Narrative and Numbers by Damodaran Aswath;

Author:Damodaran, Aswath;
Language: eng
Format: epub
Tags: BUS027000, Business & Economics/Finance, BUS001010, Business & Economics/Accounting/Financial
Publisher: Columbia University Press
Published: 2017-01-09T16:00:00+00:00

Table 9.7

Amazon, Field of Dreams

The story

Amazon will go for revenue growth in the near term, selling its products and services at close to cost in the media, retail, and cloud computing businesses, and will use its market power to earn higher margins in the future, albeit with new competitors acting as a check.

The assumptions

Base year Years 1–5 Years 6–10 After year 10 Story link

Revenues (a) $85,246 CAGR* = 15.00% 15.00% → 2.20% 2.20% Focused on revenue growth

Operating margin (b) 0.47% 0.47% → 7.38% 7.38% Retail + media business average margin

Tax rate 31.80% 31.80% 31.80% Stays unchanged

Reinvestment (c) Sales-to-capital ratio of 3.68 Reinvestment rate = 22.00% Reinvests more efficiently than competitors

Cost of capital (d) 8.39% 8.39% → 8.00% 8.00% Media + retail + cloud

The cash flows (in $ millions)

Revenues Operating margin EBIT (1—t)† Reinvestment FCFF††

1 $98,033 1.16%  $776 $3,474 $(2,698)

2 $112,738 1.85% $1,424 $3,995 $(2,572)

3 $129,649 2.54% $2,248 $4,594 $(2,346)

4 $149,096 3.23% $3,288 $5,284 $(1,996)

5 $171,460 3.92% $4,589 $6,076 $(1,487)

6 $192,790 4.62% $6,069 $5,795 $274

7 $211,837 5.31% $7,667 $5,175 $2,492

8 $227,344 6.00% $9,300 $4,213 $5,087

9 $238,166 6.69% $10,865 $2,940 $7,925

10 $243,405 7.38% $12,251 $1,424 $10,827

Terminal year $248,790 7.38% $12,520 $2,755 $9,766

The value

Terminal value $168,379

PV (terminal value) $76,029

PV (CF over the next 10 years) $4,064

Value of operating assets = $80,093

−Debt $9,202

+ Cash $10,252

Value of equity $81,143

Number of shares 463.01

Value per share $175.25 Amazon was trading at $287.06 at the time of the valuation

* CAGR = Compound annual growth rate

† EBIT (1 − t) = (Revenues* Operating Margin) (1 − tax rate)

†† FCFF = Free cash flow to firm

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