Financial Analysis of Amazon.com Inc.
Amazon.com, Inc. (Ticker symbol: AMZN) is a leading online retailer. The company was initiated in 1994 and is headquartered in Seattle, Washington. Amazon functions through the North America, International, and Amazon Web Services (AWS) segments. The company earns its revenues from product sales or services. Product sales include the sale of products and linked shipping fees and digital media content. Service sales include third-party seller fees earned and shipping fees thereof, AWS sales, digital content subscriptions, advertising services, and credit card agreements.
Amazon derives a major chunk of its revenues from product sales, almost 91% in 2009 and 74% in 2015. Revenue from sale of services has increased over the years, from 9% in 2009 to 26% in 2015. North America accounts for 59% of the company’s revenue, followed by 33% from the International segment and 7% from the AWS segment. While revenue earned from North America has increased over the years from 52% in 2009 to 59% in 2015, revenue from the International segment has come down from 47% to 33% for the same period. The company has also included the AWS segment, beginning from the first quarter of 2015, whose revenues have grown from 4% to 7% during 2013 to 2015.Amazon’s top line for FY15 recorded a y/y growth of 20% to $107 billion. Revenue from product sales and service sales were $79.3 billion and $27.7 billion, respectively in 2015. While revenue from North America, International and AWS segments were $63.7 billion, $35.4 billion and $7.9 billion, respectively in 2015.(Sec.gov, 2016) The acquisition of Nice, a company with a web interface for programming high-performance computing (HPC) workloads is expected to boost the revenues further (Novet, 2016).
Amazon has been able to gradually bring down its cost of revenue over the years from 77% in 2009 to 67% in 2015. As a result, the company’s gross margin has increased from 22% to 33% during the same time period. However, the company’s operating expense, net of depreciation& amortization (D&A), has shot up from 16% to 25% of its revenues during the same time frame. The FY15 top line was hammered by the $5.2 billion adverse changes in foreign exchange rates which was only $636 million in FY14 (Sec.gov, 2016).
The company’s D&A, as a percentage of total operating expense have increased from 8.6% in 2009 to 19% in 2015. This has affected the operating income (EBIT) margins which has nearly halved from 4.6% in 2009 to 2.1% in 2015.Amazon is trying to cut down on costs by owning its exclusive shipping and aircraft (Peter Yared, 2016). With increasing debt levels, the company’s interest costs to have increased over the years. Interest expense, as a percentage of EBIT has increased from 3% in 2009 to 20.6% in 2015.The obnoxious amount recorded as income tax provision in 2014 due to the amplified losses from certain foreign subsidiaries.
Amazon’s bottom line, following the top line trend, was also affected by the incremental operating expense, D&A expense and interest expense. However, the company managed to maintain a positive margin in 2015 after a negative margin in the preceding year.
Cash flows:
Amazon has maintained consistent positive cash flows from operations, growing from 6% to 74% during 2009 to 2015. The company’s capital expenditure as a percentage of revenue has increased from 1.5% in 2009 to 4% in 2015. Free cash flow as a percentage of revenue has dropped from 11.9% in 2009 to 6.8% in 2015. On the other hand free cash flow as a percentage of net income has quadrupled from 3% in 2009 to 12% in 2015 (Sec.gov, 2016).
Balance Sheet:
Amazon has recorded a pretty impressive current ratio of more than 1 from 2009 to 2015. The quick ratio has always been at ~1 for the same time span. Therefore, we can conclude that the company has enough liquidity to carry on its day-to-day operations. The cash ratio has come down over the years from 0.8 to 0.6. The Average Collection Period/Days Sales Outstanding has increased from 14.7 days to 21.9 days and has always been below one month. Average Payment Period/Days Payable Outstanding has come down from 107.8 days to 103.9 days which is more than 3 months (Sec.gov, 2016). Amazon’s Days Inventory Outstanding has increased from 42 to 52. Therefore Amazon can work upon its credit management and inventory management to tighten the numbers further.
The working capital turnover has always been positive and has increased from 10 in 2009 to 41 in 2015.The company’s surmounting debt levels have escalated the debt equity ratio from 0.23 in 2009 to 1.3 in 2015. But the interest coverage ratio has come down from 33.2 in 2009 to 4.9 in 2015.Amazon’s return on capital has decreased from 17% to 7% during 2009 to 2015. The return on equity has gone down by one-fourth from 17% to 4%. Return from asset too has come down from 8% to 3%.The average asset turnover has decreased from 2.2 to 1.78 from 2009 to 2015. The fixed asset turnover has decreased drastically from 19 to 5. The receivable turnover has decreased from 24.8 to 16.6. Inventory turnover has decreased minutely from 8.7 to 7 (Sec.gov, 2016). Companies usually target higher turnover ratios and therefore Amazon work towards a more efficient utilization of its assets. The P.E. ratio has increased by more than 7 times from 60 to 460 (basic) and from 61 to 470 (diluted) from 2009 to 2015.
A recent $5 billion stock repurchase program is expected to improve its shareholder value in the long run ("Amazon: Can’t Buy Back Investor Love", 2016).
Peers:
The important peers of Amazon include Wal-Mart Stores Inc. (WMT), Alibaba Group Holding Limited (BABA) and Apple Inc. (AAPL). If we compare the market capitalization of the above companies during 2015, then Amazon leads with a market capitalization of $238.7 billion against $211.9 billion, $148.9 billion and is behind Apple with a market cap of $521 billion, respectively. The industry average is $326 billion. Wal-Mart and the industry average lead in terms of revenue of $484 billion and $683 billion, Apple with $235 billion, followed by Amazon with $107 billion. Alibaba recorded revenue of only $14 billion but leads in terms of its gross margins and operating margins of 0.67 and 0.29 respectively. Apple, Wal-Mart and Amazon’s gross margins are 0.4, 0.25 and 0.33 while the operating margins are 0.3, 0.05 and 0.02, respectively. Industry margins stand at 0.33 and -0.01, respectively. Amazon is trailing behind in terms of net income of $596 million, while Apple, Wal-Mart and Alibaba recorded net incomes of $53.7 billion, $15.1 billion and $10.5 billion, respectively. Apple, Wal-Mart and Alibaba also lead in EPS numbers of $9.4, $4.67, and $4.08 and Amazon’s EPS was $1.25. Amazon leads the P.E. numbers with 405.66, followed by industry average, Alibaba, Wal-Mart and Apple with 28.86, 14.94, 14.17 and 10, respectively (In.finance.yahoo.com, 2016).
Conclusion:
Amazon’s revenue guidance for FY16 is expected to range between $26.5 billion and $29.0 billion, or to grow by 17%-28% compared with 1Q15. The operating income is expected to fall in the range $100 million- $700 million, against $255 million in 1Q15. The company with its strong fundamentals, gradual diversification and acquisitions has consolidated its position and has successfully built a brand of its own in this immensely competitive landscape.
References:
Amazon: Can’t Buy Back Investor Love. (2016). The Wall Street Journal. Retrieved from http://www.wsj.com/articles/amazon-cant-buy-back-investor-love-1455219683.
In.finance.yahoo.com, (2016). AMZN Competitors | Amazon.com, Inc. Stock - Yahoo! India Finance. Retrieved 14 February 2016, from https://in.finance.yahoo.com/q/co?s=AMZN
Novet, J. (2016). Nice, the high-performance computing company Amazon just acquired, has a heck of a customer list. VentureBeat. Retrieved 14 February 2016, from http://venturebeat.com/2016/02/13/nice-the-high-performance-computing-company-amazon-just-acquired-has-a-heck-of-a-customer-list/
Peter Yared, S. (2016). Bits are beating atoms: The Google, Facebook, Apple and Amazon shuffle. VentureBeat. Retrieved 14 February 2016, from http://venturebeat.com/2016/02/13/bits-are-beating-atoms-the-google-facebook-apple-and-amazon-shuffle/
Sec.gov,. (2016). EDGAR Search Results. Retrieved 14 February 2016, from http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001018724&type=10-k&dateb=&owner=exclude&count=40
