail Unit Sold
60%
30%
20%
40%
10%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
-10%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0%
2004
0%
2004
20%
-20%
-20%
Product Revenue
Product Revenue per Unit
Product Revenue per Account
Amazon
3rd Party
Total
Source: Indigo Equity Research, Company Data
Product Revenues represent all revenues excluding Services Revenues.
Source: Amazon, Indigo Equity Research estimates
-20
Total - Product Revenue per Unit
2012
-50
-20%
Product Revenue per Account
Growth
Growth
0%
2014
0
-10%
2013
10%
2011
50
2010
20%
2009
100
2008
30%
2007
150
2006
40%
2005
2012
-10
200
2004
0%
Accounts (m)
0
2014
10%
2013
10
2011
20%
2010
20
2009
30%
2008
30
2007
40%
2006
40
2005
50%
Growth
Product Revenue per Active Customer Account
50
2004
Product Revenue Per Unit ($)
Product Revenue per Retail Unit Sold
-10%
Growth
Notes - Retail Units & Product Revenues:
-- Product Revenues represent all revenues excluding Services Revenues.
-- Product Revenues per Retail Unit sold are much lower for 3rd Party
sales than for Amazon sales. Hence one reason for the declining
Product Revenue per retain Unit sold is the changing mix towards
3rd Party sales.
-- Retail Units includes both physical and digital goods sold.
This space is intentionally left blank.
Employees
Page 25 of 47
Employees Growth
Revenue** Growth
CONFIDENTIAL
0
Sales / Employees
For illustration purposes only.
EBIT* / Employees
EBIT & Net Income / Employees
0
2014
5
2013
100
2012
10
2011
200
2010
15
2009
300
2008
2014
2013
2012
2011
2010
2009
2008
0%
2007
0
2006
20%
2005
50
20
2007
40%
400
2006
100
25
2005
60%
500
2004
150
Sales / Employee
80%
Growth
Employees Productivity
200
2004
Employees ('000)
Employees
Net Income* / Employees
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Cost Analysis
Profit Margins
20%
40%
1.5
15%
30%
1.0
10%
0.5
5%
0.0
0%
% Sales
20%
Loss on Shipping
% Revenues
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Gross Margin
% Net Revenues
EBIT Margin*
2014
2013
2012
2011
2010
2009
2008
-10%
2007
2004
0%
2006
10%
2005
USD ((bn)
Losses on Shipping
2.0
Net Income Margin*
* = excludes Unusual Items.
Note: Amazon includes shipping costs in the Cost of Sales.
Operating Expenses (% Net Revenues)
Operating Cost Analysis
0
0%
0%
R&D
% Net Revenues
SG&A = Sales, General & Admin, and Fulfilment
2014
2013
2012
2011
2010
2009
2008
2007
2006
Fulfillment
Marketing & Sales
Technology & Content
General & Admin.
Note: Net Revenues exclude the Cost of Sales.
Depreciation Expenses
Stock Based Compensation (SBC) Expenses
Depreciation
D&A / Sales
2012
D&A / Sales (TTM)
CAPEX / Sales
SBC
% Sales
% Sales (TTM)
% Net Sales
2014
0%
2013
0
2012
0%
2011
0.0
2010
2%
2009
100
2008
2%
2007
0.3
2006
4%
2005
200
2004
4%
USD (m)
0.6
D&A / Sales
6%
2014
300
2013
6%
2011
0.9
2010
8%
2009
400
2008
8%
2007
1.2
2006
10%
2005
1.5
500
2004
USD (bn)
2005
20%
2004
2012
Other
30%
10%
% Sales
SG&A
% Net Revenues
10%
Costs / Sales
20%
2014
2
2013
40%
2011
4
2010
60%
2009
6
2008
40%
2007
80%
2006
8
2005
50%
2004
100%
USD (bn)
10
% Net Sales (TTM)
Note: Depreciation & Stock Compensation expenses are apportioned between the different operating expense categories.
-50
Tax*
Tax - Unusual Items
Tax Rate
Tax Rate
0%
2014
10%
0
2013
50
2012
20%
2011
100
2010
30%
2009
40%
150
2008
200
2007
50%
2006
250
2005
60%
2004
USD (m)
Taxes & Tax Rates
300
This space is intentionally left blank.
-10%
Tax Rate (TTM)
* = Excluding estimated Tax on Unusual Items,.
Page 26 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Cash Flow Analysis
-50%
-4
-100%
2014
2013
2012
-2
-4
-4
Net CAPEX
Working Capital
FCF Growth (TTM)
§ = Adj. for Other (non-cash) Items
Net CAPEX = Depreciation - CAPEX
CAPEX
1.0
4%
0.5
2%
0.0
0%
Net Income*
Unusual Items
FCF (12m av.)
CAPEX
CAPEX / Sales
2014
2013
2012
2011
2010
2009
2008
2007
2006
-400
2005
-400
-200
2004
-200
0
USD (m)
0
USD (m)
6%
2014
1.5
2013
200
2012
200
2011
8%
2010
2.0
2009
400
2008
400
2007
10%
2006
2.5
2005
600
2004
600
CAPEX / Sales
Net Income* & FCF
USD (m)
2011
2010
Growth
-2
Profits §
FCF
2009
2012
-2
2008
0
2007
0
2006
0%
2005
0
2004
2
USD (bn)
2
2014
50%
2013
2
2011
4
2010
4
2009
100%
2008
4
2007
6
2006
6
2005
150%
USD (bn)
Free Cash Flow (FCF) Breakdown
6
2004
USD (bn)
Free Cash Flow (FCF) Analysis
CAPEX / Sales (TTM)
* = excludes Unusual Items.
4
FCF
M&A
Equity
Debt
Other
Net Share Issues ($ Bn)
Note: Negative "Equity" amounts represent net share repurchases.
2014
2013
USD (bn)
-0.2
2012
-6
2011
-6
2010
0.0
2009
0.1
0.0
-4
2008
0.2
-4
2007
0.2
-2
2006
0.4
-2
2005
0.3
2004
0.6
USD (bn)
0
2014
0
2013
0.4
2012
0.8
2011
2
2010
2
2009
0.5
2008
1.0
2007
4
2006
0.6
2005
1.2
# Shares in issue (bn)
Share Repurchases & Shares in Issue
6
2004
USD (bn)
Total Cash Flow
6
-0.1
# Shares in issue
Note: Increasing # shares is mostly due to executive compensation.
Share Repurchases & Shares in Issue
In the last 10 years, despite a net amount of c. $1.6 bn spent on Share
repurchases, Shares in issue increased a net c. 1434 m (or c. 354% of the
equity), mostly due to executive compensation and acquisitions
(such as Zappos.com acquired in 2009 for $1.1 bn in Shares).
This space is intentionally left blank.
Page 27 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Working Capital Analysis
15
30%
10
20%
5
10%
0
0%
W.C. Assets
Total W.C.
WC % Total Assets
Total W.C.
At 2014 Q2 $8.0 bn of Cash had been generated from W.C..
2014
2013
2012
2011
2010
2009
2008
2007
2006
-10%
-20%
W.C. Liabilities
% Assets
40%
2005
-20
20
2004
2012
2010
-10
USD (bn)
0%
2014
0
2013
10%
2011
10
2009
20%
2008
20
2007
30%
2006
30
2005
40%
% Assets
Working Capital (WC)
40
2004
USD (bn)
Working Capital (WC)
WC % Total Assets
At 2014 Q2 $8.0 bn of Cash had been generated from W.C..
Note: WC Assets excludes cash & WC Liabilities excludes ST Debt.
Receivables
Other
Growth
Accrued Expenses
Inventory Turnover
15
60
Debtor days
Net Revenue / Inventory
Inventory
days
$
Growth
2014
2013
2012
2011
2010
2009
2006
2014
2013
2012
2011
2010
2009
2008
0
2007
0
2006
20
2005
5
2004
Growth
40
2005
10
2004
Days
80
$
COS / Inventory
Accounts payable
0%
Working Capital Trends
20
Sales / Inventory
2014
2004
-
2013
10%
2012
5
2011
20%
2010
10
2009
30%
2008
15
2007
40%
2006
20
2005
50%
2008
Inventories
0%
25
2007
Prepayments
2012
-
Growth
10%
2014
3
2013
20%
2011
6
2010
30%
2009
9
2008
40%
2007
50%
12
2006
15
2005
60%
USD (bn)
Current Liabilities (excludes ST Debt)
18
2004
USD (bn)
Current Assets (excludes cash)
Creditor days
Net Revenues (Gross Profit) = Reported GAAP Revenues - Cost of Sales
This space is intentionally left blank.
Page 28 of 47
CONFIDENTIAL
This space is intentionally left blank.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Balance Sheet Analysis
Net Cash
2012
-5
-10%
Net Cash / Total Assets
USD (bn)
0
2014
0
2013
5
2011
5
2010
10
2009
10
2008
15
2007
2012
-3
15
2006
0%
20
2005
0
20
2004
10%
USD (bn)
3
2014
20%
2013
6
2011
30%
2010
9
2009
40%
2008
12
2007
50%
2006
15
2005
60%
% Assets
Net Cash Breakdown
18
2004
USD (bn)
Net Cash & Gearing
-5
Investments
Cash
Debt
Net Cash
Investments are mostly debt marketable securities classified as long term.
2014
0%
2013
-
2012
0%
2011
-
2010
20%
2009
10
2008
20%
2007
10
2006
40%
2005
20
2004
40%
USD (bn)
20
Growth
60%
2014
30
2013
60%
2012
30
2011
80%
2010
40
2009
80%
2008
40
2007
100%
2006
50
2005
100%
Intangibles
Cash
Other
Share Capital
Other
LT. Debt
Current Assets
Fixed Assets
Growth
ST. Debt
Current Liabilities
Growth
Intangible Assets are mostly from acquisitions.
ST = Short Term;
Growth
Liabilities and Share Capital & Reserves
50
2004
USD (bn)
Total Assets
LT = Long Term;
USD
Book Value (BV) per share
30
75%
20
50%
10
25%
-10
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
This space is intentionally left blank.
0%
-25%
Intangible BV
Tangible BV
Total BV
Growth
This space is intentionally left blank.
Page 29 of 47
CONFIDENTIAL
This space is intentionally left blank.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Return Analysis
Net Income* & Margin
0.0
0
-0.1
-10%
-0.2
ROA
ROCE
-100
-200
Net Income*
ROE
2014
100
2013
0.1
2012
200
2011
0.2
2010
300
2009
0.3
2008
400
2007
0.4
2006
500
2005
0.5
2004
2014
-10%
2013
0%
2012
0%
2011
10%
2010
10%
2009
20%
2008
20%
2007
30%
2006
30%
2005
40%
2004
40%
USD (bn)
Return Analysis
Unusual Items
NOPAT*
ROIC (TTM)
* = excludes Unusual Items.
Total Assets & ROA
0
0%
0
0%
Share Capital
Total Assets
ROE
Debt - Excess Cash
Share Capital
2014
2013
0%
2012
0
2011
25%
2010
5
2009
50%
2008
10
2007
75%
2006
15
2005
100%
2004
IC
Return on Equity
ROA = Net Income / Total Assets
Return on Assets
ROIC = NOPAT / Invested Capital
Return on Invested Capital
NOPAT = Net Operating Profit After Tax
IC = Invested Capital = Equity + Debt - Excess Cash
IC = Total Assets - Excess Cash - Current Liabilities
EVA = ( ROIC - WACC ) x IC
Economic Value Added (EVA) is a measure of value created.
REE = Increase in Net Income / Retained Earnings
(3 yrs)
RE = Net Income - Dividends - Share Repurchases
Retained Earnings Efficiency (REE) measures the increase in
Net Income generated by Retained Earnings (RE) over 3 yrs.
-25%
ROIC (TTM)
Economic Value Added (EVA) & ROIC*
Retained Earrings Efficiency (REE)
-1.0
-1
-10%
-2
-20%
EVA
ROIC (TTM)
CONFIDENTIAL
-5%
-10%
Retained Earnings (3 yrs)
EVA is the Return on Invested Capital in excess of the WACC of 10.3%.
Page 30 of 47
2014
-0.5
2013
0%
2012
0
2011
0%
2010
0.0
2009
5%
2008
1
2007
10%
2005
0.5
2004
10%
USD (bn)
2
2014
20%
2013
1.0
2012
15%
2011
3
2010
30%
2009
1.5
2008
20%
2007
4
2006
40%
2005
2.0
2004
USD (bn)
-5%
ROA
Key:
* = excludes Unusual Items
ROE = Net Income / Share Capital
2006
USD (bn)
Invested Capital (IC) ROIC
20
-5
2012
-10
-10%
2010
-3
2014
5%
2013
10
2011
10%
2009
3
2008
10%
2007
20
2006
20%
2005
6
2004
15%
USD (bn)
30
2014
30%
2013
9
2012
20%
2011
40
2010
40%
2009
12
2008
25%
2007
50
2006
50%
2005
15
2004
USD (bn)
Share Capital & ROE
For illustration purposes only.
Increase in Net Income (3 yrs)
REE
REE = Increase in Net Income / Retained Earnings
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Unusual Items
2014
2013
2012
2011
2010
-200
EBIT Margin
USD (m)
0
2014
2013
2011
2012
-200
2010
0%
2009
200
2008
200
2007
400
2006
400
2005
Margin
600
0
-200
-400
-10%
EBIT
600
2004
0
2009
10%
2008
200
2007
20%
2006
400
2005
30%
USD (m)
Net Income* & Unusual Items
600
2004
USD (m)
EBIT & EBIT Margin
-400
Net Income*
EBIT Margin §
Unusual Items
EBIT Margins § = EBIT / Net Revenues
* = excludes Unusual Items.
Key Recent Unusual Items
($ m)
y/e 31 Dec
Notes
2012
Q1
Q2
Q3
Q4
2013
Q1
Q2
Q3
Q4
2014
Q1
Q2
1
1
1
1
1
1
1
1
1
1
Q3
-
Q4
-
Amazon has recorded very few items that we consider to be Unusual.
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-169
-
-
-
-
Total Unusual Items below the EBIT level
-
-
-
-
-
-
-169
-
-
-
Estimated Tax Impact of Unusual Items
Total Unusual Items
Note: The tax impact of Unusual items is
not always disclosed by Amazon.
-
-
-
-
-
-
-169
-
-
-
Total Unusual Items above the EBIT level
Living Social impairment charge
(1)
1 Key Unusual Items
1
(1)
In Q3 2012 a loss of $169 m was incurred related to Amazon's equity-method share of the losses reported by LivingSocial,
which were primarily attributable to its impairment charge of certain assets, including goodwill.
2
(2)
In Q3 2004 a $239 m foreign exchange gain was recorded.
Amazon has recorded very few items that we consider to be Unusual.
12
Explanation of "Unusual Items" in Indigo Equity Research Reports
i) In general, "Unusual Items" include one-off, exceptional or extraordinary amounts that are significant to the financial accounts.
"Unusual Items" typically relate to charges or gains for: asset write-downs, litigation, acquisitions, disposals, restructurings ….
eg. An Unusual Items may be a large gain on the sale of a subsidiary, where a company does not frequently sell subsidiaries.
ii) The assessment of exactly which items meet the criteria for "Unusual Items" is highly subjective; is made on a case-by-case basis; is
based on the analyst's assessment; may vary in each quarter; and are not determined by any accounting rules or company guidelines.
iii) The objective is to highlight Unusual Items to aid the understanding of the reported financial results. This is achieved by separating those
items that are significant & unusual to the Company's business either by their size, cause, frequency, nature or other characteristics.
iv) The quality and depth of information disclosed by the company is critical to identifying "Unusual Items" correctly and accurately.
v) Indigo Equity Research does not verify or confirm that this list is a complete or accurate summary of all Unusual Items for the Company.
vi) Note that the Company often reports numerous relatively small gains & losses on the disposal of assets, adjustments (impairments) to
the value of existing assets or restructuring charges. These are typically reported in the accounts as "Other Income and Expenses".
It is frequently these items that are considered for inclusion as "Unusual Items"; but there is no automatic process and criteria can vary.
Page 31 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Valuation
Valuation
Valuation - Summary
Fundamental Valuation of Amazon
DCF Valuation & Reality Check
Historical Valuation Multiples
Consensus Forecasts & Valuation Multiples
Page 32 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Valuation - Summary
Fundamental Valuation
Share Price ($)
Share Price last 3 yrs & estimated 12 month return (%)
500
500
400
400
Bull
§ = Estimates for next 12 Months
(-20%)
Base (-32%)
300
300
200
200
Bear (-44%)
100
Indigo
Fundamental
Valuation
100
Last
Base
Change
12 Months
Case §
(%)
Share Price
($)
324
Dividends Per Share
Return (incl. Div.)
($)
-
-32%
Key Forecasts:
Revenue Growth
22.3%
16.3%
-6.0%
EBIT* Margin
Tax Rate*
0.8%
66.7%
0.8%
51.7%
0.0%
-15.0%
0.38
0.62
64.3%
1.8
242.5
1.1
141.6
-41.6%
-41.6%
14.1
9.3
10.0%
Jun 2015
Dec 2014
Jul 2014
Jan 2014
Jul 2013
Jan 2013
Aug 2012
Feb 2012
Aug 2011
EPS*
0
220
-32.1%
0
P / Sales
P / EBIT*
Note: Estimated return
includes any dividend.
P / BV
* = Excluding Unusual Items
Note: See the full Indigo report for a more detailed description of the fundamental valuation.
Fundamental Valuation Methodology
The potential returns under the three scenarios (Bear, Base, Bull Cases) of the Fundamental Valuation above is a calculation based on an estimated change in
share price and dividends received. The share price is calculated by multiplying the forecast PE and EPS. In turn, the EPS is calculated based on forecast
changes in revenue, EBIT margin, net interest, other income & tax rates, and adjusting for share repurchases. This approach is summarized by the formula:
Return = Dividends
+ Δ Share Price
DPS = Dividends Per Share
Return = DPS + ( Δ PE * Δ EPS )
Δ = Change in a variable
Δ EPS = ( ( ( Δ EBIT + Δ Interest + Δ Other Income ) * Δ Tax Rate % ) / Shares ) * Δ Shares
ie. Δ PE = Change in PE ratio
However, Amazon's lack of earnings make this approach impossible, so Book Value & Sales based valuation multiples are used instead.
DISCLAIMER: The valuations and return calculations only illustrate the potential returns under the hypothetical conditions described and should not be relied
upon for any investment decision. This is not an estimate of what we believe may occur, nor a price target nor a recommendation to buy or sell an investment.
150
150
2014
2013
2012
2010
2011
0
2009
0
2008
50
2007
50
2006
100
2005
100
-50
DCF Valuation
Current Share Price
WACC
è DCF Valuation
USD (bn)
200
2004
USD (bn)
Historical Enterprise Value (EV)
200
($)
324.0
($)
10.3%
167.0
-48.5% downside risk
Reality check:
The current share price of $324.01 and FCF in year 1 of -$0.48 imply
the following ranges for FCF growth into perpetuity and WACC:
WACC
10.3%
-17.0%
FCF Growth into perpetuity
9.3%
-16.0%
-50
Market Cap.
Net Debt / (Cash)
MI & Prefs
DCF Formula: PV = FCF / (WACC - g)
Disclaimer: DCF valuation is only an illustration of potential valuation.
EV
* = Excluding Unusual Items
Historical Valuation Multiples
Consensus Forecast EPS
200
20
6
300%
10
50
5
4
200%
3
USD
100
P / Sales
15
PE
P / EBIT
150
P / BV
5
2
100%
1
P / EBIT*
PE*
P / Sales
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
0
2004
0
0
-1
CONFIDENTIAL
Last 12m
2014e
2015e
2016e
-2
P / BV
-100%
EPS*
.
Page 33 of 47
0%
2013
Unusual Items
EPS* Growth
.
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Fundamental Valuation of Amazon
Fundamental Valuation
Share Price ($)
Share Price last 3 yrs & estimated 12 month return (%)
500
500
400
400
Bull
§ = Estimates for next 12 Months
(-20%)
Base (-32%)
300
300
Last
Base
Change
12 Months
Case §
(%)
Share Price
($)
324
Dividends Per Share
Return (incl. Div.)
($)
-
220
-32%
-32.1%
Key Forecasts:
Revenue Growth
22.3%
16.3%
-6.0%
EBIT* Margin
Tax Rate*
0.8%
66.7%
0.8%
51.7%
0.0%
-15.0%
0.38
0.62
64.3%
1.8
242.5
1.1
141.6
-41.6%
-41.6%
14.1
9.3
10.0%
Bear (-44%)
200
200
100
100
Indigo
Fundamental
Valuation
Fundamental Valuation
Share Price
Dividends Per Share
Return (incl. Div.)
Jun 2015
Dec 2014
Jul 2014
Jan 2014
Jul 2013
Jan 2013
Aug 2012
Feb 2012
Aug 2011
EPS*
0
Last
12 Months
($)
($)
324.0
-
($ Bn)
($ Bn)
(bn)
($)
81.8
22.3%
0.6
0.8%
-0.1
66.7%
0.18
0.5
0.38
($)
23.00
0
Note: Estimated return
includes any dividend.
P / Sales
P / EBIT*
P / BV
Base
Case
Bear / Bull
Range
(Change)
(-/+)
-
Bear
Case
Base
Case
Bull
Case
Estimates for next 12 Months
($)
($)
-
181
-44%
220
-32%
261
-20%
93.5
14.3%
0.2
0.3%
-0.1
53.7%
0.1
0.5
0.12
95.1
16.3%
0.7
0.8%
-0.1
51.7%
0.3
0.5
0.62
96.7
18.3%
1.2
1.3%
-0.1
49.7%
0.5
0.5
1.19
23.1
23.6
24.2
Fundamental Forecasts:
Revenue
Revenue Growth
EBIT*
EBIT* Margin
Interest & Other Income
Tax Rate*
Net Income*
# Shares
EPS*
BV per share
($ Bn)
($ Bn)
-6.0%
2.0%
0.0%
6%
-15.0%
0.5%
4%
-2.0%
-
-
Bear
Case
Valuation Multiples:
PE*
P / Sales
P / EBIT*
P / BV
Base
Case
Bull
Case
Multiples used to calculate Valuation
>200
1.83
>100
14.09
-41%
-35%
10%
10%
0.9
7.7
1.1
9.2
1.3
10.6
Multiples based on forecast Valuation.
1,506.2
0.9
352.2
7.8
352.9
1.1
141.6
9.3
219.9
1.2
99.1
10.8
Notes:
incl. Div. = Includes Dividends
* = Excludes Unusual Items
** = Estimated growth excluding M&A.
(iii) Consensus EPS forecasts may not be directly comparable to the Base Case EPS*; as they may include Unusual Items (which are excluded from the Base Case).
Fundamental Valuation Methodology
The potential returns under the three scenarios (Bear, Base, Bull Cases) of the Fundamental Valuation above is a calculation based on an estimated change in
share price and dividends received. The share price is calculated by multiplying the forecast PE and EPS. In turn, the EPS is calculated based on forecast
changes in revenue, EBIT margin, net interest, other income & tax rates, and adjusting for share repurchases. This approach is summarized by the formula:
Return = Dividends
+ Δ Share Price
DPS = Dividends Per Share
Return = DPS + ( Δ PE * Δ EPS )
Δ = Change in a variable
Δ EPS = ( ( ( Δ EBIT + Δ Interest + Δ Other Income ) * Δ Tax Rate % ) / Shares ) * Δ Shares
ie. Δ PE = Change in PE ratio
However, Amazon's lack of earnings make this approach impossible, so Book Value & Sales based valuation multiples are used instead.
DISCLAIMER: The valuations and return calculations only illustrate the potential returns under the hypothetical conditions described and should not be relied
upon for any investment decision. This is not an estimate of what we believe may occur, nor a price target nor a recommendation to buy or sell an investment.
These calculations assumes all other variables remain constant; which may not occur. See also the Disclaimer & Important Information at the end of this report.
Page 34 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
DCF Valuation & Reality Check
Current Share Price
WACC
DCF Valuation
è
($ per share)
($ per share)
324.0
10.3%
167.0 -48.5% downside risk
TV
Cash
Flows
DCF Forecasts
FCF per share
Year
($)
0
2.25
FCF Growth
Discount Factor (@ WACC of 10.3%)
Present Value (PV)
($)
151.2
Net Cash / (Debt)
DCF Valuation
($)
($)
15.7
167.0
1
-0.48
2
1.24
3
3.14
4
3.64
5
4.19
6
4.79
7
5.43
8
6.10
9
6.81
10
320
0.91
0.82
0.75
16.0%
0.68
15.1%
0.61
14.2%
0.56
13.3%
0.50
12.4%
0.46
11.6%
0.41
8.0%
0.41
-0.4
1.0
2.3
2.5
2.6
2.7
2.7
2.8
2.8
132.3
TV % of Total PV
TV % of DCF
87%
79%
Notes:
The DCF valuation is based on the WACC and key assumptions which are highlighted in grey.
In year 3 the FCF is "normalized", to adjust for past FCF fluctuations eg. for Unusual Items or working capital.
Disclaimer: This DCF valuation is provided for illustration purposes and is only an indication of potential valuation.
Reality
Check
0.9%
Year 0 = last 12 months
TV = Terminal Value
PV = Present Value
DCF as a reality check that the share price reflects underlying value; (ie. discount rate v. growth outlook)
Using DCF formula; the current share price of $324.01 and FCF in year 3 of -$0.48 indicate a FCF return of 1.0%. As an alternative sensitivity analysis
to the ten year FCF forecasts & DCF valuation above; this indicates that FCF growth into perpetuity and WACC are within the following ranges:
è WACC
è FCF Growth into perpetuity
10.3%
9.3%
---
17.0%
16.0%
For the share price to be an accurate reflection of value according to DCF, the forecast
WACC and FCF growth into perpetuity must fit with these ranges given the FCF in year 1.
Present Values implied by different FCF Growth Rates & WACC
FCF Growth Rate into perpetuity
2.0%
4.0%
6.0%
8.0%
7.0%
62.8
104.7
-
DCF formula and data:
3.14
FCF3 Normalized FCF in year 3
R
g
17.0% WACC2
ion.
R = 'Return = FCF3 / Share Price
g = FCF Growth Rate into perpetuity
g = WACC - ( FCF1 / Share Price )
WACC = g + ( FCF1 / Share Price )
WACC
1.0%
9.3%
8.0%
9.0%
10.0%
11.0%
52.3
44.9
39.3
34.9
78.5
157.0
62.8
104.7
52.3
78.5
157.0
44.9
62.8
104.7
PV ($ per share) in year 3
Formula Workings - Formula & Calculations for WACC
The WACC (Weighted Average Cost of Capital) discount rate is estimated based on standard DCF (Discounted Cash Flow) & PV (Present Value) theory.
In turn, CAPM (Capital Asset Pricing Model) is used to calculate the cost of equity (KE) and cost of debt (KD). This is illustrated by the formula:
Growth in perpetuity PV formula using DCF:
Formula for calculating a discount rate:
CAPM method for calculating the cost of equity (KE):
PV = FCF1 / (WACC - g)
WACC = ( D/C * KD ) + ( MVE/C * KE )
KE = Rf + ( EMP * ß )
WACC & CAPM calculations
Long-Term Risk-Free Interest Rate
Debt Premium / Spread
Pre-tax Cost of Debt
Tax Rate*
Post-tax Cost of Debt
Equity Market Premium
Leveraged (geared) Beta
Cost of Equity
Leverage - Net Debt % of Market Cap.
WACC
g = FCF Growth Rate into perpetuity
FCF1 = Normalized FCF in Year 1
Formula / Source
4.0%
1.2%
5.2%
0.0%
5.2%
4.5%
1.40
10.3%
0.0%
10.3%
Rf
DP
Kd
Estimate by Indigo Equity Research.
Estimate by Indigo Equity Research.
Kd = Rf + DP
t
KD
Tax Rate from last 12 months; excluding Unusual Items.
Total Capital = C = D + MVe
KD = Kd * (1 - t ) = (Rf + DP) * (1 - t )
D = Net Debt
Estimate by Indigo Equity Research.
MVE = Market Value of Equity
Estimate by Indigo Equity Research.
ie. Market Capitalisation
KE = Rf + ( EMP * ß )
EMP
ß
KE
LV
WACC
= D / (D + MVe)
WACC = ( KD * D/(D+MVE ) ) + ( KE * MVE/(MVE+D) )
Note: We consider DCF to have significant limitations, due to the of uncertainty future cash flows and as it is highly sensitive to key inputs (eg. WACC).
Page 35 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Historical Valuation Multiples
2014
2012
Negative multiples are not shown, for example when a loss is reported.
2013
0
2011
0
2010
50
2009
50
2008
100
2007
100
2006
150
2005
Valuation multiples are based on Trailing 12 month (TTM) variables.
e.g.. PE is the share price at the time, divided by the trailing 12m EPS.
150
2004
The Valuation Multiples are measured quarterly.
Min / Max = The minimum / maximum share price in that quarter.
USD (bn)
Notes:
200
-50
Source: Indigo Equity Research
USD (bn)
Historical Enterprise Value (EV)
200
-50
Market Cap.
Net Debt / (Cash)
MI & Prefs
EV
TTM Valuation Multiples.
PE* Valuation Multiples
EV / EBITDA Valuation Multiples
Max
Min
Close
Max
.
Min
2014
2013
2012
2011
2010
0
0
2009
0
0
2008
20
2007
20
2006
50
2005
50
2004
40
2014
40
2013
100
2012
100
2011
60
2010
60
2009
150
2008
150
2007
80
2006
80
2005
200
2004
200
Close
* = Excludes Unusual Items
P / BV
P / EBIT* Valuation Multiples
Max
Min
0
Max
Close
2012
Min
2014
0
2013
40
2011
40
2010
80
2009
80
2008
120
2007
120
2006
160
2005
160
2004
0
2014
0
2013
5
2012
5
2011
10
2010
10
2009
15
2008
15
2007
20
2006
20
2005
25
2004
25
Close
.
P / Sales Valuation Multiples
P / FCF
Max
Page 36 of 47
Min
Max
Close
CONFIDENTIAL
For illustration purposes only.
Min
2014
2013
2012
0
2011
0
2010
0
2009
0
2008
20
2007
20
2006
1
2005
1
2004
40
2014
40
2013
2
2012
2
2011
60
2010
60
2009
3
2008
3
2007
80
2006
80
2005
4
2004
4
Close
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Consensus Forecasts & Valuation Multiples
100
25
125
25%
80
20
100
20%
60
15
75
15%
50
10%
40
10
25
5%
20
5
0
0%
2013
Last 12m
2014e
2015e
P/EBIT / PE
30%
Growth / Margin
($ bn)
150
0
2016e
-25
0
2013
-5%
Revenue
Revenue Growth
Last 12m
PE*
EBIT* Margin
P/BV
Consensus Forecasts - Valuation Multiples
Consensus Forecast Revenues, Growth & Margin
2014e
2015e
2016e
P / EBIT*
P / BV
.
.
"e" = Consensus Forecasts (estimates)
* = Excluding Unusual Items
Last 12m = Last 12 months
Consensus Forecast EPS
Changing Consensus Forecasts - EPS
6
300%
12.00
5
4
10.00
200%
USD
100%
1
0%
2014e
2015e
0.00
-100%
EPS*
Unusual Items
2013
-2
2014 Q2
2.00
2016e
EPS* Growth
.
.
2016e
Last 12m
2014 Q1
2015e
2013
2013 Q4
4.00
2014e
0
2013 Q3
6.00
Last 12m
USD
2
-1
2013 Q2
8.00
3
Valuation Multiples & Financial Ratios
y/e 31 Dec
2013
Last 12m
2014e
2015e
2016e
Profit & Loss
Enterprise Value (EV) Ratios
EV / Sales
EV / EBITDA
EV / Net Income*
Share Price (P) Ratios
P / Sales
P / EBIT*
PE*
PEG*
Other Ratios
Earnings yield*
Dividend Yield
Pay-Out Ratio
Interest Cover*
Page 37 of 47
Last 12m
Balance Sheet
1.9
>50
>100
2.0
>50
>100
5.1
1.7
>50
>100
1.8
>50
>100
5.0
Consensus Estimates
1.6
1.3
1.1
30.0
20.4
15.3
>100
>100
58.1
1.6
>50
>100
--
1.4
>50
>100
0.2
1.1
42.5
60.9
0.4
P / BV
BV Per Share
MVA
EV / Asset Value
($)
Efficiency (DuPont) Analysis
Net Income*
Asset Turnover
Total Assets / Equity
ROE*
Net Debt / EBITDA
Net Debt / Total Assets
0.2%
--5.3
0.1%
--3.8
0.1%
--1.6
0.7%
--11.4
1.6%
--24.9
21.9%
1.0%
0.4%
0.59
106.9%
22.3%
0.8%
0.2%
0.38
171.3%
22.1%
0.2%
0.2%
0.30
-48.5%
20.2%
1.5%
1.0%
2.22
>300%
19.5%
2.7%
1.9%
5.32
139.8%
Select P&L Data
Revenue Growth
EBIT* Margin
Net Income* Margin
EPS*
($)
EPS* Growth
2013
CONFIDENTIAL
2014e
2015e
2016e
Consensus Estimates
15.4
14.3
11.1
21.1
22.7
29.1
3.5
3.2
2.8
3.3
3.0
2.7
15.5
21.0
3.7
3.5
14.1
23.0
3.9
3.8
0.4%
185.4%
412.1%
2.8%
0.2%
215.7%
357.5%
1.7%
0.2%
212.1%
433.4%
1.4%
1.0%
231.3%
431.1%
9.8%
1.9%
243.6%
399.7%
18.3%
---
---
---
---
---
27.28
>50
4.6%
--
28.04
>50
5.2%
--
30.69
>50
4.6%
--
23.67
>50
4.7%
--
18.07
>50
4.7%
--
Cash Flow
P/ Op FCF
P / FCF
CAPEX / Sales
FCF / Dividends
Notes:
* = Excluding Unusual Items
Last 12m = Last 12 months
For illustration purposes only.
MVA = Market Value Added
ie. Market Cap / Total Assets
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Industry Analysis & Drivers
Industry Analysis & Drivers
es
Page 38 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
US e-commerce Industry Overview
USA Retail E-commerce (Seasonally Adjusted )
USA Retail E-commerce
80
40%
60
30%
40
20%
20
10%
0
0%
60%
50%
Growth
USD (bn)
40%
30%
20%
USA Retail E-commerce Growth
USA Retail E-commerce Growth
2014
2013
2012
2011
2010
2009
2008
2007
2006
-10%
-10%
USA Retail E-commerce
USA Retail Sales
2005
-20
0%
2004
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
10%
Amazon N. American Revenue Growth
Source: US Census Bureau, Indigo
Sources: USA Census Bureau , Indigo Equity Research
Data for the latest Q is not yet available.
Overview of the USA
e-commerce market:
Since 1990, e-commerce has grown rapidly, but still accounts for just 6% of all US retail sales. This suggests
that much growth potential remains; but it is uncertain what percentage of commerce will ultimately shift online.
- E-commerce growth has been helped by faster data transmission speeds (broadband), improving
technology, increasing economies of scale; falling transaction prices, better service quality, more
available goods online, better ease of online trading, greater consumer acceptance (and trust) ….
- Favourable tax treatment on online sales has also helped, but these are being slowly phased out.
- Whereas, the key disadvantages of retail e-commerce are that customers are unable to touch the
goods, physical (non-digital) goods are delivered by post (incurring extra costs and delayed consumer
satisfaction); and increased risk or faulty / damaged goods and fraud.
- Internet and Broadband growth are slowing in the OECD as markets become saturated. Conversely,
internet & e-commerce growth is strongest outside OECD (eg. China) where penetration is lowest.
- Note that estimates of the e-commerce market size and growth vary somewhat between analysts.
Debit and credit cards remain the main method of payment for online transactions (e-commerce) in the US.
PayPal dominates the alternative online payments, accounting for c. 16-8% of USA e-commerce in 2012.
Ecommerce Regulation:
Ecommerce and e-payment solutions (and the internet) in its earliest days was lightly regulated, but this is
changing as ecommerce grows in size. In general, regulation & taxes is favourable towards the internet.
However this is a complex area as different countries have very different laws and incentive structures.
USA Internet Penetration
USA E-commerce % of all Retail Sales
100%
10%
80%
8%
60%
6%
40%
4%
20%
Internet Penetration (%)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Broadband Penetration (%)
Sources: Nielsen Online, ITU, Internet World Stats
Page 39 of 47
2004
0%
2014
2013
2012
2011
2010
2009
2008
2007
2006
2004
2005
2%
0%
CONFIDENTIAL
For illustration purposes only.
Sources: USA Census Bureau, Indigo Equity Research
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Mobile Commerce & Payments Industry Overview
SmartPhones
5
50%
0
0%
0%
-5
Growth
iPad
Sources: IAB, Indigo Equity Research
2014
100%
2013
10
2012
150%
2011
15
2010
200%
2009
20
2008
250%
2007
25
2006
300%
2005
Units (m)
Growth
30
2004
2014
2013
2012
0
2011
20%
2010
100
2009
40%
2008
200
2007
60%
2006
300
2005
80%
2004
Units (m)
400
Growth
iPad Unit Sales
Global SmartPhone Sales (units)
-50%
Growth
iPad sales are shown as a proxy for Tablet PCs.
Data for the latest Q is not yet available.
Mobile payments & commerce may be about to take-off
Overview
The next stage of online development is the on-going evolution from the desktop to mobile devices.
Mobile services are still at an early stage of development but are growing quickly. They generate
relatively few revenues, much hype and constant speculation that they are about to become critical.
- Mobile payments; transforming smartphones into payment devices.
- Mobile commerce; shopping via mobile devices.
Gaining traction?
Every year since mid 2000's analysts have wrongly predicted that this year is “the year of mobile services”.
There is speculation that mobile commerce, advertising & location based services are finally gaining
traction; as now the hardware & technology is finally in place & consumer acceptance is growing.
This is being driven by more people having internet enabled wireless devices (ie. laptops, smartphones, tablet
PCs ….), smartphones are becoming more sophisticated (eg. with faster processors, more apps and larger
screens) and broadband wireless data services (3G, 4G, WiFi …) are becoming more widespread & cheaper.
For example; there are almost as many mobile internet users in 2012 as there were PC internet users 2000.
Smartphone penetration is growing quickly, its estimated that over 50% of US wireless subscribers now one.
Also, various new milestones are being achieved, such as Facebook now has over 600m active mobile users.
There is much anecdotal evidence of consumers using smartphones to comparison shop; finding what they
want in stores, (eg. with their cameras & barcode-scanning apps), then buying it later more cheaply online.
However, while consumer adoption of mobile devices is strong, the growth of mobile services slow.
Technology issues, small screens, fragmented media market and poor services restrict adoption.
There are concerns that consumers may take much longer than expected to accept these services for a
variety of potential reasons such as security, privacy, familiarity with the technology, ease of use, benefits …..
Underlying the slow adoption is the issue that it is the companies are pushing the mobile services, it is not the
the consumer who is demanding them. To encourage adoption, many services are offer free initially; which
leads consumers to expect them to remain free. This was the same mistake made in Web 1.0 by companies
like Yahoo who expected consumers to migrate to paid (premium) services.
Mobile payments
overview
Electronic payments is a huge market and e-commerce is still relatively small but is growing rapidly.
In 2011, Visa processed c. $3.9 trillion in payments globally, MasterCard did c. $3.1 trillion and PayPal did
only $0.1 trillion. In 2012 e-commerce represents c. 5-6% (c. $210 bn) of all c. $4.3 trillion US retail sales.
Mobile payments has much potential, but its still relatively early days and there are few revenues yet.
Consumers have shown little interest in paying with their mobile phones when it has been possible.
Mobile payments has promised a lot but delivered very little. Mobile payment adoption has been delayed by:
a lack of agreement on technology (NFC, SMS …) and standards (between, banks retailers, credit cards, ….
on things like security … ), lack of familiarity with the technology and numerous competing services.
Also, there is a lack of services (Isis have yet to be launched, Google wallet is not widely available, ….).
Page 40 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Tables of Historical Financial Results
Tables of Historical Financial Results
Quarterly Since 2012
Financial Tables
Quarterly & Annual Financial Accounts
………………………………………………………………………………………………………………
Page 42
Revenue Data
…………………………………………………………………………………………………………………………………………
Page 43
Revenue & EBIT by Region
…………………………………………………………………………………………………………………………
Page 44
Cost & Expenses Data
………………………………………………………………………………………………………………………………………
Page 45
Page 41 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Quarterly Financial Accounts
($ m)
y/e 31 Dec
Profit & Loss
Revenues
Revenue Growth
Gross Margins
EBIT
EBIT Margin
Profit before Tax
Tax Charge
Net Income
Net Income Margin
EPS
($)
EPS Growth
EPS*
($)
EPS Growth*
2012
2013
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Revenue
1
13,185
1
12,834
1
13,806
1
21,268
1
16,070
1
15,704
1
17,092
1
25,587
1
19,741
1
19,340
Revenue Growth
Gross Profit Margin
33.8%
24.0%
29.5%
26.1%
26.9%
25.3%
22.0%
24.1%
21.9%
26.6%
22.4%
28.6%
23.8%
27.7%
20.3%
26.5%
22.8%
28.8%
23.2%
30.7%
EBIT
192
107
-28
405
181
79
-25
510
146
-15
EBIT Margin
Pre Tax Profit
1.5%
84
0.8%
146
-0.2%
-22
1.9%
337
1.1%
81
0.5%
17
-0.1%
-43
2.0%
451
0.7%
120
-0.1%
-27
Tax Rate
Net Income
51%
130
-7
--274
-97
-82
--7
28%
-41
40%
239
61%
108
--126
Net Income Margin
EPS
1.0 %
0.28
0.1 %
0.02
-2.0 %
-0.61
0.5 %
0.21
0.5 %
0.18
0.0 %
-0.02
-0.2 %
-0.09
0.9 %
0.51
0.5 %
0.23
-0.7 %
-0.27
EPS Growth
-35.5 %
-96.3 %
--
-45.1 %
-37.3 %
--
-85.2 %
143.2 %
30.3 %
--
-0.02
-0.09
0.51
-- -61.4 % 143.2 %
0.23
30.3 %
-0.27
--
EPS*
0.28
0.02
EPS* Growth -35.5 % -96.3 %
-0.23
0.21
0.18
-- -45.1 % -37.3 %
Q3
-
Q4
-
* = Excludes Unusual Items
Annual Financial Accounts
($ Bn) y/e 31 Dec
Profit & Loss
Revenues
Revenue Growth
Consensus Estimates
2013
2014e
2015e
74.5
90.9
109.3
21.9%
22.1%
20.2%
Revenue
Revenue Growth
2004
6.9
31.5%
2005
8.5
22.7%
2006
10.7
26.2%
2007
14.8
38.5%
2008
19.2
29.2%
2009
24.5
27.9%
2010
34.2
39.6%
2011
48.1
40.6%
2012
61.1
27.1%
EBIT
EBIT Margin
Pre Tax Profit
Tax Rate
Net Income
Net Income Margin
EPS
EPS Growth
DPS
0.4
6.4%
0.4
-65%
0.6
8.5%
1.39
--
0.4
5.1%
0.4
22%
0.4
4.2%
0.84
-39.2%
-
0.4
3.6%
0.4
50%
0.2
1.8%
0.45
-46.8%
-
0.7
4.4%
0.7
28%
0.5
3.2%
1.12
150.5%
-
0.8
4.4%
0.9
27%
0.6
3.4%
1.49
33.0%
-
1.1
4.6%
1.2
22%
0.9
3.7%
2.04
36.7%
-
1.4
4.1%
1.5
24%
1.2
3.4%
2.53
23.8%
-
0.9
1.8%
0.9
31%
0.6
1.3%
1.37
-45.8%
-
0.7
1.1%
0.5
79%
-0.0
-0.1%
-0.09
-106.3%
-
0.7
1.0%
0.5
32%
0.3
0.4%
0.59
--
0.2
0.2%
0.2
25%
0.1
0.2%
0.30
-48.5%
-
1.6
1.5%
1.5
13%
1.1
1.0%
2.22
--
Balance Sheet
Intangible & Goodwill Assets
Tangible Fixed Assets
Current Assets
Total Assets
Current Liabilities
Long term Liabilities
Total Liabilities
Share Capital & Reserves
Total Liabilities & Reserves
2004
0.1
0.6
2.5
3.2
1.6
1.9
3.5
-0.2
3.2
2005
0.2
0.6
2.9
3.7
1.9
1.6
3.5
0.2
3.7
2006
0.2
0.8
3.4
4.4
2.5
1.4
3.9
0.4
4.4
2007
0.2
1.1
5.2
6.5
3.7
1.6
5.3
1.2
6.5
2008
0.6
1.6
6.2
8.3
4.7
0.9
5.6
2.7
8.3
2009
1.8
2.2
9.8
13.8
7.4
1.2
8.6
5.3
13.8
2010
1.9
3.1
13.7
18.8
10.4
1.6
11.9
6.9
18.8
2011
2.6
5.2
17.5
25.3
14.9
2.6
17.5
7.8
25.3
2012
3.3
8.0
21.3
32.6
19.0
5.4
24.4
8.2
32.6
2013
2.7
12.9
24.6
40.2
23.0
7.4
30.4
9.7
40.2
2014e
2.7
13.1
27.1
42.9
25.5
7.4
33.0
9.9
42.9
2015e
2.7
13.3
31.3
47.2
28.9
7.4
36.3
11.0
47.2
Cash Flow
Op FCF
Investing
Financing
Cash Flow
FCF
2004
0.6
-0.3
-0.1
0.2
0.5
2005
0.7
-0.8
-0.2
-0.3
0.5
2006
0.7
-0.3
-0.4
0.0
0.5
2007
1.4
0.0
0.1
1.5
1.2
2008
1.7
-1.2
-0.2
0.2
1.4
2009
3.3
-2.3
-0.3
0.7
2.9
2010
3.5
-3.4
0.2
0.3
2.5
2011
3.9
-1.9
-0.5
1.5
2.1
2012
4.2
-3.6
2.3
2.8
0.4
2013
5.5
-4.3
-0.5
0.6
2.0
2014e
4.9
-4.3
0.1
0.8
0.7
2015e
6.3
-5.1
0.0
1.2
1.2
EBIT
EBIT Margin
Profit before Tax
Tax Charge*
Net Income
Net Income Margin
EPS
($)
EPS Growth
DPS
($)
Notes:
Sources: Annual Financial Report & Accounts
* = Excludes Unusual Items
Growth** = Estimated organic revenue growth excluding major acquisitions & disposals. (Also note that this is NOT adjusted for currency movements.)
Growth rates are on a Year-on-Year (YoY) basis, unless stated otherwise.
Page 42 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Revenue Data
($ m)
y/e 31 Dec
2012
2013
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
1
1
1
1
1
1
1
1
1
1
Group Revenue
Media
4,710
4,119
4,600
6,514
5,058
4,397
5,033
7,227
5,467
4,844
EGM
7,975
8,161
8,558
13,934
10,214
10,415
11,048
17,126
13,017
13,278
500
13,185
554
12,834
648
13,806
820
21,268
798
16,070
892
15,704
1,011
17,092
1,234
25,587
1,257
19,741
1,218
19,340
Media
EGM
19.0%
42.7%
12.5%
38.5%
10.8%
35.5%
8.4%
27.7%
7.4%
28.1%
6.7%
27.6%
9.4%
29.1%
10.9%
22.9%
8.1%
27.4%
10.2%
27.5%
Other (AWS)
Total
60.8%
33.8%
54.3%
29.5%
59.2%
26.9%
61.1%
22.0%
59.6%
21.9%
61.0%
22.4%
56.0%
23.8%
50.5%
20.3%
57.5%
22.8%
36.5%
23.2%
Group Revenue Composition
Media
EGM
35.7%
60.5%
32.1%
63.6%
33.3%
62.0%
30.6%
65.5%
31.5%
63.6%
28.0%
66.3%
29.4%
64.6%
28.2%
66.9%
27.7%
65.9%
25.0%
68.7%
3.8%
100.0%
4.3%
100.0%
4.7%
100.0%
3.9%
100.0%
5.0%
100.0%
5.7%
100.0%
5.9%
100.0%
4.8%
100.0%
6.4%
100.0%
6.3%
100.0%
Revenue - Media
N America
2,197
1,874
2,215
2,903
2,513
2,173
2,609
3,513
2,825
2,464
International
Total
2,513
4,710
2,245
4,119
2,385
4,600
3,611
6,514
2,545
5,058
2,224
4,397
2,424
5,033
3,714
7,227
2,642
5,467
2,380
4,844
Revenue - Media Growth
N America
International
Total
16.6%
21.2%
19.0%
18.2%
8.2%
12.5%
14.9%
7.1%
10.8%
13.3%
4.8%
8.4%
14.4%
1.3%
7.4%
16.0%
-0.9%
6.7%
17.8%
1.6%
9.4%
21.0%
2.9%
10.9%
12.4%
3.8%
8.1%
13.4%
7.0%
10.2%
Revenue - EGM
N America
International
Total
4,772
3,203
7,975
4,937
3,224
8,161
5,061
3,497
8,558
8,503
5,431
13,934
6,128
4,086
10,214
6,478
3,937
10,415
6,732
4,316
11,048
10,648
6,478
17,126
7,829
5,188
13,017
8,366
4,912
13,278
Revenue - EGM Growth
N America
International
Total
44.5%
40.2%
42.7%
41.2%
34.4%
38.5%
39.2%
30.4%
35.5%
23.6%
34.7%
27.7%
28.4%
27.6%
28.1%
31.2%
22.1%
27.6%
33.0%
23.4%
29.1%
25.2%
19.3%
22.9%
27.8%
27.0%
27.4%
29.1%
24.8%
27.5%
458
42
500
515
39
554
608
40
648
769
51
820
750
48
798
844
48
892
960
51
1,011
1,170
64
1,234
1,204
53
1,257
1,168
50
1,218
65.3%
23.5%
60.8%
58.5%
14.7%
54.3%
64.3%
8.1%
59.2%
67.5%
2.0%
61.1%
63.8%
14.3%
59.6%
63.9%
23.1%
61.0%
57.9%
27.5%
56.0%
52.1%
25.5%
50.5%
60.5%
10.4%
57.5%
38.4%
4.2%
36.5%
Other (AWS)
Total
Q3
-
Q4
-
Group Revenue Growth (YoY)
Other (AWS)
Total
Revenue by Division
Revenue - Other
N America
International
Total
Revenue - Other Growth
N America
International
Total
Notes:
* = Excludes Unusual Items
Growth** = Estimated organic revenue growth excluding major acquisitions & disposals. (Also note that this is NOT adjusted for currency movements.)
Growth rates are on a Year-on-Year (YoY) basis, unless stated otherwise.
Page 43 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Revenue & EBIT by Region
($ m)
y/e 31 Dec
2012
2013
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
1
1
1
1
1
1
1
1
1
1
7,427
5,758
7,326
5,508
7,884
5,922
12,175
9,093
9,391
6,679
9,495
6,209
10,301
6,791
15,331
10,256
11,858
7,883
11,998
7,342
13,185
12,834
13,806
21,268
16,070
15,704
17,092
25,587
19,741
19,340
Revenue Growth by Region
USA
35.9%
35.5%
32.9%
23.0%
26.4%
29.6%
30.7%
25.9%
26.3%
26.4%
International
Total
31.1%
33.8%
22.2%
29.5%
19.8%
26.9%
20.8%
22.0%
16.0%
21.9%
12.7%
22.4%
14.7%
23.8%
12.8%
20.3%
18.0%
22.8%
18.2%
23.2%
Revenue Composition by Region
USA
International
56.3%
43.7%
57.1%
42.9%
57.1%
42.9%
57.2%
42.8%
58.4%
41.6%
60.5%
39.5%
60.3%
39.7%
59.9%
40.1%
60.1%
39.9%
62.0%
38.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Q3
-
Q4
-
Revenue by Region
Revenue by Region
USA
International
Total
Total
EBIT by Region
EBIT by Region
N America
International
Profit
Corporate Costs
Total
EBIT Margins by Region
N America
International
349
49
398
-206
192
344
16
360
-253
107
291
-59
232
-260
-28
608
70
678
-273
405
457
-16
441
-260
181
409
409
-330
79
295
-28
267
-292
-25
725
151
876
-366
510
562
-60
502
-356
146
438
-34
404
-419
-15
4.7%
0.9%
4.7%
0.3%
3.7%
-1.0%
5.0%
0.8%
4.9%
-0.2%
4.3%
0.0%
2.9%
-0.4%
4.7%
1.5%
4.7%
-0.8%
3.7%
-0.5%
Total
1.5%
0.8%
-0.2%
1.9%
1.1%
0.5%
-0.1%
2.0%
0.7%
-0.1%
EBIT Growth by Region
N America
International
Total
20.3%
-72.0%
-40.4%
60.7%
-90.7%
-46.8%
102.1%
-150.9%
-135.4%
113.3%
-60.5%
55.8%
30.9%
-132.7%
-5.7%
18.9%
-100.0%
-26.2%
1.4%
-52.5%
-10.7%
19.2%
115.7%
25.9%
23.0%
7.1%
275.0% #DIV/0!
-19.3% -119.0%
EBIT Composition by Region
N America
International
Total
87.7%
12.3%
100.0%
95.6%
4.4%
100.0%
125.4%
-25.4%
100.0%
89.7%
10.3%
100.0%
103.6%
-3.6%
100.0%
100.0%
0.0%
100.0%
110.5%
-10.5%
100.0%
82.8%
17.2%
100.0%
112.0%
-12.0%
100.0%
108.4%
-8.4%
100.0%
Notes:
* = Excludes Unusual Items
Growth** = Estimated organic revenue growth excluding major acquisitions & disposals. (Also note that this is NOT adjusted for currency movements.)
Growth rates are on a Year-on-Year (YoY) basis, unless stated otherwise.
Page 44 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Cost & Expenses Data
($ m)
y/e 31 Dec
2012
2013
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
1
1
1
1
1
1
1
1
1
1
Expenses Analysis
Cost of Sales
10,027
9,488
10,319
16,136
11,801
11,209
12,366
18,806
14,055
13,399
Operating Expenses
Fulfillment
1,295
1,356
1,510
2,258
1,796
1,837
2,034
2,918
2,317
2,382
Marketing & Sales
Technology and content (R&D)
480
945
537
1,082
540
1,192
851
1,345
632
1,383
675
1,586
694
1,734
1,133
1,862
870
1,991
943
2,226
General and administrative
Other
200
46
232
32
230
43
235
38
246
31
286
32
278
11
318
40
327
35
377
28
2,966
3,239
3,515
4,727
4,088
4,416
4,751
6,271
5,540
5,956
12,993
12,727
13,834
20,863
15,889
15,625
17,117
25,077
19,595
19,355
76.0%
73.9%
74.7%
75.9%
73.4%
71.4%
72.3%
73.5%
71.2%
69.3%
9.8%
3.6%
7.2%
1.5%
10.6%
4.2%
8.4%
1.8%
10.9%
3.9%
8.6%
1.7%
10.6%
4.0%
6.3%
1.1%
11.2%
3.9%
8.6%
1.5%
11.7%
4.3%
10.1%
1.8%
11.9%
4.1%
10.1%
1.6%
11.4%
4.4%
7.3%
1.2%
11.7%
4.4%
10.1%
1.7%
12.3%
4.9%
11.5%
1.9%
Other
Total Operating Expenses
0.3%
22.5%
0.2%
25.2%
0.3%
25.5%
0.2%
22.2%
0.2%
25.4%
0.2%
28.1%
0.1%
27.8%
0.2%
24.5%
0.2%
28.1%
0.1%
30.8%
Total Expenses
98.5%
99.2%
100.2%
98.1%
98.9%
99.5%
100.1%
98.0%
99.3%
100.1%
Expenses % Net Sales
(% of Gross Profit)
Fulfillment
30.2%
30.8%
32.5%
32.6%
31.7%
31.4%
32.5%
32.0%
30.8%
30.7%
Marketing & Sales
R&D
General & Admin.
Other
Total Operating Expenses
11.2%
22.0%
4.7%
1.1%
69.2%
12.2%
24.6%
5.3%
0.7%
73.6%
11.6%
25.7%
5.0%
0.9%
75.8%
12.3%
19.4%
3.4%
0.5%
68.2%
11.2%
24.4%
4.3%
0.5%
72.2%
11.5%
27.1%
4.9%
0.5%
75.4%
11.1%
27.7%
4.4%
0.2%
75.9%
12.4%
20.4%
3.5%
0.4%
68.7%
11.6%
26.5%
4.4%
0.5%
73.7%
12.2%
28.7%
4.9%
0.4%
76.8%
160
1.2%
3.7%
221
1.7%
5.0%
217
1.6%
4.7%
235
1.1%
3.4%
229
1.4%
4.0%
298
1.9%
5.1%
281
1.6%
4.5%
326
1.3%
3.6%
321
1.6%
4.3%
391
2.0%
5.0%
Total Operating Expenses
Total Expenses
Q3
-
Q4
-
(Expenses include Stock Based Compensation costs)
Expenses % Sales
Cost of Sales
Operating Expenses
Fulfillment
Marketing & Sales
R&D
General & Admin.
Stock Based Compensation Costs
% Sales
% Net Sales
Notes:
* = Excludes Unusual Items
Growth** = Estimated organic revenue growth excluding major acquisitions & disposals. (Also note that this is NOT adjusted for currency movements.)
Growth rates are on a Year-on-Year (YoY) basis, unless stated otherwise.
Page 45 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Cost & Expenses Data (continued)
($ m)
y/e 31 Dec
2012
2013
2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
1
1
1
1
1
1
1
1
1
1
Q3
-
Q4
-
Headcount Data & Analysis
Employees
65,600
69,100
81,400
88,400
91,300
97,000
109,800
117,300
124,600
132,600
Growth
73.1%
60.0%
58.7%
57.3%
39.2%
40.4%
34.9%
32.7%
36.5%
36.7%
Employee Productivity Analysis
Sales / Employees
201.0
185.7
169.6
240.6
176.0
161.9
155.7
218.1
158.4
145.9
EBIT* / Employees
EBIT / Employees
2.9
2.9
1.5
1.5
-0.3
-0.3
4.6
4.6
2.0
2.0
0.8
0.8
-0.2
-0.2
4.3
4.3
1.2
1.2
-0.1
-0.1
Net Income / Employees
Net Income* / Employees
2.0
2.0
0.1
0.1
-3.4
-1.3
1.1
1.1
0.9
0.9
-0.1
-0.1
-0.4
-0.4
2.0
2.0
0.9
0.9
-1.0
-1.0
Shipping
Shipping Revenue
Shipping Costs
Loss on Shipping
461
-1,129
-668
469
-1,054
-585
517
-1,153
-636
832
-1,798
-966
633
-1,396
-763
646
-1,364
-718
721
-1,532
-811
1,137
-2,344
-1,207
849
-1,829
-980
889
-1,812
-923
% Revenues
% Net Revenues
5.1%
15.6%
4.6%
13.3%
4.6%
13.7%
4.5%
13.9%
4.7%
13.5%
4.6%
12.3%
4.7%
13.0%
4.7%
13.2%
5.0%
13.0%
4.8%
11.9%
Notes:
* = Excludes Unusual Items
Growth** = Estimated organic revenue growth excluding major acquisitions & disposals. (Also note that this is NOT adjusted for currency movements.)
Growth rates are on a Year-on-Year (YoY) basis, unless stated otherwise.
Page 46 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research
Amazon
28 Jul 2014
Explanations and Definitions
Brief business description - Amazon
Amazon is the largest online retail merchant in the US and has significant international operations. It manages sales transactions from purchase to delivery.
Amazon also provides cloud computing services (AWS), Web Stores (e-commerce), video streaming, digital book library, kindle e-readers, Kindle PC tablets,
Explanation of Company Ratings used by Indigo Equity Research Ltd:
Industry View:
Industry View = This is an assessment from an investor's perspective of the potential for the industry as a whole to generate
ATTRACTIVE
profits in the future based on criteria such as: market structure (eg. number of competitors and industry
concentration), growth prospects, maturity (stage of the industry life cycle), regulations, technology,
disruptive forces, expected changes and speed of any changes.
Risk = The risk of earnings disappointment & volatility as well as the risk of a change in the valuation ratios that
Company Rating:
impact the company's share price. This depends on items such as revenue growth, profit margin volatility,
investor sentiment towards the company etc..... But this does not include the market risk of these elements
changing.
LOW MED. HIGH
Risk
### -
-
Quality
-
### -
Valuation
-
-
Quality = The quality of the company reflects its ability to maintain or increase earnings from its competitive
###
advantages, strategy, brand, management, market position, pricing power, services etc…..
Valuation = This is an absolute measure of valuation multiples of the company, based on a range of metrics (multiples)
such as: P/Sales, PE, PEG, P/BV, P/ FCF, EV/EBITDA, EV/Sales, Div Yield …..
Comment on Ratings: These qualitative assessments of "Company Ratings" are made for each company on a relative basis
compared to other companies with large capitalizations; but are nonetheless subjective and dependent on
the analyst's individual opinion & analysis of the company.
Financial definitions & abbreviations:
FCF = Free Cash Flow
Op FCF = Operating Free Cash Flow
EBIT = Earnings Before Interest & Tax
EBITDA = Earnings Before Interest, Tax,
TTM = Trailing 12 Months
Last 12m = Last 12 months
y/e = (financial) year end
EV = Enterprise Value
P = (Share) Price
PE = Price / Earnings
PEG = PE / Growth
BV = Book Value
Div. = Dividend
EPS = Earnings Per Share
DPS = Dividends Per Share
Depreciation & Amortisation
Explanation of what constitutes an unusual or significant item: Indigo Equity Research determined what constituted "Unusual items" in this report on the basis of
assessing what items were significantly or materially separate or different to the Company's core business and activities. This a highly subjective assessment made by
the analyst on a case-by-case basis.
Legal and Important Information
Copyright © 2014 Indigo Equity Research Limited
Analyst certification: The analyst Nicholas Landell-Mills primarily responsible for the preparation of this research report attests to the following: (1) that the views and
opinions rendered in this research report reflect the views of Indigo Equity Research Limited about the subject companies or issuers; and (2) that no part of the research
analyst’s compensation was, is, or will be directly related to the specific recommendations or views in this research report.
Disclosures: Indigo Equity Research Limited has no investment banking or share trading operations or activities. Reports are prepared at irregular intervals depending
on the analyst's judgment. Analysts, associates and members of their households may maintain a financial interest in the securities of companies in the analyst’s area of
coverage, subject to compliance with applicable regulations. Indigo Equity Research prohibits analysts, associates and members of their households from serving as an
officer, director, advisory board member or employee of any company that the analyst covers. Analysts aim to provide appropriate information on companies. Analysts do
not provide any BUY, HOLD, or SELL recommendations in their research and the research reports should not be interpreted as providing such recommendations. Indigo
Equity Research does not provide individually tailored investment advice in research reports. This report has been prepared without regard to the particular investments
and circumstances or investment objectives of the recipient. Securities and other financial instruments discussed in this report are not deposits and are not insured by any
institution. (such as the Federal Deposit Insurance Corporation). This report is not intended for distribution to, or use by any person or entity in any jurisdiction or country
where such distribution or use would be contrary to local law or regulation. These disclosures should be read in conjunction with the Disclaimer and Important Information
below.
Disclaimer and Important Information: This document has been prepared by Indigo Equity Research Limited for information and illustration purposes only. This
document is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. This document does not contain an investment
recommendation and is not a complete or comprehensive description of a company. Any projections, forecasts or estimates of potential risk or return or financial results
are only illustrative and should not be taken as limitations of the maximum possible loss or gain. The information is provided in this document at the date of preparation
and is subject to change. While this information has been obtained from sources believed to be reliable, we do not represent that it is accurate or complete and should not
be relied on as such. Indigo Equity Research Limited, its directors and employees, can accept no liability or responsibility for any direct, indirect or consequential loss
arising from use of this document or its contents. Past performance is no indication of future results. Real results may vary from forecasts. Historic price performance
may be presented in a currency other than the currency of the country in which you reside. Your actual return on this product may increase or decrease with fluctuations
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Page 47 of 47
CONFIDENTIAL
For illustration purposes only.
Sources: Amazon, Indigo Equity Research