Amazon’s Corporate Performance Report
Principles of Finance
Amazon’s Corporate Performance Report
With its corporate center located in Seattle, Washington, Amazon.com, Inc. stands out as one of the most influential e-commerce organization within its industry. Not only does Amazon’s primary source of revenue comes from retail from their online marketplace, but they also bring revenue from other ventures such as subscriptions, cloud services, physical stores such as Whole Foods, and advertising. Amazon currently ranks as one of the leading companies in their market value. In the fiscal year ending in 2019, Amazon had a market cap of $867 billion and more recently hit a $1 trillion market cap. Amazon has also brought in $87.4 billion in revenue, which is 21% from year to year. Their net income has nearly tripled with $3 million in 2017 and $10.1 billion in 2018. Operating income has also increased by 202% since 2017, with $4.1 billion to 2018 with $12.1 billion.
Furthermore, Amazon’s net sales grew by 20.8% for 2019, with $280.5 billion and $232.9 billion for 2018. With these numbers found within the data analysis, this shows the profitability and growth of Amazon. What also makes Amazon eye appealing to investors is the fact that Amazon is led by its founder, Jeff Bezos, who also has an 11.7% stake in the company. With so much at stake, Jeff Bezo is very incentivized to make the right decisions to increase stock value. With the $1 trillion market cap increase, in the last fourth quarter, Amazon’s stock price has risen by more than 7%. Amazon beats its competitors and stays at the top of their industry by being consumer obsessed, providing competitive pricing, and always focusing on innovating new ways to continue to grow the company. With that said, I strongly recommend the purchase of Amazon stock.
Introduction to and Background on Amazon
People from all around the world enjoy the benefits of e-commerce. E-commerce refers to the ability to buy and sell goods using the internet. Many people find this style of shopping convenience, you do not have to leave your home, you can process funds online, and you can have your items shipped to you anywhere in the world. One of the leading companies that helped revolutionize e-commerce is Amazon. Amazon is a company that was created by Jeff Bezos in 1994 out of his parents’ garage in Seattle, Washington. Amazon was created with the idea of being a virtual bookstore, and in July 1995 sold its first book online. Amazon quickly grew and, in 1998, began to sell CDs and videos. With the boom in the e-commerce business and the growing competition, Jeff Bezos saw a need to diversify. Amazon began to integrate a wide range of goods such as electronics, clothing, and hardware. They are now one of the biggest e-commerce companies and have expanded even more by adding online grocery stores, online streaming of movies, TV shows, and creating its own Amazon Studios division.
The mission statement for Amazon is, “We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience.” Their mission statement holds to Amazon’s beliefs in how they value their customers. Amazon’s goals are to include affordable pricing, extensive selection, and convenience. This also coincides with Amazon’s vision statement; “to be Earth’s most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavors to offer its customers the lowest possible prices.” Based on Amazon’s mission and vision statements, their goal is to have a global reach, create a customer-centric approach, and the most extensive selection of products available. (Gregory, 2019). Their philosophies have helped drive Amazon to grow and become a billion-dollar company and leader of the e-commerce world.
Amazon currently operates its business as a limited liability corporation (LLC). Amazon’s current business operations have grown since its days out of Jeff Bezos’s parent’s garage. In the eyes of Jeff Bezos, financials are not the only thing that molds Amazon’s business model. In a letter to Jeff Bezos shareholders, he explains that he sees only one metric to his operations, “Being on day 1!” (Cuofano, 2019). He believed that being focused on day two only declined Amazon’s success. Focusing on day 1 allowed for him to have “customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.” (Bezos, 2016). Instead of being competitor focused, Jeff Bezo remained customer-obsessed and has been since the very beginning. Regarding proxies, Jeff Bezo realized that the larger the company got, the more significant proxies became a thing. He felt that having proxies was a disservice to his customers, which goes against his number one focus. External trends are constant, and Jeff Bezo always made sure that he changed with the directions if you did not change with the trends, then you were getting pushed into “day 2” mentality. High-velocity decision making is essential for Jeff Bezo and Amazon. He never uses a one-size-fits-all decision and aims to make high-quality, high-velocity decisions to avoid slow decision making.
With the growth in the e-commerce industry, Amazon has stayed on top of its game against other competitors were in the beginning, eBay was the only other company giving Amazon any competition. Within the last fifteen years, that competition within the e-commerce industry has grown. eBay is still one of Amazon’s biggest competitors, but in addition to eBay, they now have companies such as Alibaba, a Chinese e-commerce company. Alibaba is a company that handles all its manufacturing, suppliers, exporters, buyers, and wholesalers. In addition to eBay and Alibaba Inc., companies like Walmart, Groupon, Overstock, and Etsy all enable competition within the industry.
Financial Statement Review
Amazon.com, Inc. is an e-commerce company that gives its consumers the ability to sell and purchase goods using the internet. Since its startup in 1994, Amazon’s financials have significantly increased. As stated by Hickman, Byrd, & McPherson, 2013, “The income statement shows a company’s revenues and profits over some time, usually a year or a quarter.” With the help of the horizontal analysis, we can show that Amazon’s revenue for the company demonstrates their level of achievement.
According to Mergent Online, Amazon’s Revenue up until 2019 was $280,522,000, and the Net Income was $11,588,000. Their net income has grown by 232% in 2018 (over 2017) and by 282% in 2019 (over 2017). The rate of growth of net income in 2019 over 2018 is 15%. Also, revenue has grown by 30.9% in 2018 (over 2017) and by 57.7% in 2019 (over 2017). The growth rate of their revenue in 2019 over 2018 is 20.45%. Net income has grown significantly higher in percentage as compared to growth in revenue. Further analysis shows the Cost of Goods Sold (COGS) incl. D&A has increased by a much lesser rate as compared to percent growth in revenue. This indicates better management of the cost of goods sold within Amazon. Also, after further analyzing the income statement, there were no negative trends to observe.
Balance sheet review
The balance sheet is what shows where a company’s financial business is at a point in time. (Hickman, Byrd, & McPherson, 2013). Within the balance sheet, there are three essential categories of items, assets, liabilities, and equity. Below you can see Amazon’s balance statement for the years 2017, 2018, and 2019. According to the balance sheet, the current assets have grown a total of 24.8% from 2017 to 2018, and 60% from 2017 to 2019, so current assets have increased and in line with the sales increase of 232%.
Current liabilities have increased but by very little, from 2018 at $68,391,000 to 2019 at $87,812,000. This increase has caused the current ratio to stay at low rates and allowed for amazon to be able to pay their short-term obligations or those due within one year. The current ratio has improved and maintained from 2018 to 2019. Also, I found a negative trend in asset growth. Asset growth increased from 2018 to 2019 by 38.49%, which is why the asset turnover was reduced from 1.58 in 2018 to 1.45 in 2019. This negative trend indicates that Amazon cannot use its assets to increase revenue but not by much. Within Amazon’s liabilities, I also discovered that they had long-term debt increase from 2017 to 2019 by 66.7%. It shows Amazon took out a long-term loan in 2019 for $25,279,000. They have taken a long-term loan and invested it into a short-term investment and increased their cash balance, but with this, it caused long-term debt-equity to increase from .91 in 2018 to 1.02 in 2019.
Cash Flow Statement
Cash flow statements provide a look at how change within Amazon’s balance sheet and income statements affect the cash and the cash equivalents and breaks down operating, investing, and finance activities of their company. Operating activities include depreciation and changes in working capital. Investing activities will consist of buying and selling of equipment such as machinery or facilities, securities investments, and returns from investments in securities. (Hickman, Byrd, & McPherson, 2013). Finance activities include paying dividends to shareholders, repurchasing or issuing stock, and borrowing, and paying loans.
Amazon’s net cash within operating activities has increased from $18,365,000 in 2017 to $30,723,000 in 2018 and from 2018 to $38,514,000 in 2019, this is a 109.7% increase from 2017. In addition, their net cash in investing activities increased from 2017 to 2018, with a slight decrease from 2018 to 2019.
Amazon’s overall performance is very strong. It surpassed my assumptions of the company and what they are capable of. Amazon is in a very strong financial position; they can keep their focus on customers and creating better cash flow but what they are currently doing is working well for them. They remain at the top of all their competitors.
Market Summary and Value Calculation
Amazon provides its customers with 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 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 its low-cost structure, an extensive 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. and in 2018, Walmart had total equity of $79.6 billion versus Amazon’s $43.55 billion. Also, Amazon employed slightly fewer employees than Walmart. Walmart leads 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 its 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, a tech analyst, the impact of the 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 attributed to Echo devices, advertisements, and Whole Foods 365.
As a business, the owners of Amazon.com, Inc. are prudent in 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 company’s financial statements. The ratios are indicators of how a business is doing individually and against its competitors. Also, ratios provide lenders and investors financial insight into how a company is doing, which assists in making lending and investment decisions. In the following sections, I will give 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; the current ratio and the quick ratio. The current ratio of a company indicates how many times you can pay current liabilities. According to Amazon.com, Inc.’s 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 higher than their current liabilities, and they have been able to pay their current 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 ratio 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 significant inventory options. Still, nonetheless, they tend to hold on to their assets longer than 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. The 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 analyze their stock.
Financial Returns and Capital Constraints
When companies publish their financial statements, they divulge the ins and outs of their operations. The finding within the financial report is a useful tool for investors to utilize when making investment decisions. Companies, and those managing them, must always consider ways to appeal to these investors. A way to appeal to investors is to use financial leverage, which is the use of debt, to purchase more assets, and to increase their return on equity. When investigating the economic conditions and performance of businesses, such as Amazon.com, Inc., a tool called DuPont analysis is used. According to the Corporate Finance Institute (n.d), “The basic DuPont Analysis model is a method of breaking down the original equation for ROE into three components: operating efficiency, asset efficiency, and leverage.”
Amazon.com, Inc. Returns on Equity (ROE)
Return on equity (ROE), “measures the profits accruing to shareholders per dollar of contributed equity.” (Hickman, Byrd, & McPherson, 2013). The ROE ratio is calculated as follows: ROE = Net Profit Margin × Asset Turnover × Equity Multiplier.
According to Amazon.com, Inc. 2019 financials, ROE is calculated using the DuPont formula as follows;
Therefore, the ROE would be equal to: ROE = 0.0413087 * 1.446377 * 3.672944 = 0.2194. From this analysis, it shows that Amazon.com, Inc.’s 4.1% net income margin indicates that for every dollar the company generates in sales, the company keeps $4.13 as profit. Now we investigate Amazon’s asset turnover of 1.44. According to My Accounting Course (n.d), “The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.” So for each dollar of assets, it generates $1.45 of sales. Lastly, equity multiplier shows the percentage of assets that are financed or owned by shareholders, in addition to the level of debt financing that is used to acquire additional assets. Amazon has an equity multiplier of 3.67%, which indicates that more of their assets were funded by equity than debt, which means investors funded more assets than creditors. This also shows that Amazon’s low leverage and less risky for investors and creditors. This is great since investors own more of the company.
- Net profit margin = Net income / Revenue = 11588 / 280522 = 4.13%
- Asset turnover = Sales / Average total assets = 280522 / 193948 = 1.446377
- Equity Multiplier (financial leverage) = Average total assets / Average Shareholder’s Equity = 193948 / 52804.5 = 3.672944
Constant Growth Stock Valuation (CGSV)
The constant growth stock valuation (CGSV) is a way of valuing stocks. “The growth rate plays a vital role in determining the value of a share of stock (or any asset).” (Hickman, Byrd, & McPherson, 2013). CGSV is calculated as follows: P0D= D0/(1+gn)/ r-gn. Unfortunately, Amazon.com, Inc. does not pay dividends to its shareholders; instead, they cycle the revenue back into their business, and with stock prices at $1,785, investors are not hurting. According to Bob Ciura (2020), “Amazon’s lack of a dividend certainly has not hurt investors to this point, as Amazon has been a premier growth stock. Over the past ten years, Amazon stock generated returns of over 30% per year.” Since Amazon does not provide dividends, we will follow the following as stated in our lecture, and based on Amazon.com, Inc.:
Therefore, $6.47/($1,785 +6.9%) = .36% +6.94% =0.073%
- Do = Use the Earnings per-share of your chosen company $6.47
- Re = Chosen company return on equity (6.47/1785 + 6.94)=6.94
- EPS = $6.47
- Po or stock price = $1,785 current stock price
- G= growth rate of the EPS = 6.94%
Amazon is on top of their game when it comes to leading in their industry. With competitors like eBay, Chewy.com, Walmart, and a few others, Amazon still manages to keep up and stay ahead of their competitors. Three ratios help assist in examining the financial strengths of a company’s capital position.
- The debt and debt/equity ratio
- The capitalization ratio (total debt/total capitalization)
- The sum of obligations categorized as debt + total shareholders’ equity
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