Trading and Investment Project

Topic- Fundamental and Technical analysis of "AMAZON"

By: Capryend R Marak

Student id:DC2023BCM0060

BCOM 2ND Semester

Abstract:

In this project; I will cover up many of Amazon's development. Their beginning,

Jeff Bezos purpose to transition Amazon into an online business. The successful

business and marketing strategy, how Amazon continues to evolve and innovate with

new products and services. I will look at Amazon's financial statement and the ratio
analysis, how well Amazon is performing year by year. This report will evaluate how

much progress and recession Amazon made from 2016 to 2019.

Introduction

Amazon has been synonymous with. e-commerce from the get-go. The company

originated from Seattle Washington started as a bookseller but throughout the time it

grew out to be the most popular web-based service in the world. Amazon was created

by Jeff Bezos, with the internet becoming more accessible in the 90s, Bezos believed
that there is a gigantic market to capitalize on, even though he didn’t have any prior

experience or knowledge about the internet. (Krishnamurthy, 2002) But upon learning,

Bezos had a vision that saw the world interacting, shopping, and doing transactions

virtually through E-Commerce. (Krishnamurthy, 2002) Bezos’s Amazon went online in

1995, the company marches to focus on the online market turned out to be a huge

success. A consistent incline in revenue, going from $150 million in 1997 to $3.1 Billion

in 2001. (Krishnamurthy, 2002) The high percentage of revenue and growth is due to the

company innovation with their services, and their ever wide expansion of subsidiaries

platforms. Amazon continues to adapt and evolve till this day. Henceforward in this

report, we will discuss in detail how did Amazon tackled the e-commerce initially and

what was their business strategy that led to their success. Then we will look at

Amazon's financial statement; their mergers and acquisitions, and the ratio analysis.

Ratio analysis is critical in determining company liquidity and profitability (Al Ahbabi and

Nobanee, 2020).

Literature Review

Amazon and E-commerce:

I have established that Amazon is one of the first organizations to start an online retail

business. But how does this online business function and operates? A study made by

Sameer Kumar, Jessica Eidem, and Diana Noriega look out how Amazon.com works in

terms of technicality. Amazon.com provides a variety of services to customers from

music to books to electronics. It acts as an online supermarket and has been accredited

as the most reliable services by customers worldwide. Part of Amazon's success is due
to its operating system. Amazon has a sorting system where they divide their

consumers into 3 categories. (Kumar, Eidem, & Noriega, 2012)

1) Customer: This group is attended by regular users who are there to shop online. This

system allows users to see the available prices, sales, and the expected delivery dates

for the products. This option also allows the users to subscribe to Amazon Prime. A

prime member will have more frequent discounts and will get the two-day shipping

option for free. (Kumar, Eidem, & Noriega, 2012).

2) Seller Customers: This option allows the user to sell their product through the

Amazon website. There is a distribution service for users who are about to sell their

products. This group gets revenue for its product in the form of a fixed fee. (Kumar,

Eidem, & Noriega, 2012).

3) Developer Customers: Developer customer is for the group who are actively

developing and creating products. Amazon provides a platform for these users through

their technology infrastructure and Amazon application software. (Amazon, 2008).

Amazon Innovations:

Bezos knows that people love Amazon service but realize that people won’t stay loyal to

Amazon if the service becomes stales. Bezos states that “Our customers are loyal to us

right up until the second somebody offers them a better service.” Bezos fully recognizes

this and believes it encourages the company to stay motivated and be creative in their

services to keep the consumers engage. Products and services like “Alexa” the voice

control artificial intelligence. Audible the online bookstore where you can listen to the

audio version rather than reading. Twitch the online gaming streaming service. These
are just a few of the many services that Amazon provides. (Robischon, 2017). Amazon

also innovates in different productions, as they also partake in manufacture. One of the

biggest Amazon manufactures is Amazon Prime Air. This massive production is a

drone delivery service, it is a work in progress; currently being tested in the United

States and the United Kingdom. However, once it's launched, the goal is to operate a

GPS to fly packages to the customers' location. No more than 30 minutes after the

order has been placed. For now, the product could only carry packages that weigh less

than 5 pounds. Only packages that fit in the cargo are applicable. Amazon Prime air

includes 86% of products that are being sold on the webpage. The delivery location

should be around 10 miles close to Amazon Order Fulfillment Center. (Pandit & Poojari,

2014)

Amazon Business and Marketing Strategy:

With the Amazon initiative of e-commerce, Amazon took on losses in the late

’90s. But Jeff Bezos always knew that would be the case in the short term. Amazon

played the long run, in the beginning, they invested heavily on building the brand equity

and branding the site. Stating that “This is an investment phase for Amazon.com. I've

been straightforward with everybody from the beginning that that's my strategy” Bezos

also doubled down on this strategy, suggesting if people don’t agree with this approach,

then they should not bother investing in Amazon stock. Because that is how Amazon

will always approach things, by willing to take risks in their business decision. (Parry,

2008)
 Amazon's strategy to become the top service didn’t rely only on innovation. A key

success to Amazon was its multiple affiliations with different brands. Amazon

throughout the years has been known for its Merger and Acquisition activities. IMDB,

Souq, Joyo, and Double Helix Games just to name a few. These acquisitions added

positively to the company's worth. As Merger and Acquisition adds a level of synergy

and diversification to the products, it breaks a wider audience. Such as the gaming

community, Amazon not only bought a gaming company Double Helix Games, but they

also acquired Twitch in 2014, the most popular gaming streaming service in the world.

(Hong, Bhattacharyya, & Geis, 2012).

Charles Edward and Andrew Lincoln from Texas A and. M university created a

research that focuses on Amazon's competitive advantage through the Michael Porter

Five Analysis. Below is the figure that identifies the forces. (Edward & Lincoln, 2008)

figure (E.Porter, 1980)

 This figure explains all factors Amazon considers a primary force to target and

focuses on. The buyers, suppliers, expected entrants, and substitutes that people

consider a threat for Amazon products and services.

Sustainable practice in the Company:

Some scholars believe that there is a positive correlation between sustainable

business practices with sustainable development and financial management. Financial

management plays a role in developing a great deal for the financial growth of a

company. (Ahbabi & Nobanee, 2019) . Another study from Abu Dhabi University

examined by (Al Nuaimi and Nobanee, 2019) reaffirms the idea of how corporate

disclosure of their sustainable business practices improves the financial growth of a

company. The research explains how an organization can have a sustainable approach

in their operations, and how sustainability can add value to the organization. (AlNuaimi

& Nobanee, 2019) Further study by Fatima Al Marar shows how sustainability helps

avoid any risks in the company. How risk management is vital in maintaining company

success. (AlMarar & Nobanee, 2020) In this case, Amazon is already abiding with

sustainability. Amazon is committed to their sustainable operations. As they are taking

precautions in reducing carbon emissions when it comes to their operations be it in its

transportation while delivering products or in its facilities. They are committed to

focusing on renewable energy. They are redesigning their packages in a unique way that

can prevent waste. Furthermore, Amazon Web Servers (AWS) are energy efficient. 3.6

times more energy-efficient than any other US center. (Amazon.Inc). These signs of

actions prove that Amazon is willing to invest in its sustainability to create a better
place for the company and the environment.

Amazon Financial Statement and Analysis

From this point on, the report will focus on Amazon's financial statement. How well the

company is performing year by year. The report will analyze Amazon's ups and downs

from 2016 to 2019.

Data Methodology

Table 1: Financial Data (Amazon)

Item/Year 2019 2018 2017 2016

Current Assets 96,334,000 75,101,000 60,197,000 45,781,000

Current 87,812,000 68,391,000 57,883,000 43,816,000

Liabilities
Inventories 20,497,000 17,174,000 16,047,000 11,461,000
Cash 55,021,000 41,250,000 30,986,000 25,981,000
Receivables 20,816,000 16,677,000 13,164,000 8,339,000
Total Assets 225,248,000 162,648,000 131,310,000 83,402,000
Total 163,188,000 119,099,000 103,601,000 64,117,000
Liabilities
Total Equity 62,060,000 43,549,000 27,709,000 19,285,000
Sales 280,522,000 232,887,000 177,866,000 135,987,000
Cost of Goods 205,768,000 173,183,000 137,183,000 105,884,000
Sold
EBIT 14,541,000 12,421,000 4,106,000 4,186,000
Interest 1,600,000 1,417,000 848,000 484,000
Net Income 11,588,000 10,073,000 3,033,000 2,371,000

I collected the data here from Yahoo Finance from 2016 till 2019. All items in Table 1

were available in the Income statement and the balance sheet. As you can see every
factor and item shows an increase from one year to another. The figure illustrates the

growth Amazon displayed from year to year. However, one can’t help but notice even

though the asset in every year is high, the net income is shockingly low. Amazon has a

low net income because they have a lot of debt and liability collected. They also spent a

lot of their money on acquiring companies and manufacturing big productions. This

made a lot of people debate whether or not Amazon is profitable.

Results and Discussion

The table below provides the ratios of current, quick, and cash. The current ratio reveals

if companies can pay their debts. Any current ratio value that is less than 1 indicates the

company might struggle to pay off its debts. Amazon from 2016 to 2019 has a current

ratio above 1. While the quick ratio shows company capabilities to pay for its current

liabilities without worrying about selling its inventory. The higher the ratio better for the

company. The cash ratio shows if the company can look out and deliver their short-term

requirement like paying for the salary. 0.5 to 1 is the preferred cash ratio. Amazon has

shown in the table is between those number in every year.

Table 2: Liquidity Ratios of (Amazon)

Ratio/Year 2019 2018 2017 2016

Current Ratio 1.10 1.10 1.04 1.04
Quick Ratio 0.86 0.85 0.76 0.78
Cash Ratio 0.63 0.60 0.54 0.59
Figure 1: Current Ratio of Amazon

Current Ratio
1.11
1.1 1.1
1.09

1.07

1.05
1.04 1.04
1.03

1.01
2019 2018 2017 2016

Figure 2: Quick Ratio of Amazon

Quick Ratio
0.88
0.86 0.86
0.85
0.84
0.82
0.8
0.78 0.78
0.76 0.76
0.74
0.72
0.7
2019 2018 2017 2016
Figure 3: Cash Ratio of Amazon

Cash Ratio
0.64
0.63
0.62

0.6 0.6
0.59
0.58

0.56

0.54 0.54

0.52

0.5

0.48
2019 2018 2017 2016

As discussed above, these graphs are associated with the ratios. All current ratios

above 1 indicate the company is in good condition to pay out its debts. The ideal quick

ratio should be 1:1, unfortunately, Amazon in every year is less than 1. Indicating

Amazon couldn’t be able to pay out its full liabilities in the short term. Whereas they are

in good condition in Cash ratio, placed between 0.5 and. 0.6.

Table 3: Activity Ratios of Amazon

Ratio/Year 2019 2018 2017 2016
Inventory Turnover 10.0 10.1 8.55 9.23
Receivable Turnover 13.5 14.0 13.5 16.3
Total Asset Turnover 1.25 1.43 1.35 1.63
Figure 4: Inventory Turnover of Amazon

Inventory Turnover
10.5

10 10.1
10

9.5
9.23
9

8.5 8.55

7.5
2019 2018 2017 2016

Figure 5: Receivable Turnover of Amazon

Recievable Turnover
18
16 16.3
14 14
13.5 13.5
12
10
8
6
4
Total Asset Turnover
2
1.8
0
2019 2018 1.6 2017 2016 1.63
1.4 1.43
1.35
1.2 1.25

1
Figure 6: Total Asset of 0.8
Amazon 0.6
0.4
0.2
0
2019 2018 2017 2016
Inventory turnover between 4 to 6 is considered the ideal ratio of turnover. Below 4

indicate a company might be overstocking. In Amazon cases, they have a high inventory

level, meaning that they have good management skills. (Wilkinson, 2013). Receivable

turnover shows how well the company is collecting their debts. A higher ratio means

companies are collecting their debt faster. Interestingly, Amazon has a ratio decrease;

from 16.3 in 2016 to 13.5 in 2019. Total asset turnover is the company's integration of

its assets to generate sales. The ratio for total asset turnover for Amazon in the 4 years.

Table 4: Debt Ratios of Amazon

Ratio/Year 2019 2018 2017 2016

Debt Ratio 0.72 0.73 0.79 0.77

Times Interest Earned 9.09 8.77 4.84 8.65

Ratio

Figure 7: Debt Ratio of Amazon

Debt Ratio
0.8
0.79
0.78
0.77
0.76
 Figure 8: Times Interest Earned Ratio of Amazon

Times Interest Earned Ratio

10
9 9.09
8.77 8.65
8
7
6
5 4.84
4
3
2
1
0
2019 2018 2017 2016

Table 5: Profitability Ratios of Amazon

Ratio/Year 2019 2018 2017 2016

Return on 0.19 0.23 0.11 0.12
Equity
Return on 0.05 0.06 0.02 0.03
Assets
Profit Margin 0.04 0.04 0.02 0.02
 Figure 9: Return

on Equity of
Return on Equity
0.25 Amazon
0.23
0.2
0.19

0.15

0.12
0.11
0.1

0.05

0
2019 2018 2017 2016

Figure 10: Return on Total Assets of Amazon

Return on Assets
0.07

0.06 0.06

0.05 0.05

0.04

0.03 0.03

0.02 0.02

0.01

0
2019 2018 2017 2016
 Figure 11: Profit

Margin of Amazon
Profit Margin
0.045
0.04 0.04 0.04
0.035
0.03
0.025
0.02 0.02 0.02
0.015
0.01
0.005
0
2019 2018 2017 2016

The return on equity is the company's ability to generate income from their equity. A

ratio from 0.15 to 0.20 is considered to be good. Amazon has managed to get that in

both 2018 and 2019. Return on Assets is related to how much success the company is

having based on assets. The year 2018 has the highest return on assets with 6%. The

profit margin is when sales revenue is greater than the cost of production. With

Amazon's growth, we can see 2018 and 2019 has a higher ratio than in 2016 and 2017.
 INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis (FA) is a holistic approach to study a business. When an investor

wishes to invest in a business for the long term (say 3 – 5 years) it becomes extremely

essential to understand the business from various perspectives. It is critical for an

investor to separate the daily short term noise in the stock prices and concentrate on

the underlying business performance. Over the long term, the stock prices of a

fundamentally strong company tend to appreciate, thereby creating wealth for its

investors.

We have many such examples in the Indian market. To name a few, one can think of

companies such as Infosys Limited, TCS Limited, Page Industries, Eicher Motors, Bosch

India, Nestle India, TTK Prestige etc. Each of these companies have delivered on an

average over 20% compounded annual growth return (CAGR) year on year for over 10

years. To give you a perspective, at a 20% CAGR the investor would double his money in

roughly about 3.5 years. Higher the CAGR faster is the wealth creation process. Some

companies such as Bosch India Limited have delivered close to 30% CAGR. Therefore,

you can imagine the magnitude, and the speed at which wealth is created if one would

invest in fundamentally strong companies.

Here are long term charts of Bosch India, Eicher Motors, and TCS Limited that can set

you thinking about long term wealth creation. Do remember these are just 3 examples

amongst the many that you may find in Indian markets.

At this point you may be of the opinion that I am biased as I am selectively

postingcharts that look impressive. You may wonder how the long term charts

ofcompanies such as Suzlon Energy, Reliance Power, and Sterling Biotech may

look?Well here are the long term charts of these companies:

These are just 2 examples of the wealth destructors amongst the many you may find in

the Indian Markets.The trick has always been to separate the investment grade

companies which create wealth from the companies that destroy wealth. All investment

grade companies have a few common attributes that sets them apart. Likewise all

wealth destructorshave a few common traits which is clearly visible to an astute

investor.Fundamental Analysis is the technique that gives you the conviction to invest

for a long term by helping you identify these attributes of wealth creating companies.

1.2 - Can be a fundamental analysis?

Of course you can be. It is a common misconception that only chartered accountants

and professionals from a commerce background can be good fundamental analysts.

This is not true at all. A fundamental analyst just adds 2 and 2 to ensure it sums up to 4.

To become a fundamental analyst you will need few basic skills:

1. Understanding the basic financial statements.

2. Understand businesses with respect to the industry in which it operates.

3. Basic arithmetic operations such as addition, subtraction, division, and multiplication

.The objective of this module on Fundamental Analysis is to ensure that you gain the

first two skill sets.

1.3- I'm happy with technical analysis ,so why bother about Fundamental Analysis ?

Technical Analysis (TA) helps you garner quick short term returns. It helps you time the

market for a better entry and exit. However TA is not an effective approach to create

wealth. Wealth is created only by making intelligent long term investments. However,

both TA & FA must coexist in your market strategy. To give you a perspective, let me

reproduce the chart of Eicher Motors:

1.4- The profit and loss statement

The Profit and Loss statement is also popularly referred to as the P&L statement,

Income Statement, Statement of Operations, and Statement of Earnings. The Profit

and Loss statement shows what has transpired during a time period. The P&L

statement reports information on:

1. The revenue of the company for the given period (yearly or quarterly)

2. The expenses incurred to generate the revenues

3. Tax and depreciation

4. The earnings per share number

From my experience, the financial statements are best understood by looking at the

actual statement and figuring out the information. Hence, here is the P&L statement

of Amara Raja Batteries Limited (ARBL). Let us understand each and every line item.
Amazon.com calculation of intrinsic value : FCF calculation
Since the intrinsic value calculations based on Discounted Cash Flow Intrinsic Value: DCF (FCF Based), or Discounted

Earnings Intrinsic Value: DCF (Earnings Based) cannot be applied to companies without consistent revenue and

earnings, GuruFocus developed a valuation model based on normalized Free Cash Flow and Book Value of the

company.

The details of how we calculate the intrinsic value of stocks are described in detail here.

This method smooths out the free cash flow over the past 6-7 years, multiplies the results by a growth multiple, and

adds a portion of Total Stockholders Equity.

Intrinsic Value: Projected FCF = ( Growth Multiple * Free Cash Flow (6 year avg) + 0.8 * Total Stockholders Equity

(most recent) ) / Shares Outstanding (Diluted Average)

In the case of negative Total Stockholders Equity, the following formula is used (see Explanation section below for

the reason):

Intrinsic Value: Projected FCF = ( Growth Multiple * Free Cash Flow (6 year avg) + Total Stockholders Equity (most

recent) / 0.8 ) / Shares Outstanding (Diluted Average)

Add all the Free Cash Flow together and divide 6 will get Amazon.com's Free Cash

Flow(6 year avg) = $11,125.92.

Amazon's.com intrinsic value: Projected FCF for today is calculated as

Intrinsic Value: Projected FCF=(Growth Multiple*Free Cash Flow (6 year avg)+Total

Stockholders Equity (Mar24)*0.8) /Shares Outstanding (Diluted Average)

=(14.862653310476*11125.92+216661*0.8)/10670.000

=31.74

* For Operating Data section :All numbers are indicated by the unit behind each term

and all currency related amount are in USD.

* For other sections: All numbers are in millions except for per share data, ratio, and

percentage. All currency related amount are indicated in the company's associated.
 Introduction to Technical Analysis
Probably one of the greatest versatile features of technical analysis is the fact you.can apply TA on any asset class

as long as the asset type has historical time series data. Time series data in technical analysis context is information

pertaining to the price variables namely – open high, low, close, volume etc.

Here is an analogy that may help. Think about learning how to drive a car. Once you learn how to drive a car, you can

literally drive any type of car. Likewise you only need to learn technical analysis once.Once you do so, you can apply

the concept of TA on any asset class – equities, commodities, foreign exchange,fixed income etc.

This is also probably one of the biggest advantages of TA when compared to the other fields of study. For example

when it comes to fundamental analysis of equity, one has to study the profit and loss, balance sheet, and cash flow

statements. However fundamental analysis for commodities is completely different.

TECHNICAL ANALYSIS :
CHART of AMAZON:
PERFORMANCE COMPARISON:
Net sales :
Stock range:
Conclusion:

To sum up, Amazon has been the top online retailer due to howt

hey operate their strategy efficiently. Ever since the move to

online, Amazon has seen consistent increases year by year.

However, the low net income and the increased liability is

alarming to many. But I believe that is due to Amazon's

commitment to investing in long-term projects and acquiring big

enterprises. More expenses come when there are more

obligations and responsibilities, but in the long term, Amazon can

make up for the expected losses. There is no denying the

progress Amazon has made, with the new project plans ahead

and new manufacture production they are creating, Amazon has

shown no sign of slowing down.