Amazon Inc.

AMZN

Chloe Harris | Section 001 | ckharris@email.sc.edu

December 3rd, 2018

Company Overview –Nature of Business and Industry Operations

Company Executive Summary

Jeff Bezos founded Amazon Inc. (Ticker: AMZN) on July 5, 1994 and quickly knew

that he had plans grander than selling books out of his garage. Amazon is a technological C-

corporation that operates on the stock market within the consumer discretionary sector. The

company is seen as a titan of e-commerce, logistics, payments, hardware, data storage and

media. Amazon is also comprised of multiple other industries as well; their main industry being

internet and direct marketing retail. Most of the revenue that Amazon generates is from its

cloud service – Amazon Web Services, or AWS.

Recommendation and Analyst Ratings

Recently, the stock price of Amazon (which is currently $1,613.92) has been very

volatile; it has a bearish pattern lately and this in large part due to recent attempts to appease

public relations (i.e. significantly raising the minimum wage of its employees), exposure to

volatile discretionary spending patterns, unimpressive growth in net income, and weak operating

cash flow. The stock price literally fell to an extreme 52-week low of $1,124.74 even though it

had the capability of reaching an all-time 52-week high of $2,050.50. Fortunately, Amazon is

currently in correction. And with recent record-breaking sales during Black Friday and Cyber

Monday, quarter four earnings are well on their way to being exemplary. According to

Morningstar Equity Analyst Report, as of October 30, 2018, Amazon is undervalued

therefore investors should buy the stock (Morningstar Equity Analysis Report - AMZN.,

2018); this report is in agreeance with Schwab’s equity rating of a B which means that the

company will outperform expectations and should be bought Schwab Equity Ratings Report
- Amazon.com Inc., 2018). Amazon is a definite buy as it will be soon entering into a bullish

market.

Bond Rating, Insider Trading and Stock Repurchases

The company was assigned a Baa1 senior unsecured rating and a Baa1 rating to the

company’s proposed offering of up to $16 billion in senior unsecured notes by Moody’s

Investment Service; this changed the Amazon’s rating outlook from stable to positive (Moody's –

Amazon, 2017). According to Amazon’s SEC Form 4, executives of the company have been

selling shares in accordance with stock price dips. Within the last three months, there has

been twentyt sales and only one buy at open market (Insider Trading - AMAZON COM INC

(AMZN), 2018). Amazon recently stripped Amazonians of stock options; at one point,

Amazon’s shares outstanding steadily grew due to these employee compensation packages. This

dampens the belief that Amazon’s market cap will slowly swell over time. Amazon has stock

repurchase program that became effective in February 2016, but management has not utilized it.

And this is due to their share trading at 98.08 times earnings.

Vulnerabilities and Risks

As previously stated, Amazon does operate in a volatile consumer-consumption industry;

this creates highs and lows that are based on the variability of consumer purchases. The

profits from the fulfillment component of Amazon are seasonal in nature with high sales being

seen in the Summer and late-Fall months and lower sales projections during mid-Winter and

Spring. Amazon recently opened eighteen new warehouses; as the company continues to ramp

up investments, its cash flows consequently suffer, but this is done purposefully in an attempt to

ensure future profitability and returns. While Amazon does dominate the e-commerce
component, it has to make significant headway with AmazonFresh to even begin to even

remotely compete with the brick and mortar capabilities of Wal-Mart.

Dividend Yield

Amazon operates in an industry with a dividend yield of 1.30%. Cash from the operations

of Amazon has drastically increased in recent years. Consequently, Amazon’s free cash flow is

drastically decreasing. Free cash flow is used to pay dividends, make acquisitions, develop new

products, invest in new property, plant and equipment, pay interest expenses, and reduce debt.

Paying dividends loses to making acquisitions or purchasing new properties because Amazon is

a rapidly growing technological company. These reinvestments fund growth and increase their

value. The company literally does not have the means to issue dividends currently due to its

aggressive reinvestment strategies. An individual who invests in Amazon needs to realize that it

is not a value stock, but a growth stock, so it is imperative that they do not expect a constant

stream of payments from the company. With a five-year growth rate of 34.50, Amazon is

highly unlikely to pay dividends in the years to come.

Examination of Ratios

The current ratio of Amazon is 1.08 which is significantly lower than that of its

industry whose is 1.63. This automatically signals a higher risk of distress or default but

consider the fact that it is a growth company with many capital expenditures. Management also

uses its assets very efficiently, and this could also be a reason why its current ratio is beneath the

industry’s ratio.

While the industry of operation has a total debt to equity ratio of 1.24, Amazon only

has a ratio of 0.63. Amazon does not use a significant amount of debt to finance its growth.
Instead, it reinvests its monstrous earnings. It does not take on debt as a means of leveraging its

assets.

Amazon has a return on equity ratio of 25.44 while the industry in which it operates

in has a ratio of 22.34. It is evident that Amazon is operating above its industry average, and

this is primarily due to the fact that the net income has increased. The ROE of Amazon has

drastically decreased from what it was at the beginning of the year (175.14), and this is because

they are no longer using a substantial amount of debt to fund their growth.

Amazon certainly has the ability to convert sales into profits; this is not the reason

why it has a lower net profit margin in comparison to its industry (3.67 versus 7.05).

Instead, unlike its competitors within the industry, Amazon is constantly and vigorously re-

investing its profits into its cloud computing business and other technology-related products and

services. The core operating expenses of Amazon are consistently growing faster than the

company’s revenue.

The issue with Amazon’s high P/E ratio of 98.08 is the fact that its peers are

operating substantially closer to the industry’s average – 21.01. Amazon does not retain

much of its earnings; instead, it uses these earnings to finance its business activities on a massive

scale. Many risk-adverse investors would not place a bet that the stocks of Amazon will be worth

$6,000 per share. However, the company has a high P/E ratio due to its ability to have a high

sales growth rate of 25% and decisive investments in its operations. It also has a forward P/E of

63.49 which also indicates that the company’s earnings will continue to climb.

The price to book ratio of Amazon, 31.71, is significantly higher than the industry’s,

5.83, because it has a lofty amount of tangible assets. Amazon has hundreds of fulfilment and

logistical centers in America and foreign nations.

 The PEG of Amazon (2.84) is more realistic and closer to the industry’s average

(.96) because it is factoring in the growth rate of the company. Again, Amazon is a growth

stock, not a value stock. Because of this, it would not be wise to assume Amazon is overvalued

or not a good buy just because its PEG is higher than one.

Industry Company Stock Industry/Company Estimate

Ratio Ratio Price Price
P/E 21.01 98.08 $1,767 0.2142 $378.51
P/B 5.83 31.71 $1,767 0.1839 $324.87
PEG .96 2.84 $1,767 0.3380 $597.30
AVERAGE $433.56

As the table above indicates, Amazon’s stock is overpriced based on fundamental finance

calculations; it did not even correct too much in accordance with the PEG ratio. However, the

market believes this stock is almost worth triple its PEG ratio making it a growth stock that

makes consumers (along with market) believe that its value will continue to climb.
 Works Cited

Insider Trading - AMAZON COM INC (AMZN). (2018, December 3). Retrieved December 3,

2018, from https://www.secform4.com/insider-trading/1018724.htm

Moody's - Amazon. (2017, August 14). Retrieved December 3, 2018, from

https://www.moodys.com/research/Moodys-assigns-Baa1-senior-unsecured-rating-to-

Amazons-proposed-notes--PR_371261

Morningstar Equity Analysis Report - AMZN. (2018, October 30). Retrieved December 3, 2018,

from https://www.schwab.wallst.com/Client/Reports?docKey=2039-

0P000000B7_20181029_RT-1

Schwab Equity Ratings Report - Amazon.com Inc. (2018, November 30). Retrieved December 3,

2018, from https://www.schwab.wallst.com/Client/Reports?docKey=2683-45294-

20181203

What is AWS? - Amazon Web Services. (n.d.). Retrieved March 13, 2018, from

https://aws.amazon.com/what-is-aws/