Amazon.com

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Amazon.com

• cuddle up with a DCF model
• critically evaluate a valuation model
• what is the analyst assuming about profitability,
  efficiency and leverage?
• are the pieces put together in a logical way?
• consider the option value of owning a share of
  AMZN
• how to adjust the value estimate for employee
  stock options

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Amazon.com
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Why is the default valuation of AMZN negative?

• ROE is HUGE positive amount. Why?
• Why cant the stock price be negative?

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Hitting the analyst forecasts -clean up the
financial statements

• Restate financials in 2000 by moving 84460 of
  depreciation out of SGA and into depreciation.
  Makes EBITDA really before DA!

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Income Statement AssumptionsSales Revenue Growth
Rate

• Per analyst model, 24 in 2001, constant at 25
  through 2010, and terminal growth rate (beyond
  2010) of 7.
• Is this reasonable?

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Income Statement AssumptionsEBITDA margin

• EBITDA earnings before interest, taxes,
  depreciation and amortization
• gross margin RD SGA
• keep CGS/Sales at constant 76.3 and adjust
  SGA/Sales to hit EBITDA margins
• SGA/Sales is 9.7 in terminal period
• EBITDA margin improves from -8 to 14

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Income Statement AssumptionsDepreciation and
Amortization(just a stop on the way to CapX)

• goodwill and intangibles written off in 2001
• 2000 depreciation ratio 84460/(317613366416)/2
  25
• implies that the useful life of fixed assets is
  between 4 years and 8 years.
• hold constant

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Income Statement Assumptionsnon-operating
income, interest and taxes

• Set non-operating income to 12 in 2001 to write
  off Investments, Intangibles and Other Assets
  (total is 407624)
• set interest rate to 7.75 to value debt
  approximately at its book value
• enter tax rates as given (although taxes are not,
  generally, expressed as a of EBITDA, as in
  analyst report)

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balance sheet assumptionscash

• what does the analyst report assume about cash?
• set operating cash to 0 for all future periods
• what is the valuation implication of doing this?

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balance sheet assumptionsworking capital

• what does analyst model assume?
• adjusted Other Current Liabilities to hit WC
  assumptions (shown on FCF computations on Cash
  Analysis sheet)
• in 2001 decrease in WC is 1220837 (1100522 cash
  liquidation plus 120315 WC reduction in analyst
  report)
• WC turnover ratio goes from 8 to -8.

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balance sheet assumptionsPPE

• PPE end PPE beg capX depreciation
• can forecast depreciation and PPE (as of
  sales), so two degrees of freedom to get to capX
• forecast fixed depreciation at 25 and adjust the
  PPE/Sales ratio to get capX on SCF
• should you forecast CapX/Sales or PPE/Sales?

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balance sheet assumptionsleverage

• nothing in analyst report about leverage
• what is the present value implications of future
  debt issued at its cost of capital?
• leave debt at approx. 100 of assets
• OR trend from 100 of total assets to 50
• very little impact on valuation, unless.

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valuation assumptions

• set cost of equity capital to 22.6 so that WACC
  is 20.
• set valuation date to 6/30/2001
• change of shares to 370,000K to match analysts
  of shares.
• P 15
• But check out ratios!

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option value for AMZN

• 1/3 chance EBITDA/Sales is .20 higher
• P 41.03
• 1/3 chance that EBITDA/Sales is as forecast
• P 15.00
• 1/3 chance that EBITDA/Sales is .20 lower
• P -11.13
• value (41.03)/3 (15.00)/3 (0.00)/3 18.68
• OR value (41.03)/100 (15.00)10/100
  (0.00)89/100 1.91

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AMZN what happened
excluding cash liquidation
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Amazon.com
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AMZN what happened
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Key takeaways from AMZN

• ALWAYS forecast complete income statements and
  balance sheets in order to arrive at free cash
  flow forecasts.
• Always conduct a ratio analysis on your forecast
  financial statements to check they are plausible.
• When a firm is in financial distress the equity
  has option value!

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valuing contingent claims
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new accounting for stock options

• value option at grant date and record
• compensation expense 100
• PIC options 100
• at exercise
• cash 50
• PIC options 100
• PIC regular 150
• if not exercised
• do nothing

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AMZN option income effects

• Years Ended December 31,
• 2003
  2002 2001
• ---------
  ---------- ----------
• Net income (loss)-as reported 35,282
  (149,132 ) (567,277 )
• Add Stock-based 87,751
  68,927 4,637
• compensation, as reported
  
• Deduct Total stock-based (94,525 )
  (148,083 ) (400,445 )
• compensation determined under
  
• fair value based method for
  
• all awards
  
• - ------- -
  - -------- - - -------- -
• Net income (loss)-SFAS No.
  28,508 (228,288 ) (963,085 )
• 123 adjusted
  
• 
  - ------- - - -------- - -
  -------- -
• Basic earnings (loss) per 0.09
  (0.39 ) (1.56 )
• share-as reported
  
• Diluted earnings (loss) per 0.08
  (0.39 ) (1.56 )
• share-as reported
  

For SP 500, expensing options would lower EPS by
20 in 2001. (Bear Stearns)