Most of us here should be familiar with Amazon.com – they are the largest e-commerce retailer by online revenue in the world (you can check out the report by Forbes published in May 2019 here.)

Had you invested in the company since its IPO back in 15 May 1997, at a price of just US$18 per share, you would be sitting on a 191% capital gain based on its closing price of US$3,450.96 as at market close yesterday (31 August.)

In my post today, I will be sharing with you all the researches I have done about the NASDAQ-listed company – including its businesses, historical financial performance, debt profile, and dividend payouts to shareholders (over a 5-year period between FY2015 and FY2019), a summary of its financial performances so far this year (i.e. 1H FY2020), and finally, whether or not its current share price (at the time of writing) is trading at a discount or at a premium (based on its current vs. its historical valuations.)

Let’s begin…

A Brief Introduction about Amazon.com Inc.’s Businesses

Amazon.com Inc.’s primary customer sets include:

(i) Consumers – where they can access the company’s hundreds of millions of unique products (which are either sold directly by the company or by third-parties) through their websites, mobile apps, Alexa Devices (a virtual assistant artificial intelligence technology developed by Amazon.com Inc.), and also through their physical stores (a list of all their physical store locations can be found here.)

That’s not all – the company also manufactures and sells electronic devices including Kindle, Fire tablet, Fire TV, Echo, Ring, and other devices, along with developing and producing media content.

Finally, they also have an ‘Amazon Prime’ membership program where members can enjoy unlimited free shipping on over 100 million items, along with access to unlimited streaming to tens of thousands of movies and TV episodes, including Amazon Original content, among others (you can find out more about the perks of being an ‘Amazon Prime’ member here.)

(ii) Sellers – where they can sell their products on Amazon’s stores, with orders being fulfilled on their behalf for a fixed fee, a percentage of sales, per-unit activity fees, interest, or some combination thereof.

(iii) Developers & Enterprises – where Amazon.com Inc. serves developers and enterprises of all sizes through their subsidiary Amazon Web Services (or AWS in short), which provides on-demand cloud computing and Application Programming Interfaces (or APIs), with fees computed based on usage (you can read more about AWS here.)

(iv) Content Creators – this is where independent authors and publishers can make use of Amazon.com Inc.’s Kindle Direct Publishing and Amazon Publishing platforms to make their books available on the Kindle Store, as well as on Amazon’s websites (and they will receive a royalty for every sale.) You can learn more about Kindle Direct Publishing here, and about Amazon Publishing here. There are also programs available for musicians, filmmakers, skill and app developers to publish and sell their content.

Historical Financial Performance of Amazon.com Inc. between FY2015 and FY2019

Now that you have a better understanding of Amazon.com Inc.’s primary businesses (from the previous section), let us take a look at the company’s key financial performances over a 5-year period (between FY2015 and FY2019); the company has a financial year-end on 31 December:

Total Revenue and Net Profit (US$’mil):

FY2015FY2016FY2017FY2018FY2019
Total
Revenue
(US$’mil)
$107,006m$135,987m$177,866m$232,887m$280,522m
Net
Profit
(US$’mil)
$596m$2,571m$3,033m$10,073m$11,588m

Amazon.com Inc.'s Total Revenue and Net Profit between FY2015 and FY2019

Over a 5-year period, both the company’s total revenue and net profit have went up every single year – with the former growing at a compound annual growth rate (or CAGR) of 21.3%, and the latter growing by a very impressive CAGR of 81.0%!

Gross and Net Profit Margin (%):

The following table is Amazon.com Inc.’s gross and net profit margin which I have calculated:

FY2015FY2016FY2017FY2018FY2019
Gross Profit
Margin (%)
33.0%35.1%37.1%40.2%41.0%
Net Profit
Margin (%)
0.6%1.7%1.7%4.3%4.1%

Amazon.com Inc.'s Gross and Net Profit Margin between FY2015 and FY2019

Amazon.com Inc. saw its gross profit margin grow every single year between FY2015 and FY2019. The same goes for its net profit margin as well – except that it suffered a mild 0.2 percentage point dip on a year-on-year (y-o-y) basis in FY2019.

Return on Equity (%):

To explain in layman terms (for the benefit of those who may be hearing about Return on Equity, or RoE, for the first time), it is a measure of profitability (in percentage terms) the company is able to generate for every dollar of shareholders’ money it uses in its businesses – for instance, if a company has a RoE of 15.0%, it means the company is able to generate a profit of $15 for every $100 of shareholders’ money it uses.

That said, let us take a look at Amazon.com Inc.’s RoE between FY2015 and FY2019 which I have computed:

FY2015FY2016FY2017FY2018FY2019
Return on
Equity (%)
4.5%12.3%10.9%23.1%18.7%

Amazon.com Inc.'s Return on Equity between FY2015 and FY2019

Out of the 5 years I have looked at, Amazon.com Inc.’s RoE saw y-o-y declines in 2 years (in FY2017 as well as in FY2019.)

Debt Profile of Amazon.com Inc. between FY2015 and FY2019

Another area I focus my attention on when deciding whether or not to invest in a company is its debt profile – I prefer to invest in companies with very little or no debt, as well as one that is in a net cash position.

In this section, let us find out if Amazon.com Inc. is in a net cash/debt position over the years, as well as whether it is able to fulfil its short-term debt commitments (through its ‘current ratio’, where anything about 1.0 means that the company is able to fulfil its short-term debt commitments):

FY2015FY2016FY2017FY2018FY2019
Cash & Cash
Equivalents
at the End
of Period
(US$’mil)
$15,890m$19,934m$21,856m$32,173m$36,410m
Total
Borrowings
(US$’mil)
$8,227m$7,694m$24,743m$23,495m$23,414m
Net Cash/
Debt
(US$’mil)
+$7,663m+$7,694m-$2,887m+$8,678m+12,996m
Current
Ratio
1.11.01.01.11.1

My Observations:

  • Amazon.com Inc. have seen its cash and cash equivalents increase every single year – from US$15,890m in FY2015 to US$36,410m in FY2019 – a CAGR of 18.0% over a 5-year period
  • Its total borrowings have declined in two successive years (in FY2018 and FY2019), which is good to note
  • Finally, the company is also in a net cash position in 4 out of 5 years (the only year where the company was in a net debt position was in FY2017, where its total borrowings was also at its highest), and its current ratio have been maintained at between 1.0 and 1.1 in the past 5 years I have looked at

Dividend Payouts by Amazon.com Inc. between FY2015 and FY2019

The company has not declared any dividend payouts to its shareholders over the years.

Amazon.com Inc.’s 1H FY2020 Financial Performance (vs. 1H FY2019)

The company released its financial results for the first half of the financial year 2020 on 31 July 2020 (the period under review was between 01 January and 30 June 2020), and in this section, let us take a look at some of the key statistics, and compare the figures against the previous year (i.e. 1H FY2019):

1H
FY2019
1H
FY2020
% Variation
Total Revenue
(US$’mil)
$123,104m$164,364m+33.5%
Net Profit
(US$’mil)
$6,186m$7,778m+25.7%
Gross Profit
Margin (%)
42.9%41.0%
Net Profit
Margin (%)
5.0%4.7%
Cash & Cash
Equivalents
at the End
of Period
(US$’mil)
$22,965m$37,842m+64.8%
Total
Borrowings
(US$’mil)
$23,329m$33,128m+42.0%
Net Cash/
Debt
(US$’mil)
-$364m+4,714m

Looking at the latest set of results in the table above, there are some positives, as well as some negatives to note, and they are:

Positives:

  • Its total revenue and net profit saw y-o-y growth by 33.5% and 25.7% respectively
  • Due to its cash & cash equivalents improving by 64.8% on a y-o-y basis (from US$22,965m in 1H FY2019 to US$37,842m in 1H FY2020), and at the same time, its total borrowings increasing by a smaller percentage, the company reversed from a net debt position in 1H FY2019 to a net cash position in 1H FY2020

Negatives:

  • Both its gross and net profit margins have declined on a y-o-y basis – by 1.9 percentage points and 0.3 percentage points respectively
  • Its total borrowings have gone up by 42.0% compared to the same time last year

At its Current Price, is Amazon.com Inc. Considered ‘Cheap’ or ‘Expensive’?

One of the simplest ways I use to determine if the share price of a company is considered ‘cheap’ or ‘expensive’ is to compare its current valuations (based on its current share price), against its average valuations over the years.

The following table is Amazon.com Inc.’s historical valuations over a 5-year period (between FY2015 and FY2019), along with its average. Do note that I have omitted dividend yield as the company did not pay out any dividends over the years:

FY2015FY2016FY2017FY2018FY2019Average
P/E
Ratio
540.7153.0190.274.680.3207.8
P/B
Ratio
23.818.520.416.914.818.9

At the time of writing, the share price of Amazon.com Inc. is trading at US$3,450.96, and as such, its current valuations are as follows:

P/E ratio: 131.2
P/B ratio: 23.4

Comparing the company’s current vs. its historical valuations, it seems that at its current price, it is considered to be neither ‘cheap’ nor ‘expensive’, because even though its current P/E ratio is lower than its 5-year average, its current P/B ratio is higher than its 5-year average.

In Conclusion

To sum up, what I like about Amazon.com Inc. is its ability to report improvements to its top- and bottom-line over the last five years. Its gross profit margin have also grown every single year over the same time period.

It is also good to note that the company is in a net cash position in 4 out of the 5 years I have looked at.

Finally, while the company’s net profit margin saw a slight decline on a y-o-y basis in FY2019, but personally, I am not too concerned (unless it has been going on a downward slide in successive years.)

With that, I have come to the end of my post on Amazon.com Inc. Do note that everything you have just read above is for educational purposes only, and they do not represent any buy or sell recommendation for the shares of the company. As always, please do your own due diligence before you make any investing decisions.

Disclaimer: At the time of writing, I am not a shareholder of Amazon.com Inc.

 

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