Editing Amazon.com, Inc. (section)

== Valuation ==
We employed a Discounted Cash Flow (DCF) model to arrive at an intrinsic valuation for Amazon. Furthermore, we utilized a trading comparable analysis to generate a relative valuation.

=== DCF ===
We obtained the average year-on-year growth rate by using revenue figures from 2018 to 2022. This growth rate was then utilised to project the expected revenues from 2023 to 2027. In a similar fashion, we used the average growth in taxes (as a percentage of EBIT) from the past years to forecast future taxes. As for other financial statement components, their growth was analysed and forecasted as a percentage of the projected revenue. 
{| class="wikitable"
|+
! ''$ million'' 
! colspan="5" |''Historical''
! colspan="5" |''Projected''
|-
!'''Income Statement''' <ref name=":1">https://www.wsj.com/market-data/quotes/AMZN/financials/annual/income-statement</ref>
!'''2018'''
!'''2019'''
!'''2020'''
!'''2021'''
!'''2022'''
!'''2023'''
!'''2024'''
!'''2025'''
!'''2026'''
!'''2027'''
|-
|Revenue 
|232,887
|280,522
|386,064
|469,822
|513,983
|565,381
|630,400
|693,440
|780,120
|873,735
|-
|''% growth''
| -
|20.45%
|37.62%
|21.70%
|9.40%
|10.00%
|11.50%
|10.00%
|12.50%
|12.00%
|-
| colspan="11" |
|-
|EBIT
|25,330
|30,457
|39,572
|48,362
|39,039
|49,162
|61,750
|75,553
|93,578
|114,419
|-
|''% revenue''
|11%
|11%
|10%
|10%
|8%
|9%
|10%
|11%
|12%
|13%
|-
|
|
|
|
|
|
|
|
|
|
|
|-
|Profit
|10,073
|11,588
|21,331
|33,364
|style="color: red;" | -2,722
|style="color: red;" | -42
|5,519
|12,375
|22,421
|35,217
|-
|''% revenue''
|4%
|4%
|6%
|7%
|style="color: red;" | -1%
|0%
|1%
|2%
|3%
|4%
|-
| colspan="11" |
|-
!'''Cash Flow items''' <ref>https://www.wsj.com/market-data/quotes/AMZN/financials/annual/cash-flow</ref>
!
!
!
!
!
!
!
!
!
!
|-
|D&A
|12,613
|15,715
|16,748
|23,421
|25,528
|37,084
|43,325
|49,566
|56,587
|63,664
|-
|% of PPE
|13%
|11%
|8%
|8%
|7%
|9%
|9%
|9%
|9%
|9%
|-
| colspan="11" |
|-
|Net Operating Cash Flow
|30,723
|38,514
|66,064
|46,327
|46,752
|55,554
|80,778
|95,548
|116,789
|139,190
|-
|Net Investing Cash Flow
|style="color: red;" | -12,369
|style="color: red;" | -24,281
|style="color: red;" | -59,611
|style="color: red;" | -58,154
|style="color: red;" | -37,601
|style="color: red;" | -67,097
|style="color: red;" | -74,744
|style="color: red;" | -75,285
|style="color: red;" | -84,545
|style="color: red;" | -85,815
|-
|Net Financing Cash Flow
|style="color: red;" | -7,686
|style="color: red;" | -10,066
|style="color: red;" | -1,104
|6,291
|9,718
|style="color: red;" | -936
|1,064
|1,064
|1,064
|1,064
|-
|
|
|
|
|
|
|
|
|
|
|
|-
|Cash, BOP
| -
|32,176
|36,413
|42,380
|36,480
|54,256
|41,777
|48,876
|70,204
|103,512
|-
|Net Change in Cash
|10,317
|4,237
|5,967
|style="color: red;" | -5,900
|17,776
|style="color: red;" | -12,479
|7,099
|21,328
|33,309
|54,439
|-
|Cash, EOP
|32,176
|36,413
|42,380
|36,480
|54,256
|41,777
|48,876
|70,204
|103,512
|157,952
|-
|
|
|
|
|
|
|
|
|
|
|
|-
|Net Operating Cash Flows*
|30,723
|38,514
|66,064
|46,327
|46,752
|55,554
|80,778
|95,548
|116,789
|139,190
|-
|CAPEX
|style="color: red;" | -11,323
|style="color: red;" | -12,689
|style="color: red;" | -35,044
|style="color: red;" | -55,396
|style="color: red;" | -58,321
|style="color: red;" | -57,721
|style="color: red;" | -64,650
|style="color: red;" | -64,415
|style="color: red;" | -72,837
|style="color: red;" | -73,202
|-
|Free Cash Flow
|19,400
|25,825
|31,020
|style="color: red;" | -9,069
|style="color: red;" | -11,569
|style="color: red;" | -2,168
|16,128
|31,133
|43,952
|65,988
|-
| colspan="11" |Note: Net Operating Cash Flows incorporate the effect of Depreciation and Amortisation and changes in Net Working Capital.
|}
Sources suggest a terminal growth rate within the 3-5% range<ref name=":2">https://valueinvesting.io/AMZN/valuation/dcf-growth-exit-5y</ref>. The DCF model employs an estimate of 3%, but the full range is accommodated in the sensitivity analysis. This figure is used in calculating the terminal value, which, when discounted, results in a present terminal value of approximately $1.199 trillion.  

In calculating the DCF that forecasts the financial trajectory of a US-based company over the next five years, the risk-free rate is pegged at the US 5-year Treasury rate of 3.87%<ref name=":3">[https://ycharts.com/indicators/5_year_treasury_rate#:~:text=5%20Year%20Treasury%20Rate%20(I%3A5YTCMR)&text=5%20Year%20Treasury%20Rate%20is,long%20term%20average%20of%203.74%25. https://ycharts.com/indicators/5_year_treasury_rate#:~:text=5%20Year%20Treasury%20Rate%20(I%3A5YTCMR)&text=5%20Year%20Treasury%20Rate%20is,long%20term%20average%20of%203.74%25.]</ref>. This figure represents the monthly average rate spanning from January to July 2023. 

The summarised estimates from the DCF analysis can be found in the table below. 
{| class="wikitable"
!Input name
!Input value
!Reasons
|-
|Risk free rate
|3.87%
|US 5 year Treasury note rate <ref name=":3" /> 
|-
|Market risk premium
|4.70%
|Analysts expectations <ref name=":4" />
|-
|Levered beta
|0.88
|Analysts expectations <ref name=":5" />
|-
|Cost of equity
|8.01%
|CAPM model
|-
|Cost of debt
|5.25%
|US typical debt rate <ref name=":6" />
|-
|Internally calculated WACC
|7.74%
|Calculated using the WACC formula from above estimates
|-
|Terminal growth rate
|3%
|Analysts expectations <ref name=":2" />
|}
The market risk premium fluctuates between 4.2% and 5.2% <ref name=":4">https://valueinvesting.io/AMZN/valuation/wacc</ref>, thus we employ an average of 4.7% for our calculations. The volatility of Amazon's stock price is viewed as being lower relative to the general market. This is reflected in its beta, which varies from 0.64 to 1.12 <ref name=":5">https://valueinvesting.io/AMZN/valuation/wacc</ref>, yielding an average of 0.88. Consequently, we derive a cost of equity of 8.01%. When this is combined with the cost of debt, which stands at 5.25% <ref name=":6">[https://www.theguardian.com/business/2023/jun/14/fed-interest-rate-pause-inflation#:~:text=US%20Federal%20Reserve%20officials%20have,year%20of%20consecutive%20rate%20increases. https://www.theguardian.com/business/2023/jun/14/fed-interest-rate-pause-inflation#:~:text=US%20Federal%20Reserve%20officials%20have,year%20of%20consecutive%20rate%20increases.]</ref>, we arrive at a weighted average cost of capital (WACC) of 7.74%.

DCF calculation incorporates the H-model with an underlying assumption that starting from 2027 Amazon's free cash flows will grow by 7% until until 2037 where the terminal growth of cash flows will be 3%. The H-model assumes a smooth transition between the two stage of Amazon lifecycle. In the process of discounting the future Free Cash Flow to its present value, the WACC serves as the discount factor. This calculation leads to a share price of $138.23, a summary of which is presented in the table below.
{| class="wikitable"
!Metric
!Metric value
|-
|WACC
|7.96%
|-
|Short term Growth
|7%
|-
|Long term growth
|3%
|-
|H terminal value
|1,758,880
|-
|PV of terminal value
|1,199,300
|-
|PV of all future cash flows
|1,326,882
|-
|Number of years
|10
|-
|Cash
|54,253
|-
|Debt
|140,118
|-
|Equity
|1,412,747
|-
|Number of shares outstanding 
|10,220
|-
|Fair share price
|138.23
|-
|Current Share Price
|134.30
|}
The closing share price for Amazon stocks on 14th July 2023 stood at $134.40<ref>https://www.marketwatch.com/investing/stock/amzn</ref>.

We conducted a sensitivity analysis using a WACC range of 6.5% to 9.0%, and a terminal growth rate span of 1.5% to 4.0%.
{| class="wikitable"
!
!
! colspan="7" |WACC
|-
!
!
!6.50%
!7.00%
!7.50%
!7.74%
!8.00%
!8.50%
!9.00%
|-
! rowspan="6" |Terminal growth rate
!1.5%
|$          152.25 
|$        137.38 
|$        125.02 
|$        115.37 
|$        114.60 
|$        105.70 
|$          98.00 
|-
!2.0%
|$          164.52 
|$        147.00 
|$        132.71 
|$        121.71 
|$        120.84 
|$        110.82 
|$        102.26 
|-
!2.5%
|$          179.85 
|$        158.77 
|$        141.94 
|$        129.21 
|$        128.21 
|$        116.79 
|$        107.16 
|-
!3.0%
|$          199.57 
|$        173.48 
|$        153.22 
|$        138.22 
|$        137.05 
|$        123.86 
|$        112.89 
|-
!3.5%
|$          225.86 
|$        192.38 
|$        167.32 
|$        149.26 
|$        147.86 
|$        132.33 
|$        119.65 
|-
!4.0%
|$          262.67 
|$        217.59 
|$        185.45 
|$        163.08 
|$        161.38 
|$        142.69 
|$        127.77 
|}

=== Relative Valuation ===
A comparable trade analysis is conducted to establish a relative valuation for Amazon, supplementing the aforementioned absolute DCF valuation. The analysis takes into account key competitors, such as Alibaba and Ebay <ref>https://www.shopify.com/blog/amazon-competitors</ref>. 

The EV/EBITDA ratio, a commonly used valuation metric, takes into account both debt and liabilities relative to the actual earnings. On the other hand, the EV/Revenue ratio serves as an effective tool to determine whether a stock is undervalued or overvalued compared to its industry peers by accounting for the enterprise value and revenue generated by the firm.

The table provides a brief analysis of the ratios and market cap of the several companies in the analysis including their minimum/maximum, median, quartile and mean values.  

In order to consider growth in relative valuation, PEG and growth adjusted EV/Revenue valuation multiples are used. PEG is the ratio of P/E to the annual growth in EPS. Growth adjusted EV/Revenue multiple is the ratio of EV/Revenue to the annual growth in revenue. 
{| class="wikitable"
!Name
!P/E <ref>https://finbox.com/NASDAQGS:AMZN/explorer/pe_ltm/</ref>
!EPS 2022 <ref>https://www.macrotrends.net/stocks/charts/AMZN/amazon/eps-earnings-per-share-diluted</ref>
!EPS 2023 <ref name=":7">https://finance.yahoo.com/quote/AMZN/analysis/</ref>
!EPS growth
!PEG
|-
|Amazon.com Inc
|321.8 
| -0.27
|1.57
| -681.5%
| -47.22
|-
|MercadoLibre Inc
|92.3
|9.53
|16.69
|75.1%
|122.85
|-
|Etsy Inc
| -16.1  
| -5.48
|2.33
| -142.5%
|11.30
|-
|Chewy Inc
|306.7
|0.12
| -0.01
| -108.3%
| -283.11
|-
|eBay Inc
|39.2  
| -2.27
|3.35
| -247.6%
| -15.83
|-
|Alibaba Group 
|23.9
|2.34
|8.52
|264.1%
|9.05
|-
|Vipshop Holdings Ltd
|9.8
|1.43
|1.88
|31.5%
|31.14
|-
|'''Median'''
|'''31.6'''
|'''0.8'''
|'''2.8'''
|'''-38.4%'''
|'''10.2'''
|-
|'''Mean'''
|'''111.1'''
|'''0.8'''
|'''4.9'''
|'''-115.6%'''
|'''-24.5'''
|}
{| class="wikitable"
!Name
!Revenue 2022 <ref>https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue</ref>
!Revenue 2023 <ref name=":7" />
!Revenue growth
!EV/Revenue
!Growth Adjusted EV/Revenue
|-
|Amazon.com Inc
|514.0
|560.8
|9.1%
|2.9
|31.8
|-
|MercadoLibre Inc
|10.5
|13.5
|28.5%
|5.2
|18.2
|-
|Etsy Inc
|2.6
|2.8
|7.6%
|4.8
|63.5
|-
|Chewy Inc
|10.1
|11.4
|12.7%
|2.0
|15.8
|-
|eBay Inc
|9.8
|10.1
|2.6%
|2.5
|96.0
|-
|Alibaba Group 
|126.491
|132.7
|4.9%
|2.5
|50.8
|-
|Vipshop Holdings Ltd
|14.956
|15.8
|5.6%
|2.5
|44.3
|-
|'''Median'''
|'''10.3'''
|'''12.5'''
|'''6.6%'''
|'''2.5'''
|'''47.6'''
|-
|'''Mean'''
|'''98.3'''
|'''106.7'''
|'''10.1%'''
|'''3.2'''
|'''45.8'''
|}
Amazon had a negative annual EPS in 2022 which results in a negative EPS growth and PEG. Therefore, this multiple is not used to obtain a valuation. It has both a high PE and EV/Revenue multiple compared to the industry median, which usually implies that the stock is overvalued. 

On the other hand, Amazon has a noticeably lower growth adjusted EV/Revenue multiple (31.8) compared to the industry median (47.6). This results in an implied share price of $211.09, which is significantly higher than the current share price.