Advanced Financial Modeling:

Amazon Case Study

Corporate Finance Institute®

 Course Objectives

Build a financial forecast Understand Implied Value Develop an Investment

Analysis Recommendation

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 Building a Financial Forecast

Corporate Finance Institute®

 Session Objectives

Learn the steps of building a Identify key competitors Analyze key historical
financial forecast for the business segments financial information

Consider general Review Industry research Build the 3-statement

macroeconomic conditions financial model

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 Financial Forecasts

An estimate of future financial outcomes for a company

The inputs and assumptions used in their forecast should be defendable

The analyst must understand past performance and current conditions

Analysis Date Year 1 Year 2 Year 4

Year 3

Historical Period Forecast period is subject to significant judgement

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 Building a Financial Forecast

The thorough process of building a robust financial forecast involves the following steps:

1. Analyze historical 2. Understand the business 3. Review key comparables

financial information drivers and outlook and industry growth forecasts

4. Document the general 5. Develop forecast inputs 6. Create financial projections

macroeconomic and assumptions along with alternative
environment scenarios

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 Situation Overview

Given the recent strong performance of Amazon stock, your firm is considering investing in the company.

Your objective is to determine the appropriate value of the company and whether an investment is justified in
the context of the current market price.

Analyze historical financials and the competitive landscape to develop a robust financial model

Formulate a range of value for Amazon stock using accepted valuation techniques

Develop an investment recommendation for Amazon

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 Historical Financial Information

Gather financial information for the past 3 to 5 years and review key historical trends and performance measures.

A financial analyst should be adept at gathering data even through manual means.

Revenue Margins
Growth and Returns

Capital Turnover
Spending Rates

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 Historical Analysis

Historical revenue An average of historical

Historical growth can provide a margins can offer an
Analysis strong indication of indication of future
future growth potential levels

Analyzing the level of Historical turnover rates

historical capex provides can help forecast
valuable insight into certain balance sheet
levels required to items moving forward
sustain future growth

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 Segmented Information

A review of Amazon’s segment disclosure should also be undertaken Each segment should be classified into market
comparable groups. Forecast assumptions will need to be made specific to each business unit.

3rd Party Seller Subscription Amazon Web

Online Stores Physical Stores Services Other
Services Services (AWS)

Retail Subscription
First Party Retail Third Party Retail Cloud Advertising
Services (Prime)

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 Comparable Companies

Identify key competitors for the business segments and prepare a comparable company analysis for each

Understand the key competitors in each industry and their respective growth prospects by reviewing:

• Public filings and related disclosures of the competitors

• Independent industry research and projections

First Party Third Party Retail

Cloud Advertising
Retail Retail Subscriptions

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 General Macroeconomic Conditions

Review general macroeconomic conditions and trends

that impact the general economy
Inflation Interest
This information can be found from a variety of Rates Rates
government and general economic publications

We have provided the relevant data, as well as industry

research courtesy of IBISWorld
GDP Employment
Growth Rates

Monetary / Consumer
Fiscal Policies Spending

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 Building the Financial Model

The next step is to develop a robust set of assumptions and forecast scenarios

Forecast Base and

Assumptions Alternative
Scenarios
Data Analysis

• Historical Financial Information

• Competitive Landscape
• Macroeconomic Environment

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 Implied Value Analysis

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 Session Objectives

Understand how a Review a sum-of-the parts

discounted cash flow analysis analysis to value each
can be applied to value business segment
Amazon

Consider precedent Analyze secondary value

transactions and what they measures, to add clarity to the
imply for Amazon investment recommendation

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 Implied Value Analysis

Various valuation techniques should be used to derive a range of potential values for Amazon stock.

Limited relevance for Amazon

Discounted Sum-of-the-Parts Precedent Current Equity Research

Cash Flow Analysis Transactions Market Prices Target Prices
Analysis Analysis

Primary Value Measures Secondary Value Measures

help validate our primary measures

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 Implied Value Analysis – DCF

A Discounted Cash Flow (DCF) analysis values Amazon based on the present value of its future cash flows. The
key elements of a DCF analysis includes the following:

1. Financial Forecast 2. Terminal Value 3. Discount Rate 4. Sensitivities

A robust financial forecast
of Amazon’s future
results. This determines
the projected annual Free
Cash Flow to Firm (FCFF)
to be discounted to the
valuation date
The value of the future An appropriate discount A sensitivity analysis
cash flows beyond the rate should be should be prepared,
projection period. Can be determined and applied which demonstrates the
determined via an exit to the future cash flows per share impact of
multiple, a perpetual and terminal value. The variations in key
growth model, or an firm’s Weighted Average assumptions to the DCF
average of both. Very Cost of Capital (WACC) is
judgmental yet significant commonly used as the
to the valuation discount rate

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 Implied Value Analysis – DCF Summary

A waterfall chart illustrates the key components of Amazon’s Enterprise Value implied by a DCF Analysis.

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 Sum of the Parts

In a Sum-of-the-Parts (SOTP) valuation, the total value of a company is the sum of all its business segments.

Retail
First Party Retail Third Party Retail Subscription Cloud (AWS) Advertising
Services (Prime)

Each business segment is valued using the trading multiples of comparable companies for each segment

The choice of trading multiple to use for valuation purposes depends on availability of information and is subject to
professional judgement

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 Implied Value Analysis - SOTP

A waterfall chart is effective in illustrating the components of the total Enterprise Value implied by the SOTP analysis.

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 Precedent Transactions

A precedent transactions analysis provides an indication of what a market participant would pay for Amazon stock.

EV P
EBITDA CF
Multiple Selection Context Mechanics
We can utilize In the context of The mechanics of this
precedent transactions Amazon, given the lack methodology are very
to analyze Amazon’s of directly comparable similar to a comparable
value in a transactional acquisition targets to company analysis (i.e.
setting. The choice of the aggregate applying a range of
multiple is a matter of business, this method multiples to a level of
professional could be limited in its earnings to estimate a
judgement usefulness relative value)

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 Implied Value Analysis – Precedent Transactions

Given Amazon’s size and diversity of business segments, it is difficult to identify highly relevant precedent
transactions. There have also been a limited number of relevant precedent transactions over the past three years,
with transaction multiples varying widely.

This analysis serves as an additional data point, but in this case offers limited insight into Amazon’s value.

Precedent Transaction Multiples (EV/EBITDA)

25.0x

20.2x
20.0x 18.5x
16.7x
15.2x
14.4x
15.0x 12.8x Average: 12.6x
10.0x 9.1x Implied EV: US$723 Billion
7.3x
5.8x 6.1x
5.0x

0.0x

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 Implied Value Analysis – Secondary Value Measures

Secondary value measures serve as useful benchmarks and can help validate primary measures. Examples
include equity research target prices and the historical trading performance of Amazon stock.

Equity Research Target Prices ($/sh.) AMZN Historical Share Price Performance
$5,200 $4,000
$4,650
$4,500 $3,500
$4,400
$4,350 $3,000
$4,250
$4,155 $2,500
$4,150
$4,100 $2,000
$4,000
$3,975 $1,500
$3,940
$3,900 $1,000
$3,860
$3,750 $500
$3,700
$0
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Oct-15 Sep-16 Jul-17 May-18 Mar-19 Jan-20 Dec-20

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 Amazon Implied Value Summary

A greater weighting is usually placed on primary value measures in determining an appropriate value range,
particularly intrinsic methodologies. Significant judgment is required in determining appropriate weightings.

Implied Enterprise Value Summary (US$ Billions)

Discounted Cash Flow $1,808 $3,253

SOTP $1,332 $3,931

Precedents $331 $1,157

Research Targets $1,976 $2,754

Historical Share Price $1,016 $1,889

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

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 Investment Recommendation

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 Course Objectives

Develop our investment Discuss the purpose and Understand what makes
recommendation benefits of a dashboard an effective dashboard

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 Selected Implied Value Range

The selected value range should ideally overlap with as many of the values implied by the different methods,
though consideration must be given to the benefits and shortcomings of each.

Implied Enterprise Value Summary (US$ Billions)

Discounted Cash Flow $1,808 $3,253

SOTP $1,332 $3,931

Precedents $331 $1,157

Research Targets $1,976 $2,754

Historical Share Price $1,016 $1,889

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

$2,800 $3,200

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 Valuation Considerations

Your selected value range may vary depending on

your research and assumptions utilized

Valuations involve considerable judgement; different

analysts may come to different conclusions

Ensure findings are presented clearly

and defendable

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 Investment Recommendation

From the selected range of implied Enterprise Value, we can determine our targeted equity value per share.

We recommend proceeding with the purchase of Amazon shares.

Amazon Implied Equity Value (US$ Billions) Investment Recommendation: BUY

Low Mid High Low High

Selected Implied Value Range $2,800 $3,000 $3,200 Equity Value per Share (US$/sh.) $5,289 $6,061

Less: Net Debt ($59) ($59) ($59) Current Share Price (US$/sh.) $3,075 $3,075

Equity Value $2,741 $2,941 $3,141 Potential Upside 72% 97%

Equity Value per Share (US$/sh.) $5,289 $5,675 $6,061

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 Benefits of a Dashboard
A dashboard is an easy to read, one page summary of the analysis and is used to quickly gain insights into the most
important aspects of a business valuation.
Intuitive Presentation
Designed to be intuitive to any
user. The power of data
visualization allows an easy
and smooth navigation
throughout the information
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Customizable
Customized in terms of users
and expectations to present
the most valuable and useful
set of information needed to
achieve specific goals
Comprehensive and
Time-Saving
Allow users to see, at a glance,
a summary of the desired
information in a single
document rather than across
multiple reports
 Elements of an Effective Dashboard

Effective data visualization is critical in laying the foundation of a dashboard

Present the analysis data in a quick, easy-to-follow format

Keep the most relevant information as concise and understandable as possible

Components of an Effective Dashboard

1. Overview of the business or investment opportunity

2. Current capitalization and key metrics
3. Historical and forecast financial summary
4. Implied value summary
5. Conclusion / recommendation

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 Course Summary

Corporate Finance Institute®

 Session Objectives

Build a financial forecast Understand Implied Value Develop an Investment

Analysis Recommendation

Corporate Finance Institute®