A financial investigation By: Brandon Margosian

AMAZON.COM, INC.

Amazon is an American e-commerce company that was founded in July of 1994 by Jeff Bezos and is based in Seattle, Washington.

Amazon is the largest Internet-based retailer in the world based on sales and a market capitalization of $423 billion. The company sells apparel, books, furniture, food, software, jewelry and much more. It started as an online bookstore and still sells media content such as, audiobooks, music and DVDs. They also produce consumer electronics such as e-readers and tablets. Amazon Prime members have access to benefits such as 2-day free shipping.

Industry Conditions

Amazon is in the Retail sector. The specific industry Amazon resides in is Internet, Mail Order and Online shops. More simply, E-tailing, defined as internet-based store format (Kumar, 2012). Some of Amazon's main industry competitors/peers are Alibaba Holdings (China), eBay, Best Buy, and Overstock.com.

The conditions of this industry are very welcoming for growth. Internet commerce (e-commerce) specifically, is growing rapidly. Amazon's presence has helped big retailers like RadioShack, Circuit City and Borders go out of business (Divine, 2016).

Seven Trends in E-Commerce

  1. Consumers will complete the majority of their shopping journeys via multiple devices.
  2. Smartphone shopping will continue to gain ground.
  3. Expect more big online shopping days with even bigger sales.
  4. Retailers will see a high web influence on in-store sales.
  5. Marketing will shift from device-focused to people-focused.
  6. Ads will become more relevant and non-intrusive.
  7. Instant delivery services will become common (Criteo, 2016).

Financial Position

Amazon finds itself in impressive financial condition. Its stock currently sells at $886.54. Competitors in the industry can not say the same. Alibaba trades at $107.83 and eBay trades at $33.57.

In the last three years, its revenues have increased at an average rate of 22.2% while its stock has forged forward at 41.8% annual rate (Cohan, 2017).

  • 2015 Net Income: $576 million
  • 2016 Net Income: $2.37 billion

Amazon has had a consistent positive net change in cash for over five years. Over the past three years, they have boasted a free cash flow (in mil) of $1,949, $7,331, $9,706, according to MorningStar.

Financial Position

Efficiency with equity and inventory is a strength of Amazon. As Amazon is centered around selling products, inventory turnover is a crucial indicator of how well a company is turning inventory into sales.

  • 2016 ROE - 14.52%
  • 2016 Inventory Turnover - 8.13
  • 2016 Days Inventory - 44.87

Lastly, another key figure for investors, EPS, rounded out at $4.9 in 2016, a significant leap from $1.25 in 2015.

Economic Outlook

Forbes lists Amazon as the only contender with Apple to become the first trillion dollar company. If Amazon keeps up its current stock price growth rate, its market capitalization will hit $1 trillion by 2020 (Cohan, 2017). According to the U.S. Census Bureau, we have only seen the tip of the iceberg. As of July 2016, only 8.4% of all retail sales occurred via e-commerce.

Amazon is primed for further growth due to their creative expansion. Reports say they will be venturing into the banking and financial services by teaming up with Wells Fargo to offer solutions from big banks (Divine, 2016).

Amazon has the potential to disrupt markets and industries such as shipping, TV (Amazon Prime Video, Amazon Fire Stick), and electronics (Amazon Echo Dot).

Amazon's lack of fear in entering markets is displayed by the PPE they have invested in: Fleet of aircraft, branded trucks and ocean freight. Amazon continues to vertically integrate to control more of the supply chain.

The sky is the limit for the economic outlook as Amazon continues to lay waste to retailers. Amazon projects a long-term growth forecast of 50% a year.

Investing Recommendation: Yes

I believe Amazon is a very safe and potentially rewarding investment. As the company continues to soar, the stock continues to rise, this is most likely a buy now situation. With the potential long-term value of Amazon, the stock could continue to rise. One con to investing is that Amazon trades high for a company with low profit margins (Burrows, 2016).

Another big reason for investing in Amazon is their product and market diversification. Succeeding with consumer electronics and making waves in various markets = several revenue sources, potential profit margin increases

Amazon has returned 2,400% for shareholders over the last 10 years. The mega-cap growth is too compelling to stay out despite the high valuation of stock (Burrows, 2016).

Proverbs 21:5 tells us, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty” (ESV). Diligence in investing is critical for success.

References

AMZN Amazon.com Inc XNAS:AMZN Stock Quote Price News. (n.d.). Retrieved April 03, 2017, from http://www.morningstar.com/stocks/XNAS/AMZN/quote.html

Brealey, R.A., Myers S.C., & Marcus, A.J. (2015). Fundamentals of Corporate Finance, 8th ed. New York, NY: McGraw-Hill Education.

Burrows, D. (2016). Should You Buy Amazon.com, Inc. Stock? Retrieved April 2, 2017, from http://investorplace.com/2016/07/buy-amazon-stock-amzn-3-pros-3-cons/2/#.WOKYbPnys2w

Cohan, P. (2017). Race To $1 Trillion: Apple Will Get There First But Buy Amazon. Retrieved April 02, 2017, from https://www.forbes.com/sites/petercohan/2017/03/31/race-to-1-trillion-apple-will-get-there-first-but-buy-amazon/#74f3070ce862

Divine, J. (2016, October 24). What Industry Will Amazon Enter Next? Retrieved April 2, 2017, from http://money.usnews.com/investing/articles/2016-10-21/amazon-com-inc-amzn-stock-next-industry

Eichmann, E. (Ed.). (2016). Criteo E-commerce Industry Outlook 2016. Retrieved April 2, 2017, from http://www.criteo.com/resources/criteo-ecommerce-industry-outlook-2016/

Kumar, S., Eidem, J., & Diana, N. P. (2012). Clash of the e-commerce titans. International Journal of Productivity and Performance Management, 61(7), 805-830.

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