Sagar Gogia

ACG 6315

FSA PROJECT: Amazon.com Inc.

Executive Summary

The purpose of this paper is to analyze Amazon’s financials, calculate the key

ratios, analyze the trend and the stock price chart for fiscal year 2016, and conclude with

a recommendation for investing in Amazon or not.

Amazon.com is one of the largest e-commerce companies in the world. Although

the primary product line was books at first, the company rapidly diversified into a host of

other product categories. The growth of the e-commerce industry with consumers

increasingly buying products online has proved to be favorable for the company. While

the big brands may build their own online stores over time, a platform like Amazon

allows multiple new buyers and sellers. Smaller players are far more dependent on

Amazon since they don’t have the resources that Amazon does to invest in technology

and fulfillment to generate the kind of reach that Amazon can deliver. Moreover, the

market is in the early growth phase (considering opportunities in international markets),

so the company’s high growth rates are likely to be sustained over the next few years.

Amazon's competitive advantage is its lowest price and excellent delivery network.

Meeting/Beating Analyst Forecasts

Earnings per share (EPS) measures the amount of profit a company is making. When the

company meets or surpasses the expected EPS, the share prices are likely to increase.

Overall, Amazon.com Inc. met its expected earnings per share (EPS) shown in Exhibit 2

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 Amazon com Inc.
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from year 2014 to 2016. Amazon is highly likely to meet the estimated EPS in future

even though it did not meet the estimated EPS twice in 2014 and once in 2015 and once

in 2016. Amazon outperformed its expectations in the second quarter of 2016; the

expected EPS was $1.11 but the actual was $1.78. In the last quarter of 2015, Amazon

failed to meet its expected EPS by -35.89%, which led to a more than 22% drop in the

share price the same day.

Amazon was able to meet 8 quarterly expected EPS out of 12. We can see that the

numbers have improved in 2016. Thus, Amazon is considered to be fairly consistent in

meeting its forecasts.

Trends

The income statement in (Exhibit 1) provides investors the information regarding the

revenue and the profit number of the company and helps evaluate the growth of the

company. The income statement of Amazon in 2015 shows the revenue of $107,006

million and a phenomenal increase of 21% in 2016 with the revenue of 135,987 million.

Amazon's Net income (exhibit 1) has increased tremendously compared to 2014 when

net income was -$241 million to 2016 when the net income was $2371 million. On the

negative side, the investment losses have increased exponentially from -22 million in

2015 to -96 Million in 2016. The evaluation of the revenue and net income shows the

high growth of Amazon.

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ACG 6315

Choice of Accounting Methods

Amazon has a strong balance sheet with an increase in cash from $15890 million

in 2015 to $19334 million in 2016 and increasing short-term investments from $3918

million in 2015 to $6647 Million in 2016. Amazon's depreciation is recorded on a

straight-line method over the estimated lives of the assets. The allowance for the doubtful

accounts was 189 million in 2015 which increased to 237 million in 2016. Amazon uses

First-in- first-out ("FIFO") method which gives a better understanding of the value of

ending inventory on the balance sheet.

Ratio Analysis

Exhibit 5 shows the ratio calculations. The first and most commonly used ratio is current

ratio to measure short-term debt solvency. It is also a way to measure the short-term risk.

High current ratio signifies the greater liquidity of the assets. Which is easier to be able to

pay short-term debt. According to the balance sheet in Exhibit 4, the total current assets

in 2015 were $36474 million and the current liability is $33899 million with a current

ratio of 1.08. In 2016, while current assets increased to $45781 million, the current

liability of $43816 Million decreased the current ratio to 1.04. The current ratio of

Amazon is too low. However, Amazon is an online retail giant and products are sold

every second which means the company is using the money for investing rather than

grounding money in liquid assets.

Quick Ratio shows the company's ability to pay all current liabilities. The quick

ratio of Amazon in 2016 was 0.78 which was slightly higher than 2015. A higher ratio

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signifies that the company is doing better financially and is more likely to be able to pay

off its liabilities.

Inventory turnover ratio is a very important analysis for a company like Amazon.

It determines the company's financial status and their ability to sell the inventory and

collect the receivables in any given period. Inventory turnover in 2016 was 8.13 which is

almost 5% more than 2015. This shows that Amazon is getting better at selling their

products compared to the previous year.

Auditor’s Report

Ernst & Young LLP Independent registered public accounting firm audited Amazon.com

Inc.'s financial reporting as of December 31, 2016. In its opinion, Amazon maintained its

financial reports based on Committee of Sponsoring Organizations of the Treadway

Commission (COSO). Amazon has pledged assets of $418 Million in 2015 and 715

million in 2016 as collateral for standby and trade letters of credit. The auditor has also

consolidated a balance sheet, statement of operations, income statement, stockholders'

equity and cash flows which indicates an unqualified opinion.

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ACG 6315

Stock Price Chart

Amazon’s one-year Stock Price Chart fiscal year 2016.

The above chart shows the one-year Amazon stock performance. The chart shows a

10.95% overall increase from Jan 1 2016 at 675.89 to Dec 31, 2016 at 749.87. The graph

also shows a massive dip of about 28% in the beginning of February 2016. The one year

stock price chart show a steady growth and overall upwards trend. Looking at the trend,

one year moving average and other indicators, the stock price of Amazon would likely

continue to grow.

Conclusion

Amazon.com Inc. has the EPS of $1.54 in the last quarter of 2016, which is well above

the estimated EPS. Revenues have increased more than 34% since 2014, with the net

income increase of over 110% in 2016 compared to 2014. Cash and short-term

investments have increased. In 2016, Amazon's sales were $135.9 billion and profit

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totaled $2.3 billion. The stock prices have shown a tremendous rise in past 2 years.

According to the company's investments and returns, it could potentially grow by up to

20% next year.

After analyzing all the financial aspects of Amazon, it is safe to say that Amazon is a

good purchase for a long term investor.

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ACG 6315

Exhibit 1: Amazon’s three-year Comparative Income Statements: 2016, 2015 &

2014

AMAZON.COM INC (AMZN) INCOME STATEMENT

Fiscal year ends in December. USD in millions except per

share data. 2014-12 2015-12 2016-12

Revenue 88988 107006 135987

Cost of revenue 62752 71651 88265

Gross profit 26236 35355 47722

Operating expenses

Sales, General and administrative 16650 20411 27284

Other operating expenses 9408 12711 16252

Total operating expenses 26058 33122 43536

Operating income 178 2233 4186

Interest Expense 210 459 484

Other income (expense) -79 -206 190

Income before income taxes -111 1568 3892

Provision for income taxes 167 950 1425

Investment gains (losses) 37 -22 -96

Net income from continuing operations -241 596 2371

Net income -241 596 2371

Net income available to common shareholders -241 596 2371

Earnings per share

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 Amazon com Inc.
October 23 2017
Basic -0.52 1.28 5.01

Diluted -0.52 1.25 4.9

Weighted average shares outstanding

Basic 462 467 474

Diluted 462 477 484

EBITDA 4845 8308 12492

Exhibit 2: Company’s three-year quarterly actual EPS compared to three-year quarterly

average consensus analyst estimates.

Date Quarter Estimate Actual EPS

12/27/16 Q416 $1.37 $1.54

10/27/16 Q316 $0.85 $0.52

7/28/16 Q216 $1.11 $1.78

4/28/16 Q116 $0.58 $1.07

1/28/16 Q415 $1.56 $1.00

10/22/15 Q315 -$0.13 $0.17

7/23/15 Q215 -$0.15 $0.19

4/23/15 Q115 -$0.13 -$0.12

1/29/15 Q414 $0.24 $0.45

10/23/14 Q314 -$0.73 -$0.95

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7/24/14 Q214 -$0.15 -$0.27

4/24/14 Q114 $0.22 $0.23

Exhibit 3: Common-size Income Statement: 2016 and 2015

Amazon.com Inc., Common-Size Consolidated Income Statement

12 months ended Dec 31, 2016 Dec 31, 2015

Net product sales 69.61% 74.08%

Net services sales 30.39% 25.92%

Net sales 100.00% 100.00%

Cost of sales -64.91% -66.96%

Gross profit 35.09% 33.04%

Fulfillment -12.96% -12.53%

Marketing -5.32% -4.91%

Technology and content -11.83% -11.72%

General and administrative -1.79% -1.63%

Other operating expense, net -0.12% -0.16%

Operating income 3.08% 2.09%

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Interest income 0.07% 0.05%

Interest expense -0.36% -0.43%

Other income (expense), net 0.07% -0.24%

Non-operating income (expense) -0.22% -0.62%

Income (loss) before income taxes 2.86% 1.47%

Provision for income taxes -1.05% -0.89%

Equity-method investment activity, net of tax -0.07% -0.02%

Net income (loss) 1.74% 0.56%

Source: https://www.stock-analysis-on.net

Exhibit 4: Company’s two-year Comparative Balance Sheets

Fiscal year ends in December. USD in

millions except per share data. 2015-12 2016-12

AMAZON.COM INC (AMZN)

BALANCE SHEET

Assets
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ACG 6315

Current assets

Cash

Cash and cash equivalents 15890 19334

Short-term investments 3918 6647

Total cash 19808 25981

Receivables 6423 8339

Inventories 10243 11461

Deferred income taxes

Current Assets 36474 45781

Non-current assets

Property, plant and equipment

Land 9770 13998

Fixtures and equipment 18417 25989

Other properties 1866 2454

Property and equipment, at cost 30053 42441

Accumulated Depreciation -8215 -13327

Property, plant and equipment, net 21838 29114

Goodwill 3759 3784

Intangible assets

Deferred income taxes 1084

Other long-term assets 2289 4723

Total non-current assets 28970 37621

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Total assets 65444 83402

Liabilities and stockholders' equity

Liabilities

Current liabilities

Accounts payable 20397 25309

Accrued liabilities 10384 13739

Deferred revenues 3118 4768

Total current liabilities 33899 43816

Non-current liabilities

Long-term debt 8235 7694

Capital leases 5948 7519

Deferred taxes liabilities 392

Other long-term liabilities 3978 4696

Total non-current liabilities 18161 20301

Total liabilities 52060 64117

Stockholders' equity

Common stock 5 5

Additional paid-in capital 13394 17186

Retained earnings 2545 4916

Treasury stock -1837 -1837

Accumulated other comprehensive

income -723 -985

Total stockholders' equity 13384 19285

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ACG 6315

Total liabilities and stockholders'

equity 65444 83402

Exhibit 5

Ratio 2015 2016

current ratio 1.08 1.04

quick (acid-test) ratio 0.77 0.78

asset-turnover 1.78 1.83

average collection period 47.22 44.87

inventory turnover 7.73 8.13

debt-to-equity ratio 1.06 0.79

ROA 0.99 3.19

ROE 4.94 14.94

Exhibit 6: Common-size Balance Sheet: 2016 and 2015

Fiscal year ends in December. USD in

2015-12 % 2016-12 %2
millions except per share data.

AMAZON.COM INC (AMZN) BALANCE SHEET

Assets

Current assets

Cash

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 Amazon com Inc.
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Cash and cash equivalents 15890 24.28% 19334 23.18%

Short-term investments 3918 5.99% 6647 7.97%

Total cash 19808 30.27% 25981 31.15%

Receivables 6423 9.81% 8339 10.00%

Inventories 10243 15.65% 11461 13.74%

Deferred income taxes

Company’s two-year Comparative

36474 55.73% 45781 54.89%
Balance Sheets

Non-current assets

Property, plant and equipment

Land 9770 14.93% 13998 16.78%

Fixtures and equipment 18417 28.14% 25989 31.16%

Other properties 1866 2.85% 2454 2.94%

Property and equipment, at cost 30053 45.92% 42441 50.89%

Accumulated Depreciation -8215 -12.55% -13327 -15.98%

Property, plant and equipment, net 21838 33.37% 29114 34.91%

Goodwill 3759 5.74% 3784 4.54%

Intangible assets

Deferred income taxes 1084 1.66%

Other long-term assets 2289 3.50% 4723 5.66%

Total non-current assets 28970 44.27% 37621 45.11%

Total assets 65444 100.00% 83402 100.00%

Liabilities and stockholders' equity

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ACG 6315

Liabilities

Current liabilities

Accounts payable 20397 31.17% 25309 30.35%

Accrued liabilities 10384 15.87% 13739 16.47%

Deferred revenues 3118 4.76% 4768 5.72%

Total current liabilities 33899 51.80% 43816 52.54%

Non-current liabilities

Long-term debt 8235 12.58% 7694 9.23%

Capital leases 5948 9.09% 7519 9.02%

Deferred taxes liabilities 392 0.47%

Other long-term liabilities 3978 6.08% 4696 5.63%

Total non-current liabilities 18161 27.75% 20301 24.34%

Total liabilities 52060 79.55% 64117 76.88%

Stockholders' equity

Common stock 5 0.01% 5 0.01%

Additional paid-in capital 13394 20.47% 17186 20.61%

Retained earnings 2545 3.89% 4916 5.89%

Treasury stock -1837 -2.81% -1837 -2.20%

Accumulated other comprehensive

-723 -1.10% -985 -1.18%
income

Total stockholders' equity 13384 20.45% 19285 23.12%

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October 23 2017
Total liabilities and stockholders'
65444 100.00% 83402 100.00%
equity

Exhibit 7: Statement of Cash Flows: 2016, 2015 and 2014

AMAZON.COM INC (AMZN) Statement of CASH FLOW

Fiscal year ends in December. USD in millions except 2014- 2015-

per share data. 12 12 2016-12

Cash Flows From Operating Activities

Net income -241 596 2371

Depreciation & amortization 4746 6281 8116

Investments losses (gains) -3 5

Deferred income taxes -316 81 -246

Stock based compensation 1497 2119 2975

Accounts receivable -1039 -1755 -3367

Inventory -1193 -2187 -1426

Accounts payable 1759 4294 5030

Accrued liabilities 706 913 1724

Other working capital 741 1292 1955

Other non-cash items 185 281 -689

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1192

Net cash provided by operating activities 6842 0 16443

Cash Flows From Investing Activities

Investments in property, plant, and equipment -4893 -4589 -6737

Acquisitions, net -979 -795 -116

Purchases of investments -2542 -4091 -7756

Sales/Maturities of investments 3349 3025 4733

Net cash used for investing activities -5065 -6450 -9876

Cash Flows From Financing Activities

Long-term debt issued 6359 353 621

Long-term debt repayment -1933 -4235 -4361

Excess tax benefit from stock based compensation 6 119 829

Repurchases of treasury stock

Other financing activities

Net cash provided by (used for) financing activities 4432 -3763 -2911

Effect of exchange rate changes -310 -374 -212

Net change in cash 5899 1333 3444

1455

Cash at beginning of period 8658 7 15890

1455 1589

Cash at end of period 7 0 19334

Free Cash Flow

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 Amazon com Inc.
October 23 2017
1192

Operating cash flow 6842 0 16443

Capital expenditure -4893 -4589 -6737

Free cash flow 1949 7331 9706

Supplemental schedule of cash flow data

Cash paid for income taxes 177 273 412

Cash paid for interest 91 478 496

Where can you find company’s financial information and data?

Amazon financial report 2016. (n.d.). Retrieved October 23, 2017, from

https://secsearch.sec.gov/search?affiliate=secsearch&query=amazon%2Bfinancial%2Bre

port%2B2016

AMZN income statement. (n.d.). Retrieved October 23, 2017, from

http://www.nasdaq.com/symbol/amzn/financials?query=income-statement

AMZN: summary for amazon.com, Inc. (2017, October 21). Retrieved October 23, 2017,

from https://finance.yahoo.com/quote/AMZN?p=AMZN

Amazon.com (NASDAQ:AMZN) Stock price, news & analysis. (n.d.). Retrieved

October 23, 2017, from https://www.marketbeat.com/stocks/NASDAQ/AMZN

Sagar Gogia
ACG 6315

Amazon financial report 2016. (n.d.). Retrieved October 23, 2017, from

https://secsearch.sec.gov/search?affiliate=secsearch&query=amazon%2Bfinancial%2Bre

port%2B2016

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