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Amazon

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

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Amazon

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  1. 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

  2. Amazon.com

  3. Why is the default valuation of AMZN negative? • ROE is HUGE positive amount. Why? • Why can’t the stock price be negative?

  4. Hitting the analyst forecasts -clean up the financial statements • Restate financials in 2000 by moving 84460 of depreciation out of SG&A and into depreciation. Makes EBITDA really before DA!

  5. 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?

  6. Income Statement AssumptionsEBITDA margin • EBITDA = “earnings before interest, taxes, depreciation and amortization” = gross margin – R&D – SG&A • keep CGS/Sales at constant 76.3% and adjust SG&A/Sales to hit EBITDA margins • SG&A/Sales is 9.7% in terminal period • EBITDA margin improves from -8% to 14%

  7. Income Statement AssumptionsDepreciation and Amortization(just a stop on the way to CapX) • goodwill and intangibles written off in 2001 • 2000 depreciation ratio = 84460/(317613+366416)/2 = 25% • implies that the useful life of fixed assets is between 4 years and 8 years. • hold constant

  8. 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)

  9. 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?

  10. 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.

  11. balance sheet assumptionsPP&E • 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?

  12. 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….

  13. 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!

  14. 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

  15. AMZN – what happened excluding cash liquidation

  16. Amazon.com

  17. AMZN – what happened

  18. 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!

  19. valuing contingent claims

  20. 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 – regular150 • if not exercised do nothing

  21. 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 • Basic and diluted earnings $ 0.07 $ (0.60 ) $ (2.64 ) • (loss) per share-SFAS No. 123 • adjusted For S&P 500, expensing options would lower EPS by 20% in 2001. (Bear Stearns)

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