ACC 345 Business Valuation Report Template – Summary Business Valuation Report of Amazon, Inc. – Studocu

Summary Business Valuation Report of
Amazon, Inc.

Amazon, Inc.
April 15, 2022

Contents
SUMMARY BUSINESS VALUATION REPORT OF AMAZON, INC. …………………………………………………….. 1
INTRODUCTION …………………………………………………………………………………………………………………………………. 4
Description of the Assignment …………………………………………………………………………………………………………….. 4
Standard of Value ………………………………………………………………………………………………………………………………. 4
AMAZON, INC. ……………………………………………………………………………………………………………………………………….. 5
Brief History/Overview ………………………………………………………………………………………………………………………. 5
FINANCIAL ANALYSIS …………………………………………………………………………………………………………………….. 12
Financial Analysis Overview …………………………………………………………………………………………………………….. 12
By looking at Amazon’s financial statements, you understand the amount of growth they have achieved in a
relatively short period. Amazon’s balance sheet and income statement supply crucial financial information about
the company, and you get a glimpse into the company’s assets, liabilities, equity, and revenue. …………………. 12
The balance sheet and income statement provide information regarding how the company is performing.
However, you are also given the current and quick ratios that tell you whether or not Amazon can cover its
liabilities. ……………………………………………………………………………………………………………………………………….. 12
In the last five years, Amazon has seen significant growth. From 2017 through 2021, there have been across-
the-board increases for Amazon, and not even Covid could slow them down, by looking at their total current
assets from 2020 to 2021 you will notice that they saw an increase of $28,847. ………………………………………. 12
As you can see from the balance sheet, Amazon’s assets have increased each year, and their liabilities have as
well. Increases such as these usually are a clear indication of expansion within the company……………………. 12
Balance Sheets ………………………………………………………………………………………………………………………………… 12
Income Statements ……………………………………………………………………………………………………………………………. 14
Normalization Adjustments ……………………………………………………………………………………………………………….. 15
ECONOMIC OUTLOOK ……………………………………………………………………………………………………………………… 16
Industry Analysis ……………………………………………………………………………………………………………………………… 16
General Economic Analysis ………………………………………………………………………………………………………………. 19
BUSINESS VALUATION ……………………………………………………………………………………………………………………. 20
Valuation Approaches ………………………………………………………………………………………………………………………. 20
Selected Method – Income Approach ………………………………………………………………………………………………….. 22
The utilization of the discount rate in a valuation is to discount the net income back to the present value. By
doing this, you provide a better understanding of what the net income and profitability of the company will be
in the future. The risk-free long-term U. Government bond rate is the percentage of what the company would
collect on risk-free security from the government. The equity risk premium “refers to an excess return that
investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking

INTRODUCTION

Description of the Assignment

The following is a valuation of Amazon, Inc. for the purposes of the sale of a minority
stake of the company. In this valuation you will find a summary of the financial health, future
performance, and an estimated value of the business.

Standard of Value
Amazon is currently a “going concern”, the assets being valued here are being valued at the fair
market value.

Amazon, Inc.
Brief History/Overview

Nature, Background, and History
Amazon, Inc. had very meager beginnings, created in July of 1994 by Jeff Bezos in his
garage in Seattle, Washington, to sell books online. Not long after its creation, Amazon quickly
expanded into selling clothing, electronics, and video games; if there is anything you are looking
for, the first place you go to look on the internet is Amazon.
Since its creation 28 years ago, Amazon, Inc. has grown into, if not the biggest, then one
of the biggest retailers on the internet. As part of this growth, it ventured into creating its own
product line, from Kindle, an e-reader that allows subscribers to download content to Echo and
Alexa which are devices that will enable you to listen to music, obtain information, control your
“smart home,” and much more with just your voice. These are only a few examples of Amazon’s
products on the market today.
Facilities
Amazon’s main headquarters is in Seattle, Washington, where it has been since its
creation in 1994. It was announced in “2018 that it was going to expand its headquarters and
build three new facilities; one in Long Island, NY, the second in Arlington, VA, and the third in
Nashville, TN.” (Still, 2018)
Along with the three headquarters Amazon also has numerous fulfillment centers used for
sorting, receiving, and other types of centers where merchandise can be stored and/or shipped
directly to the customer.
Over the almost 28 years that it has been in operation, Amazon has acquired some major
assets. From 2017 through 2021 a few of the major purchases that have occurred have been,
“Whole Foods, Zappos, Kiva Systems, PillPak, Inc., Twitch and MGM Holdings, Inc. (currently
listed as pending as of July 2021.).” (Johnston, 2021)

Bezos.” ( (Dudovskiy, Amazon Organizational STructure: A brief overview, 2020) From there it
breaks into twelve smaller levels as seen in the chart below:

(Dudovskiy, Amazon Organizational STructure: A brief overview, 2020)
Competition
“As of October 2021, Amazon accounted for 41 percent of the U. e-commerce market,
making it by far the leading online retailer the country. Second place was occupied by the e-
commerce site of retail chain Walmart, with a 6 percent market share, followed in third place
by eBay, with 4 percent.” (Chevalier, 2021). As Covid-19 spread across the nation in 2020,
online sales increased rapidly; consumers were faced with the closure of their local brick and

mortar stores, and they turned to the only place they knew to get the necessities needed; that
place was Amazon, followed at a close second by Walmart.
Amazon sets itself apart from other online retailers by offering more than just products. It
also provides Amazon Web Services (AWS), which is the “world’s most comprehensive and
broadly adopted cloud platform, offering over 200 fully featured services from data centers
globally.” (Cloud Computing with AWS, 2022) It also offers an Amazon Prime membership that
gives subscribers free and fast shipping and streaming of movies, tv shows, and music.
Due to its large selection of offerings on the website, not only for consumer goods but also
for digital content, Amazon’s “retail store rivals include Target, Walmart, Best Buy, and Costco.
For subscription services, Amazon competes with Netflix, Apple, and Google. In the web
services category, Amazon has several rivals such as Oracle, Microsoft, and IBM.”
( Investopedia)
Strengths and Weaknesses
Like any company in operation, Amazon has its share of strengths and weaknesses. A
few of Amazon’s strengths, its most significant and notable strength, is brand awareness. “The
iconic “smile” created in the Amazon logo is known across the world for fast, efficient and
reliable online retailing and distribution.” (Gaille, 2021) It maintains a solid and secure position
as number 1 in the North American retail and world markets, coming in at number 2 behind
Alibaba.
Weaknesses Amazon faces, it has focused on developing its market in North America,
which has allowed sites like Alibaba, its biggest competitor in the world market, to gain a
foothold. There have been several instances of customer privacy and security. You will
occasionally on the news see reports of hackers gaining access to Amazon Alexa or Echo
products or reports of Prime subscribers’ account information being hacked. Despite offering

they would be doing a $10 billion share buyback. Lowering the stock prices allows everyday
traders to purchase full stocks at lower prices versus buying fractional stocks from brokers. The
buyback shows investors and potential investors that they have money and are not looking to
invest in new facilities.
Business Risks
As with any business or anything in life, there are certain risks. Amazon faces some risks;
the more immediate ones they are facing are; “significant inventory risk, risks related to
adequately protecting our intellectual property rights and being accused of infringing intellectual
property rights of third parties, government regulation is evolving and unfavorable changes could
harm Amazon’s business, Amazon faces additional tax liabilities and collection obligations,
Amazon’s supplier relationships subject them to a number of risks.” (Vyom., 2020)
Inventory risk is something everyone is facing since the outbreak of Covid-19. Due to the
Pandemic shutting down manufacturing facilities and well, basically the whole world, we have
seen vast supply shortages of everything from computer chips needed to build new cars to
Tapioca in the grocery store.
Another risk Amazon faces is the potential for being accused of intellectual property theft
from a third party. As with any new technology introduced on the market there is always the
chance that someone is going to attempt to say it was stolen from them. As Amazon creates new
devices and makes technological advances, they open themselves up to the potential of this
happening to them.
Government regulation is a risk Amazon also faces. As Russia invaded Ukraine and the
United States Government brought sanctions against Russia, Amazon stopped all shipping to the
country and all streaming services. If the U. Government decided in a unanimous vote that it
wanted to stop all imports from China, that would affect Amazon.

With the increase in business and sales so to is there an increase in taxes and collection
obligations. As Amazon grows bigger, they will face steeper taxes and more stringent collection
obligations from the government.
The last risk is the one that I feel would hurt Amazon probably just as much as the
inventory risk, and that is their relationship with third party suppliers. This could cause a lot of
headache for Amazon, especially if these third party suppliers take the customers money for a
product and does not produce that product. If this happened enough times Amazon could lose a
lot of business and ruin their good name.

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Assets
Amazon’s current assets have increased a little over $100,000 between 2017 and 2021.
Current assets are “all the assets of a company that are expected to be sold or used as a result of
standard business operations over the next year.” (Hayes, 2021)They include “include cash, cash
equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and
other liquid assets.” (Hayes, 2021)
Another asset under current assets is Property, Plant, and Equipment (PPE) has increased
since 2017 by $111,415. The increase would be caused by company expansion and the
construction and acquisition of new warehouses.

Liabilities
As mentioned above, Amazon’s liabilities increased over the last five years at what could be
considered a snail’s pace compared to the assets. Their current liabilities, which are due within a
year, increased by $84,383 since 2017.

Their total liabilities have more than doubled over the last five years. In 2017 total liabilities
were $103,601; at the end of 2021, they were $282,304, which is a difference of $178,703. By
looking at these numbers, you can see that expansions and acquisitions have played a significant
role in these increases.

Stockholder’s Equity
“Amazon shareholder equity for the quarter ending December 31, 2021, was $138,
a 48% increase year-over-year.” (Amazon Share Holder Equity 2010-2021: AMZN.
Macrotrends, n.)

Income Statements
Over the last five years, Amazon has shown a steady increase in its sales. Don’t get me
wrong, just because a company is showing an increase in sales; does not always mean an equal
increase in profit, but for Amazon, it does. Amazon’s gross profit has increased over the last five

years from $65,932 in 2017 to $197,478 in 2021, which is a difference of $131,564.
When looking at the income statement, you will notice that from 2017 to 2018, there
was a significant increase in operating income, from $4,106 to $12,421. This increase is due to

Amazon’s acquisition of Wholefoods in 2017.
Even with the increases in operating income and other expenses, Amazon’s net income
in 2021 reflected growth just shy of 10 times its value in 2017.

ECONOMIC OUTLOOK

Industry Analysis

Industry Overview
The e-commerce industry is growing at a record pace. Since 2020, Amazon saw a spike
in sales thanks to the Pandemic. (Yuen, 2022) As you can see from the chart below, Amazon
has grown substantially since 2015. As technology changes and we discover new and faster
ways to do things, Amazon will create more opportunities for those they provide services
to.

(Yuen, 2022)
Competitive Landscape

For a company that started in the garage of its founder, Jeff Bezos, Amazon has grown into
the “world’s largest retailer outside of China.” (NYT) Until last year, Walmart was the world’s
largest retailer outside of China; Amazon has now claimed that title. “Reaching over $386 billion

in revenues worldwide in 2020.” (Yuen, 2022)

Due to Amazon’s expansive portfolio, they have several different types of competitors to be
watchful of. The first and most obvious are the online retailers, including Wayfair, Inc.,
Overstock, Etsy, and JD. The next type of competition they face would include
physical stores; Amazon now falls into the brick-and-mortar category since purchasing Whole
Foods. Those that fall into this category would be stores such as Target, Costco, Walmart, Best
Buy, and Big Lots.
Another area in which Amazon faces competition would be the third-party seller services.
Only one site shares this with Amazon, which happens to be eBay.
Everyone gets online streaming services and other online subscriptions with an Amazon Prime
subscription. This includes e-books, audio, movie streaming services, and music, to name a few.
The competition in this market for Amazon is Apple Itunes, Google Play, and Netflix.
The last area where Amazon sees competition is the web services department. With the
creation of Amazon Web Services, they have opened themselves up to competition from
Microsoft, Oracle, IBM, and Google.
Products, Operations and Technology
Amazon’s product offering has grown since its inception. What once was a place to
purchase books online has grown into a company that now offers its one product line. Not
only do they offer services such as Prime, Prime Video, and AWS, Amazon now offers
things like Amazon Echo, which is a smart technology speaker that can understand voice
commands and can connect to Amazon’s Alexa. Alexa is another device that can

Labor Trends When it comes to labor trends, I do not believe that Amazon will have any issues
in this area. Other than, of course, having to contend with facilities deciding that they
want to unionize. I think that as long as they are expanding and creating new jobs with
better pay and better working condition and hours, this will be another area in which they
excel
General Economic Analysis
Interest rates Amazon affects inflation. Yes, you read that right; Amazon affects i nflation. By not having
actual “storefronts, the company’s overhead costs are significantly lower than other retailers. That
gives Amazon the edge to undercut rivals on prices and operate on a thinner profit margin.”
(Krishna, 2021)
GDP With a surge in online shopping over the last two years, thanks to the effects of the pandemic,
Amazon sales have increased. “If you consider the macro picture, consumers spending more is a good
sign because it contributes to the GDP. That being said, consumer spending on Amazon is not significant
enough to tip the GDP scale.” (Krishna, 2021)
International and Domestic Trade Policy
The sanctions that the United States is presently putting on Russia are international trade
policies that could affect Amazon. There are, of course, ones that have been in place long before
Amazon was a thing, and those are the ones on Cuba, China, North Korea, and Syria. There are
no actual trade policies on the line unless something occurs between the U. and Canada or the
U. and Mexico.

BUSINESS VALUATION

Valuation Approaches

Asset Approach
This approach uses the value of the company’s assets after the liabilities have been deducted.
It utilizes the balance sheet instead of the income statement like the other methods do, and it is
utilized when a business is built on assets instead of income.
When doing this type of analysis, the first thing one must do is to review the balance
sheet, preferably one that is the most recent and closest to the date the analysis is being
performed. You must then value the assets and liabilities at market value. It is best that when
performing this step, you use sound judgment because you will be placing a value on such things
as property, plant, equipment, and land. Next, you have to make sure that all the assets and
liabilities are accounted for. Not everything you are looking for will be listed readily on the
balance sheet. Now, you can determine the value.
Income Approa This approach looks to determine cash flow futures and economic benefits. You can locate ch

the information you use to complete this analysis on the income statement. You will more
commonly see this type of valuation incorporating discounted cash flow. The analyst will
calculate the future projections when performing this type of valuation. It is usually done for a
five (5) year period, as five years is typically a reasonable time frame for a business to remain in
operation. You can forecast potential revenues and expenses with the most up-to-date
information available. Of course, these amounts will be affected by taxes, depreciation, and
amortization; this gives you your free cash flow amount.
This is where you would determine what the discount rate would be. You can find the
discount rate using the Build-Up Method or the CAPM (Capital Asset Pricing Model). You
would then assign a terminal value. The terminal value is ” the value of an asset, business, or