Market Summary and Value Calculation
Principles of Finance
Market Summary and Value Calculation
Amazon provides their customers an online retail shopping service. Their customers can purchase items online, pay for them over the internet, and have them delivered right to your door without ever leaving your home. In addition to being one of the largest online retailer companies, Amazon has begun to build an advertising business that not only competes with its competitors Google and Facebook but is also expected to bring in $17.6 billion in 2020. Amazons revenue for 2019 was $280.522 billion, an increase of 20.5% over $232.887 billion in 2018. Their profits of $11.588billion in 2019 had a 15% increase over $10.073 billion in 2018. Some strengths Amazon has to offer are their low-cost structure, a large product selection, and many third-party sellers.
Overall market competitors
Amazon’s growth in the e-commerce market has caused its competitors to lose their customers. According to Jeremy Bowman (2019), Amazon controls 49.1% of the e-commerce industry. There are many Amazon competitors but some of the biggest ones are Walmart, Alibaba, Costco, and eBay. Of these competitors Amazon’s number one competitor is Walmart, Inc. In 2018, Walmart had a total equity of $79.6 billion versus Amazon’s $43.55 billion. In addition, Amazon employed slightly less employees than Walmart. Walmart lead these areas but not by much. Where Amazon excels is in the innovation department. Amazon and launched 17 locations of Amazon Go stores, where consumers can go in to pick up items versus ordering online. Walmart announced it would add automated robots inside their retail stores. Amazon also turned to leverage robots in their fulfillment centers, they also began to utilize robots to deliver packages. Amazon continues to thrive over its competitors in the innovation department. Other areas where Amazon thrives in comparison to its competitors are in customer service, digital growth, and supply chain logistics.
Market analysts tend to study market conditions, consumer behavior, and competitor’s activity so that they can help companies decide on products and services to sell. One market analyst, Morgan Stanley, says the following; “Amazon is poised to surge 15%, making it a top ‘buy’ pick for 2020.” (Stanley, 2020). Amazon shares had grown by 3% and with their higher earnings as of last quarter Morgan Stanley predicts that Amazon shares will continue to grow at least another 15%. According to James Lee, tech analysist, the impact of COVID-19 epidemic, stocks have dropped significantly. However, with the recent request to self-quarantine the need for deliveries of items such as food, household, and others are in high demand. “Amazon is expected to benefit from increased demand for healthcare, grocery and consumer packaged goods products” (Lee, 2020). In 2018, another market analyst, Raymond James, had expected the e-commerce industry to represent 39% of retail sales. As Amazon drives their e-commerce sales by more than 50%, has caused difficulties for other companies to compete. This lines up perfectly with the analysis provided by Morgan Stanley. Another analyst, SunTrust Robinson Humphrey, states that Amazon’s business will grow from $7.5 billion in 2018 to $25 billion by 2022. Amazon’s growth can be contributed to Echo devices, advertisements, and Whole Foods 365.
As a business, the owners of Amazon.com, Inc. are prudent to taking on effective planning and financial management so that they can run a successful and financially stable company. According to Lohrey (2019), “Ratio analysis is critical for helping you understand financial statements, for identifying trends over time, and for measuring the overall financial state of your business.” Ratios contain numerical values, which are obtained from the companys financial statements. Ratios are indicators of how a business is doing individually and against its competitors. In addition, ratios provide lenders and investors financial insight of how a company is doing, which assist in making lending and investment decisions. In the following sections I will provide a ratio analysis of Amazon.com, Inc. to provide background on the benefits of the health of the company.
Liquidity ratios are a tool that is utilized by the management of a business and reflects the ability a company must repay short-term liabilities such as operating and financial expenses. I will be discussing the following two ratios for Amazon.com; current ratio and quick ratio. The current ratio of a company indicates how many times you can pay current liabilities. According to Amazon.com, Inc. current ratio listed below you can see an improvement from 2017 to 2018 but then from 2018 to 2019, it remained the same. This is not necessarily bad and dictates a desirable situation to be in because their current liabilities are greater than their current liabilities and they have been able to pay their currently liabilities for the last three years. The quick ratio uses its near cash or quick assets to pay its current liabilities. According to the quick ratio analysis below, Amazon’s quick ratio had improved from 2017 to 2018 and again from 2018 to 2019. The low ratios of .76 in 2017, .85 in 2018, and .86 in 2019 indicate that Amazon cannot fully pay back its current liabilities. This does not necessarily mean that Amazon is in bad shape as its quick ratio does increase from year to year.
Debt management ratios
The debt to equity ratio is calculated by taking long term debt and divide it by shareholders equity. A higher number indicates the company has more debt to equity, and a lower number indicates that it has less debt to equity. Times interest earned is the ability to meet interest payments on a company’s debt.
Asset management ratios
Asset management ratios can tell you how a company is managing its assets. Two ratios that I will cover for Amazon are the inventory turnover and asset turnover. The inventory turnover will tell how often a company sells and replaces its stock of goods during a given period. Amazon’s inventory turnover has a 41-day inventory turnover, this could be due to its big inventory options but nonetheless they tend to hold on to their assets longer then the industry standard. Asset turnover is how well a company uses its assets to generate sales revenue or income.
The profitability ratios are used to assess a company’s ability to generate earnings. Two of the ratios we used were the return on equity (ROE) and gross profit margin. Return on equity shows the profitability of the business as it relates to equity. Amazon’s ROE has increased and topped its competitors Walmart and Target. Gross profit margin is the money that is left over after sales.
Market value ratios
Market value ratios are used to evaluate a company’s current share price. Two of the ratios we will be using for Amazon are the price-earnings ratio (P/E) and price-to-book (P/B). the P/E ratio evaluates the share price as it relates to the annual net income of a business. Amazons P/E is higher than the industry standard but that is because Amazon is associated as a tech company. The price-to-book (P/B) ratio is used to conduct an analysis of a stock.
Anderson, G. (2019, March 28). Amazon’s Weakness In Private Label Outweighs Its Success. Retrieved from https://www.forbes.com/sites/retailwire/2019/03/28/amazons-weakness-in-private-label-outweighs-its-success/#20086edd479b
Liquidity Ratios Overview. (2018, March 29). Retrieved from https://www.learnmanagement2.com/Liquidityratios.html
Bowman, J. (2019, February 6). These Stocks Are Amazon’s Biggest Competitors. Retrieved from https://www.fool.com/investing/who-are-amazons-biggest-competitors.aspx
Commerce The New E in Success. (2018, February 2). Retrieved from https://www.raymondjames.com/commentary-and-insights/business-ownership/2018/02/02/e-commerce-the-new-e-in-success
Jurevicius, O. (2020, March 16). Amazon SWOT Analysis (5 Key Strengths in 2020). Retrieved from https://strategicmanagementinsight.com/swot-analyses/amazon-swot-analysis.html
Lohrey, J. (2019, January 25). Importance of Ratio Analysis in Financial Planning. Retrieved from https://smallbusiness.chron.com/importance-ratio-analysis-financial-planning-80600.html
Morgan Stanley thinks Amazon is poised to surge 15%, making it a top ‘buy’ pick for 2020 (AMZN) | Markets Insider. (n.d.). Retrieved from https://markets.businessinsider.com/news/stocks/amazon-stock-price-surge-morgan-stanley-buy-rating-fresh-money-2020-2-1028890047
Nagy, F. (2019, February 11). How to Complete a Ratio Analysis on Financial Statements. Retrieved from https://bizfluent.com/how-12039840-complete-ratio-analysis-financial-statements.html
Rexaline, S. (2020, March 11). Why This Analyst Recommends Buying Amazon, Baidu, Facebook And Uber Following COVID-19 Battering. Retrieved from https://www.benzinga.com/analyst-ratings/analyst-color/20/03/15527063/why-this-analyst-recommends-buying-amazon-baidu-facebook-and-uber-following-covid-1