This report provides an analysis and evaluation of the current and prospective
profitability, liquidity and financial stability of Amazon.com. Methods of analysis include
business strategy analysis, financial analysis, prospective analysis and accounting analysis.
Business strategy analysis includes the company’s strength, weakness, opportunities and risks.
Financial analysis is conducted through ratio analysis comparison to its industry average and its
leading competitor Wal-Mart. Prospective analysis includes sales and EPS forecasts, pro forma
financial statements, and enterprise valuation using both Free Cash Flow and Residual Income
approaches. Accounting analysis describes quality of financial reporting, such as reasonableness
of accounting principles chosen including quality of disclosures.
Details of computations and information can be found in the appendices. Results of
analysis show that Amazon.com has strong cash generating operation strategy, high growth in
new business segment, and favorable ratios that are above industry average and competitors. In
particular, Amazon.com is expanding aggressively, but its existing operations make it safe, thus
it shows successful growth. As a result, the report projected the future of Amazon.com to be
profitable and safe, and therefore rise in stock price should be expected.
Business Strategy Analysis
Amazon.com is a highly customer based company and therefore its principles are largely
focused on customers rather than competitors. The main four principles are; analysis of customer
obsession, passion for invention, commitment to operational excellence, and long-term thinking.
Based on these principles, Amazon.com seeks its successful future through increasing sales
volume, minimizing variable costs, leveraging fixed costs, developing contents and technology,
and maintaining long-term sustainable growth in free cash flows with cash generating operating
cycle. Interestingly, Amazon.com’s sales strategy is similar to that of Wal-Mart. Both companies
are focusing on minimizing costs and prices so as to increase sales volume. This is what has
made Wal-Mart one of the biggest retailers presently.
Providing wide range of products and services is one of Amazon.com’s strengths.
Attracting customers and sale of the variety of products and services is its primary source of
revenue. Therefore, Amazon.com believes that improving all aspects of the customer experience,
Financial Analysis of Amazon.com
including lowering prices, improving availability, offering faster delivery and performance
times, increasing selection, increasing product categories and service offerings, expanding
product information, improving ease of use, improving reliability, and earning customer trust, are
key to successful growth. While expanding the range of products and services, Amazon.com was
also effective at lowering prices by minimizing variable costs, through deep discounts from
suppliers and reducing defects in products, and maintaining low fixed costs through process
efficiency. This cost leadership enabled the company to get a large market share and became one
of the leading companies. In addition, Amazon.com had high inventory turnover ratio and thus
had cash generating operating cycle, which reflect operating efficiency and effectiveness. As a
result, the company’s cash flow statements reflect high ending cash balance generated that have
never been negative since its inception.
The rapid growth and huge expansion is not only viewed as strength for Amazon.com,
but as a weakness on the other hand. By expanding into new products and services, Amazon.com
put itself into more competitions from different industries. It is the most significant risk that
Amazon.com faces recently because the new competitors may have greater resources, longer
histories, more customers, and greater brand recognition. They may secure better terms from
vendors, adopt more aggressive pricing, and devote more resources to technology, infrastructure,
fulfillment, and marketing. However, failing in some of those competitions would not have
significant impact on overall Amazon.com business due to its gigantic e-commerce business and
its operating strategy focuses on large stable free cash flow. For example, in 2016, Amazon.com
announced cash provided by operating activities to be $16,443 million, which is much greater
than $9,876 million cash used in investing activities. Since Amazon.com has the ability to fund
its expansion with cash on hand rather than costly and risky investments, there are more
opportunities than risks.
Another risk in Amazon.com is its ability to cover operating expense. Due to low gross
margin, Amazon.com suffered net loss in 2014 while its sales revenue had increased. However,
the increase in operating expense since 2013 was due to development of Amazon Web Services
(AWS), which is classified as technology and content expense. Amazon.com decided to expend
most of those costs rather than capitalizing and reflecting it on income statement because they
had confidence that it would be recovered soon. In addition, despite the fact the company
Financial Analysis of Amazon.com
reported net loss in 2014, Amazon.com’s statement of cash flows always had positive ending
cash flow that increase over the years. Fortunately, AWS revenue is growing at 50% range since
2014, which is much greater than retail sales growth of 15-20%. Unlike retail product sales, web
services have higher gross margin despite their development costs, which is classified as
operating expense. This AWS sales growth would give Amazon.com more ability to cover the
Although its net income or loss fluctuates over time, Amazon.com has an increasing
trend in the sales since 1995. In 2014, Amazon.com reported net loss of $241 million but the
company exceeded Wall Street expected sales growth when the whole market was suffering
(Wingfield N. New York Times).Due to the domination of the online retail landscape,
Amazon.com maintained its sales growth rate at 20% in 2014 while its gigantic competitor, WalMart only had 2% sales growth. Subsequently, the sales growth rate has steadily increased and
reached more than 27% in 2016 while Wal-Mart had nearly zero sales growth.
Beside sales growth, gross margin ratio and operating expenses per sales ratio are the two
most significant issues for Amazon.com. Amazon.com’s retail business strategy was to minimize
cost and price to increase sales volume, which should result in low gross margin around 27% like
Wal-Mart which has a similar strategy. This is unlike Amazon.com’s gross margin which has
increased steadily from 21% in 2011 to 41% in 2016. On the other hand, there has been increase
in operating expense per sales, which put Amazon.com in net loss in 2014. Both gross margin
and operating expenses are influenced by increase in AWS sales, which has high gross margin
and operating expenses since Amazon.com expensed costs related to AWS rather than
capitalizing them. With increase in sales of both retail and AWS, Amazon.com easily turned to
an increasing trend of net income right after the loss.
Unfortunately, Amazon.com’s turnover ratios do not seem good compared to its income
statement items. There is a fluctuation on inventory turnover and decline in accounts receivables
turnover. Variability in inventory turnover is affected by numerous factors, including pr...