Amazon.com Valuation Exercise 15.402 Finance Theory II

Amazon.com

Valuation Exercise

15.402 Finance Theory II

Prof. Kevin Rock

5/10/01

revised 5/16/01

2

Contributors

Amy Rabatin Andre Caldas Oliveira Cristen Baca Lance DurhamAndreas Wold-Olsen Andres Trevino Jason Ottman Natalie Brain

Anne Bosser Anna Mitelman Dave Greenwood Chris PunBert-Jaap Djikstra Bill Behrman Eric Partlan Ed Tai

Tyler Rameson Bob Kelly Jason Escamilla Eric JanBransby Whitton Thomas Salopek

Jayne Tan Evan Lee Niall Corrigan Xiaoyu LiuJeff Winkler Grace Webber Rebecca Kirk Ralph Taylor-SmithJosh Burack Greg Chalker S. Andrew Hill Shannon O'Callaghan

Karen Loomis Jody Renna Sergio Delgado Jenny ZhongKen Yang Joe Skorski Tisha Young John Verberkmoes

Keyur Patel Juan Carlos Calderon Waymond Harris David KrauseLeslie Koenigs Ken TateLloyd Prophet Luis WongCaroline Chan Macarena DominguezMark deLaar Victor Pena

Michael Prazma Dany MakloufSean Hwang Bob PalazziSavina Eneva

Background: 1999 Analysis Market Analysis: 1999-Present

Financial Analysis Forward Looking

3

Agenda

Background: 1999 Analysis

Market Analysis: 1999-present

Financial Analysis

Forward Looking

4


BackgroundMarket Analysis

Financial Analysis

Forward LookingBackgroundMarket Analysis

Financial Analysis


Financial Analysis

Forward Looking

5


A brief overview of the “ Amazon.com Valuation Exercise” submitted by 15.434 on December 8, 1999 1999 Valuation Historical Analysis Holdings Profile Valuation of Internet Companies


Financial Analysis


Financial Analysis

Forward Looking

6

1999 Valuation

Key Assumptions Growing market share to 24% of a market growing at

8% per year Gross margins grow to 25% while marketing falls to

8% of Sales Capex and Depreciation offset (not true in 1999) Growth in free cash flows of 5% after 2010

Weighted Average Cost of Capital Comparables: Borders, Barnes & Noble and Wal-Mart Amazon.com Beta = 1.47 WACC = 17%


Financial Analysis


Financial Analysis

Forward Looking

7

1999 Valuation (cont’d)

Results of the Analysis Share Price = $18.20 per share (= 1.47) Range: $27.50 per share (= 1) to $6.80 per

share (= 3)

Key Insights Increased gross margins and shrinking marketing

& selling expenses are key drivers of long-term value

Free Cash Flows projected to be positive starting in 2003


Financial Analysis


Financial Analysis


Financial Analysis

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8

Historical Analysis

Expansion of Price/Revenue Multiple

100

2,100

4,100

2Q1997

3Q1997

4Q1997

1Q1998

2Q1998

3Q1998

4Q1998

1Q1999

2Q1999

3Q1999

revenue

price indexed


Financial Analysis


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9

Historical Analysis (cont’d)

IPO date: May 15, 1997 Price per share: $1.50 (adjusted for stock splits)

Invested in other Internet retailers drugstore.com, gear.com, pets.com, etc.

Analyst forecasts are rosy $17B sales of on-line merchants in 1999 Web sales to consumers $108B in 2003 Sales growth is 59% CAGR


Financial Analysis


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Financial Analysis


Financial Analysis

Forward Looking

10

Holdings Profile

Insiders held 60% of the stockThe remaining 74 million shares (float) traded Janus funds = 22% of the float Short interest = 22% of float 56% of the float was actively traded

Average daily volume 12.9 million sharesExcluding Janus, and short shares, Amazon’s shareholder base turned over every 6 days!A stock with huge interest and very small float led to large volatility and BIG price swings!

Janus Capital

9%

Everyone else31%

Jeff Bezos34%

Other insiders

26%


Financial Analysis


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11

Valuation of Internet Companies

Usually estimated using comparables P/E * estimated earnings P/S Breakup Value

Most stocks are overvalued “Nifty Fifty” study Value = current operating value + value of all future

growth opportunities

1999 Study of 20 internet companies concluded valuation implies a growth rate of 80%!Indeed, high P/S ratios led to overvaluation


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12

Market Analysis


Financial Analysis


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13

Lehman: “..investors should stay away

from the company's bonds because the extreme credit risk facing the company

has not been properly taken into

account.”

Merrill: “We believe that [AMZN] will go

down less and recover faster if a (first quarter)

pullback occurs”

GS: “We continue to believe that our four holiday favorites: ... Amazon.com

Inc. (AMZN), ... will continue to be well-positioned to maintain or increase

their leadership positions."

JP Morgan: Initiates coverage of Amazon.com with a "BUY" rating and a 12-month price target of

$160

Wall Street Sentiment


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Forward Looking

14

Amazon:Our sister kissing Buy Rating reflects our extreme caution in a difficult economic environment, while still recognizing the company’s enormous long term potential

SG Cowen, 5/2001Barnes and Nobel.com:We are encouraged by B&N progress…we continue to believe BNBN has a viable business long term given the strength of its brand

Goldman Sachs, 4/2001

Buy.com:We are discontinuing coverage of Buy.com. Our most recent rating was neutral and most recent suitability rating was speculative

US Bancorp Piper Jaffray, 3/2001

Wall Street Sentiment (cont’d)


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15

Comparables: Stock Performance

Source: http://finance.yahoo.com/

Legend: AMZN: Amazon; BNBN: Barnes And Noble; BUYX: Buy.com; EFTD: FTD.com


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16

17.56

Source: http://finance.yahoo.com/

Comparables: Stock Profile


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Institutional Holdings

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

LEGG M

ASON INC

LINCOLN

CAPIT

AL M

ANAGEMENT C

O

JANUS C

APITAL

CORP

MORGAN S

TANLEY D

EAN WIT

TER & C

O

CITIG

ROUP INC

BARCLAYS G

LOBAL

INVESTORS N

A /CA/

FMR C

ORP

AMERIN

DO INVESTM

ENT ADVIS

ORS INC

TCW G

ROUP INC

BRINSON P

ARTNERS INC/IL

STATE STREET C

ORP

OLD M

UTUAL ASSET M

ANAGERS UK L

TD

VANGUARD GROUP IN

C

TIAA C

REF INVESTM

ENT MANAGEM

ENT LLC

CALIFORNIA

PUBLI

C EM

PLOYEES R

ETIREM

E..

DRESDNER RCM

GLO

BAL IN

VESTORS LLC

/CA...

JOHO C

APITAL

LLC

STATE TREASURER S

TATE OF M

ICHIG

AN

HELLM

AN JORDAN M

ANAGEMENT C

O INC /M

A/

MUNDER C

APITAL

MANAGEM

ENT /ADV

This Qtr

Last Qtr

2 Qtrs Ago

3 Qtrs Ago

Institutional Holdings


Financial Analysis


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Forward Looking

Large institutional shareholders have continued to accumulate shares, others

are mostly flat to rising.

18

Top Insiders and Institutions (as of March 31, 2001)

Top Insiders Shr. Held % Held. Relation. BEZOS JEFFERY P 116,190.70 32.41 B KLEINER PERKINS C&BYERS VII LP

27,211.00 7.59 B

KAPHAN SHELDON J 13,008.00 3.63 VP COVEY JOY D 1,583.10 0.44 VP ALBERG THOMAS A 1,171.60 0.33 D RISHER JOHN DAVID 408 0.11 VP MOROUSE MARY E 360 0.1 VP SHRIRAM KAVITARK R 146.6 0.04 VP SPIEGEL JOEL R 100 0.03 VP APOSPOROS GEORGE 90 0.03 VP

Total 160,269.00 44.71

Top Institutions Shr. Held % Held. LEGG MASON INC 33,291 9.29 LINCOLN CAPITAL MANAGEMENT CO

30,517 8.51

JANUS CAPITAL CORPORATION

19,739 5.51

MSDW & COMPANY 6,510 1.82 CITIGROUP INC 5,085 1.42 BARCLAYS BANK PLC 4,031 1.12 FIDELITY MGMT & RESEARCH CO

3,379 0.94

AMERINDO INVESTMENT ADVR

3,077 0.86

TCW GROUP, INC. 2,903 0.81 BRINSON PARTNERS, INC. 2,060 0.58

Total 110,592 30.86359.2 million shares outstanding

60% owned by insiders

40% owned by institutions

*All share data in thousands

Institutional Holdings (cont’d)


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Insider Trades vs. Time

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000Ja

n-99

Feb

-99

Mar

-99

Apr

-99

May

-99

Jun-

99

Jul-9

9

Aug

-99

Sep

-99

Oct

-99

Nov

-99

Dec

-99

Jan-

00

Feb

-00

Mar

-00

Apr

-00

May

-00

Jun-

00

Jul-0

0

Aug

-00

Sep

-00

Oct

-00

Nov

-00

Dec

-00

Jan-

01

Feb

-01

Mar

-01

Time

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

# of Shares Sold

Average Sale Price of SoldShares

Insider Trading


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Director John Doerr Sells most of stock

Bezos + Friends

Bezos

Bezos

TransCosmos

20

What the FY 2000 Numbers Show...

Revenue growth slowing From 298% (’98), 122% (’99), 30%(2000) Expanding revenue base limits growth rate Business conditions

- Market maturity

- General slowdown in consumer spending

$1.6B net loss $500M equity losses (permanent and temporary) $860M operating loss (before interest and other)

Amazon Financials


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21

Amazon.com

Financial PerformanceRev Growth: 22%GM Growth: 26%OM Growth: -15%NI Growth: 24%

RatiosP/E: NAP/S: 2.23P/B: NA

FTD.com

Financial PerformanceRev Growth: 38%GM Growth:30%OM Growth: 7%NI Growth: NA

RatiosP/E: NAP/S: 2.41

P/B: 23.23

B&N.com

Financial PerformanceRev Growth: 38% GM Growth: 21%

OM Growth: -164%NI Growth: -4%

RatiosP/E: NAP/S: 0.96P/B: 3.31

Buy.com

Financial PerformanceRev Growth:NA GM Growth:7%

OM Growth: -17%NI Growth: NA

RatiosP/E: NAP/S: 0.09P/B: 0.78

Source: Bloomberg, Financial performance figures are expressed in percentage terms to compare the relative over last calendar year

Comparables: Financials


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Sales: $1.00 COGS (0.76)

Gross profit 0.24 Marketing (0.22) Technology & content (0.10) SGA (0.04) Amortization (0.12) Impairment (0.18) Net interest expense (0.04) Unrealized gain/loss (0.05)

Loss per $1 revenue: ($0.51)(Based on FY 2000 Operating Results)

Flawed Business Model?


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1999 Valuation Revisited

Good valuation but several incorrect assumptions Massive capital expenditures (supply chain,

warehousing, etc.) vs. forecast of equal CAPEX and depreciation

Operating expenses nearly 200% higher than forecast Lower gross margins than forecast Led to lower FCFs than forecast suggested

However, valuation said $18.20/share and the most recent closing price was $17.56/share.

So, if you bought the 1999 valuation…


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Profits

-40

-20

0

20

40

60

80

8-Dec-99 17-Mar-00 25-Jun-00 3-Oct-00 11-Jan-01 21-Apr-01

$/s

ha

re Short Sell

Put Option

Short the Stock or Buy a Put (Put Strike at $80, $10 Option Price)

1999 Valuation Revisited (cont’d)


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Other Strategies

2:1 Reverse Hedge (Buy 2 Calls, Short 1 Share)

1:2 Hedge (Long 1 Share, Buy 2 Puts)

Bottom Straddle (Buy 1 Put, Buy 1 Call)

Protect yourself against the upside Why? The valuation showed massive overvaluation.

Save the option costs and just short the stock!!!

1999 Valuation Revisited (cont’d)


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Financial Analysis


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Turnover Control

Accounts receivable turnover has been constant at approximately 1-3 days

Accounts payable turnover has averaged 60 days Over 50% of COGS financed w/ accts payable 1Q ‘01 - suppliers receive (request?) faster

payments (45 days)

Inventory turnover has decreased due to Amazon’s move from “just in time” to “leveled” inventory Reduced delays in filling customer orders More products carried in stock


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Operating Cycle

Leveled inventory and decreased days payable have adversely impacted the operating cycle

Operating Cycle in Days

-70

-60

-50

-40

-30

-20

-10

0

Mar

-99

May

-99

Jul-

99

Sep-

99

Nov

-99

Jan-

00

Mar

-00

May

-00

Jul-

00

Sep-

00

Nov

-00

Jan-

01

Mar

-01

Day

s


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Profitability

Return on assets has been consistently negative

Amazon has lost approximately 12 cents for each dollar tied up in the business

Return on Assets

-25%

-20%

-15%

-10%

-5%

0%

Jun-

97

Sep

-97

Dec

-97

Mar

-98

Jun-

98

Sep

-98

Dec

-98

Mar

-99

Jun-

99

Sep

-99

Dec

-99

Mar

-00

Jun-

00

Sep

-00

Dec

-00

Mar

-01


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Short-term Liquidity

Current and acid test ratios have declinedsignificantly, indicating potentialdifficulties in meeting current obligations

Short-Term Liquidity Deteriation

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1999 Q1 1999 Q2 1999 Q3 1999 Q4 2000 Q1 2000 Q2 2000 Q3 2000 Q4 2001 Q1

Rat

io

Current Ratio

Acid Test Ratio


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Long-term Solvency

Debt to assets ratio of greater than one is a concern for long-term solvency

Suggests that future capital needs will be funded through equity – are the markets open?

Long-Term Solvency Risk

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1999Q1

1999Q2

1999Q3

1999Q4

2000Q1

2000Q2

2000Q3

2000Q4

2001Q1

Rat

io

Debt to Assets


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Assumptions: U.S. Books, Music, Video

Revenue: Industry CAGR growth = 32% (from Jupiter) AMZN market share declines from 47% in 2000 to 28% in

2005

Gross Margin % constant at 2000 level of 24.6%Operating expenses grow at two-thirds sales growth rate (historically consistent with AMZN operating expense growth)


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DCF Assumptions: U.S. Early Stage

Consumer Electronics and Home Products combined CAGR = 59% (Jupiter study ) Assume AMZN growth matches industry CAGR Gross margins: 21% (from CE retailer Best Buy)

Toysrus.com partner revenue growth = 27% (Jupiter projections for online Toys category) Assume AMZN growth matches industry CAGR

Other ACN (partner revenue) = 88% of toysrus.com revenue

Operating expenses grow at two-thirds sales growth rate


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Assumptions: International

Revenue growth by segment United Kingdom – Books/Music/Video Industry CAGR

59% FY2001 declining to 20% FY2004-FY2006 (from Jupiter)

Germany – B/M/V Industry CAGR 54% FY2001 declining to 18% FY2004-FY2006 (from Jupiter)

France - B/M/V Industry CAGR 87% FY2001 declining to 31% FY2004-FY2006 (from Jupiter)

Japan - FY2000 AMZN sales grown by projected increase in Japan online spending

AMZN market share remains at 35% of total international market


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Assumptions: International (cont’d)

Gross Margin constant at 21% (conservative and lower than U.S. B/M/V)

International operating expense growth modeled after U.S. expense growth (e.g. 2003 Int’l op. exp. % = 1999 U.S. op. exp. %)


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Other Assumptions

Net WC grows at 61% of sales growth rate based on historical Net WC growth.

Tax rate = 0% through 2007 due to NOLs; 40% after 2007

Capital expenditures in 2001 fall to 35% of 2000 CapEx level (due to current warehouse overcapacity); after 2001 growth in single digits. CapEx is calculated assuming: Net PP&E decreases by 10% per year Depreciation constant at 2000 level

Terminal value: cash flows grow at 10% after 2010


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DCF Model Assumptions


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Actual2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US Books, Music, Video 1,698 1,908 2,448 2,976 3,510 3,976 4,572 5,258 6,047 6,954 7,997Early-Stage Businesses 682 975 1,249 1,840 2,149 2,448 2,815 3,237 3,723 4,281 4,924International 381 601 767 959 1,170 1,404 1,614 1,856 2,135 2,455 2,823Total Revenue $2,761 $3,485 $4,464 $5,775 $6,829 $7,828 $9,002 $10,352 $11,905 $13,690 $15,744

Actual2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sales Growth 68% 26% 28% 29% 18% 15% 15% 15% 15% 15% 15%

Gross Margin 24% 25% 25% 24% 24% 24% 24% 24% 24% 24% 24%Operating Expense (as % of Sales) 35% 26% 23% 19% 18% 18% 18% 18% 18% 18% 18%

Tax Rate 0% 0% 0% 0% 0% 0% 0% 0% 40% 40% 40%

CapEx, Net PPE, Depreciation:Actual2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Capital Expenditures $135 $47 $51 $54 $57 $60 $62 $65 $66 $68 $70Net PPE $366 $329 $296 $267 $240 $216 $195 $175 $158 $142 $128Depreciation $84 $84 $84 $84 $84 $84 $84 $84 $84 $84 $84

Change in NWC

Actual2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

NWC $386 $448 $524 $618 $687 $749 $817 $892 $973 $1,062 $1,160- DeltaNWC ($113) ($62) ($77) ($94) ($69) ($61) ($68) ($75) ($82) ($89) ($97)

38

Projected Cash Flows


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Actual2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Net Sales $2,762 $3,485 $4,464 $5,775 $6,829 $7,828 9,002 10,352 11,905 13,690 15,744 COGS 2,106 2,615 3,358 4,361 5,157 5,917 6,804 7,825 8,998 10,348 11,900 Gross Profit 656 870 1,105 1,413 1,672 1,911 2,198 2,527 2,906 3,342 3,844

Operating Expenses 972 911 1,036 1,113 1,254 1,403 1,614 1,856 2,134 2,454 2,822

EBIT (316) (41) 69 300 418 508 584 672 772 888 1,022 Income Tax Expense 0 0 0 0 0 0 0 0 309 355 409 EBIAT (316) (41) 69 300 418 508 584 672 463 533 613

Depreciation Expense 84 84 84 84 84 84 84 84 84 84Capital Expenditures (47) (51) (54) (57) (60) (62) (65) (66) (68) (70)- DeltaNWC (62) (77) (94) (69) (61) (68) (75) (82) (89) (97)

FCF ($66) $26 $236 $375 $471 $537 $616 $399 $460 $530

39

WACC - Determination of Beta

Average unlevered Beta = 0.92Average levered Beta = 1.14

Company MV of DebtMV of Equity

Total Cap % Debt u

Amazon.com 1,286 5,273 6,559 19.6% 2.55 2.05B&N.com 136 355 491 27.7% 0.64 0.46FTD.com 10 280 290 3.6% 0.68 0.66Stamps.com 29 152 181 16.3% 2.38 1.991-800 Contacts 12 245 258 4.7% 0.79 0.751-800 Flowers 66 514 579 11.3% 0.63 0.56Global Sports 44 133 177 24.8% 1.28 0.96Borders 1,201 1,543 2,744 43.8% 0.72 0.40Wal-Mart 45,647 237,024 282,671 16.1% 1.25 1.05Best-Buy 1,899 11,749 13,648 13.9% 1.51 1.30Cost-Co 4,285 16,142 20,427 21.0% 1.30 1.03


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FMV % AssumptionDebt $1,286 19.6% MV debt = 60% BV debt (downgrade)Equity $5,273 80.4% Close price of $14.68 as of 5/11/2001

$6,559For comparables, MV debt = book value of debt

40

Amazon’s WACC

Market Risk-free Cost of Cost of Debt / Beta risk rate equity debt capital WACC1.14 8.8% 4.3% 14.3% 9.5% 19.6% 13.4%1.47 8.8% 4.3% 17.2% 9.5% 19.6% 15.7%2.00 8.8% 4.3% 21.9% 9.5% 19.6% 19.5%

2.55 8.8% 4.3% 26.7% 9.5% 19.6% 23.4%3.00 8.8% 4.3% 30.7% 9.5% 19.6% 26.6%

Cost of debt before tax = 15.9%Tax rate = 40%

Beta = 2.55 = Amazon’s current betaBeta = 1.14 = Average beta of the comparables, levered for AmazonBeta = 1.47 = beta in December 1999


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Valuation using DCF


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Closing price of Amazon.com as of 5/11/2001 = $14.68

PV of PV of Total Debt Equity # of Per shareBeta WACC FCF TV (1) Value Value Value S/O Value1.14 13.4% $1,555 $4,890 $6,445 $1,286 $5,159 359.2 $14.361.47 15.7% $1,366 $2,363 $3,729 $1,286 $2,442 359.2 $6.802.00 19.5% $1,119 $1,038 $2,157 $1,286 $870 359.2 $2.422.55 23.4% $919 $534 $1,453 $1,286 $166 359.2 $0.463.00 26.6% $787 $334 $1,121 $1,286 ($165) 359.2 ($0.46)

(1) Perpetuity Growth 10%

42

DCF Sensitivity analysis


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Per share valueBeta WACC g = 5% 6% 7% 8% 9% 10%1.14 13.4% $6.00 $6.77 $7.78 $9.16 $11.17 $14.361.47 15.7% $3.57 $3.95 $4.42 $5.01 $5.77 $6.802.00 19.5% $1.34 $1.49 $1.67 $1.88 $2.12 $2.422.55 23.4% $0.01 $0.08 $0.16 $0.25 $0.35 $0.463.00 26.6% ($0.71) ($0.67) ($0.62) ($0.57) ($0.52) ($0.46)

Sensitivity to the growth rate of FCF after 2010:

Sensitivity to the operating expenses:Operating expenses

Beta WACC 18% 16%1.14 13.4% $14.36 $20.411.47 15.7% $6.80 $10.262.00 19.5% $2.42 $4.402.55 23.4% $0.46 $1.783.00 26.6% ($0.46) $0.55

43

Valuation using Price/Sales

Company Revenues Earnings P/Sales P/E Price 52-week %declineHigh Low from high

Amazon.com 2,762 -1,411 2.2 -4.3 16.89 62.38 8.10 -72.9%B&N.com 320 -65 1.1 -5.4 2.18 11.06 0.97 -80.3%FTD.com 98 -35 2.8 -8.1 5.75 6.14 1.06 -6.4%Stamps.com 15 -213 9.9 -0.7 3.02 16.38 2.22 -81.6%1-800 Contacts 145 10 1.7 23.4 21.18 63.75 13.25 -66.8%1-800 Flowers 385 -67 1.3 -7.7 8 8.60 2.55 -7.0%Global Sports 43 -58 3.1 -2.3 4.6 11.13 2.38 -58.7%Borders 3,271 44 0.5 35.4 19.3 19.98 10.88 -3.4%Wal-Mart 191,329 6,295 1.2 37.7 53.02 62.94 41.44 -15.8%Best-Buy 15,327 395 0.8 29.7 56.55 81.19 21.00 -30.3%Cost-Co 32,164 631 0.5 25.6 35.87 52.50 25.94 -31.7%

Average Price/sales excluding min and max= 1.7 Value per share is = $13.29The difference with DCF proves that the market is still very optimistic about Amazon


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Forward Looking


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45

Future: Makings of a Winner

The Space E-tailing Brokerages On-line Auctions

The Losers Insufficient demand Higher costs Negative profits

The Winners First mover advantage Superior customer service Strong name brand


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46

E-tailing: Profit Reigns Supreme

The Story: “Virtual” stores face reality that retailing involves real goods

and real costs Many face the reality of negative profits

The Casualties: Kozmo (.com) Inc. – liquidation was delivered to its’ door

NY State of Mind: model only works in dense urban areas New orders = more hires to deliver more goods = higher costs

Pets.com – only the singing puppet remains Not a natural e-tailing market: Is it convenient to wait days to get dog food

that sells down the street? $82.5 million said “yes” in the 1998 IPO Negative gross margin in every quarter of operation said “no”

Webvan – needs to order some cash flow from the bread aisle Cash flows indicate a fast transition from start-up to liquidation From Dec99 to Dec00 (millions): CFO: (59) to (263), CFI: (641) to 247.5, CFF: 746 to (4.3)


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47

E-tailing: Winning mix

Natural e-tailing market and product Commodities (Flowers, DVD’s, not luxury goods) that customers can

wait a few days to receive. Remember shipping charges (No Dog Food)!

Operational efficiency: ROA isn’t virtual Leverage assets across business lines and channels

Exceptional user interface and customer service Just because its online doesn’t make it convenient Generate repeat customers through a great experience, not fancy web

sites.

A brand that pays off: If you’re losing money on every sale, you can’t make it up in volume Forget the Super bowl ads

Current examples:Lands’ End, Staples, FTD


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Online Brokerages

The Story: Trading at the speed of the net Increased competition from traditional brokerage houses Revenue growth through increased trading volume from existing

customers and new customers is difficult to achieve in current market

Major players: E-Trade

Current competitive advantage: leading brand name, proprietary technology

Growth opportunity: expanded products and service offerings—on-line and off-line brokerage and banking services, access to IPO

Datek Online and Ameritrade Current competitive advantage: low cost trading, relatively well-known

name, advanced technology Challenges: Hard to grow business in low volume market condition,

maybe targets for acquisition


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Online Auction

The story: Competitive advantage: Internet is the largest auction site More and more people and business are going on line Auction house collecting fees, but do not carry inventory or ship

products Auction sites attract even more business in a slow economy

The winning player: E-Bay

First-mover advantage: world’s largest and most popular person-to-person online trading community—has customer loyalty

Low cost and scalable business model Established infrastructure


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ISPs

Definition: company that provides access to the internet. In addition to serving individuals, they also serve companies, providing a direct connection from the company’s networks to the internet.

Winners: AOL, Earthlink

Losers: Free internet access providers, small players

Large subscriber base permits economies of scale that allow ISPs to increase e-commerce revenues and improve margins

High marketing & customer acquisition costs

High churn rates increase volatility in revenues

Broadband driving growth rates

Alliances with cable companies and computer manufacturers drive growth


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Portal: One-stop Shop

What is a portal: Offers broad array of resources and services

Successful portals: Useful services - partnerships, free e-mails, search engine Large consumer base Ability to generate advertising revenue Example: Yahoo - first pure content web site to generate profit

Failed portals: Not enough useful service Not enough customer base Example: Go.com, Sloanspace


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Other Net Models

Drkoop.com’s downfall

Failed alliances with partners (AOL, Go.com, etc.) Unable to build brand Acquisitions did not provide positive net return


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Other Net Models: Monster.com

Has become the pre-eminent site in its sector 26.1 million unique visits last March

Capturing network effects Makes the sector attractive to online companies

Global presence and aggressive marketing Superbowl segments

Not overly dependent on advertising for revenue 60% from employers paying for job postings, 24% for access to resume

database, 16% from advertising

Has managed to become profitable 1st quarter revenues up 111% from last year Operating profit of $32.5 million. This has lead the owner (TMPW) to

exceed EPS predictions by 4 cents/share (EPS 18 cents)

May be immune as job seeker population increases


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Contributors

Amy Rabatin Andre Caldas Oliveira Cristen Baca Lance DurhamAndreas Wold-Olsen Andres Trevino Jason Ottman Natalie Brain

Anne Bosser Anna Mitelman Dave Greenwood Chris PunBert-Jaap Djikstra Bill Behrman Eric Partlan Ed Tai

Tyler Rameson Bob Kelly Jason Escamilla Eric JanBransby Whitton Thomas Salopek

Jayne Tan Evan Lee Niall Corrigan Xiaoyu LiuJeff Winkler Grace Webber Rebecca Kirk Ralph Taylor-SmithJosh Burack Greg Chalker S. Andrew Hill Shannon O'Callaghan

Karen Loomis Jody Renna Sergio Delgado Jenny ZhongKen Yang Joe Skorski Tisha Young John Verberkmoes

Keyur Patel Juan Carlos Calderon Waymond Harris David KrauseLeslie Koenigs Ken TateLloyd Prophet Luis WongCaroline Chan Macarena DominguezMark deLaar Victor Pena

Michael Prazma Dany MakloufSean Hwang Bob PalazziSavina Eneva

Background: 1999 Analysis Market Analysis: 1999-Present

Financial Analysis Forward Looking

Amazon.com Valuation Exercise 15.402 Finance Theory II

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Transcript of Amazon.com Valuation Exercise 15.402 Finance Theory II