Amazon Pitch Book • Ace Your Investment Banking Interviews with Wall Street Oasis • Investment Banking Interview Prep Course • Get started – go to “Courses” menu at the top of WallStreetOasis.com • Access to all Webinars & Cases (250+ videos) • Access to 1,000+ investment banking interview questions and over 500+ detailed answers • Email [email protected] with any questions • For 1-on-1 Mentor Sessions with Presenter (IB Mock Interviews and/or Career Coach) • Click on “Career Coach” under the “Career Boost” menu at top of WallStreetOasis.com to learn more about our mentor program and get started • Email [email protected] with any questions 2 Amazon Pitch Book – Parte Uno Pitch Book Table of Contents 3 On the first lecture we will do this: On ensuing lectures we will see… • Amazon Company Overview: • Industry Overview • Company Overview • Competitive environment • Strategy • Key Industry trends • Financials • Corporate Finance Activity • Valuation • Historical share price performance • Valuation overview • Valuation analysis • Comparables overview • Precedents overview Pitch Book Table of Contents II 4 On ensuing lectures we will also see these… And finally these… • Transaction Opportunities • Team Overview • Strategic review and • Investment Banking Team Opportunity • Deal Tombstones • Recommendation 1 • Recommendation 2 • Appendices • Recommendation 3 In a Nutshell – The slide management will actually be able to understand 100% (the rest is uncertain, at best…) 5 Why? Why should they make this deal? What is the unique opportunity right now that they will miss if they don’t work with you? What? What is the deal about, what is the value created, etc. Next Steps? Well, they should hire you to help you close the deal, because you are uniquely equipped to do so… Company Overview – Firm 6 Highlights • How has the stock performed? 447% in • History: Amazon was 5 years. founded in 1995 in Seattle • What is the market pricing? U$ 1800 by Jeff Bezos… (what year • What are the drivers behind their the company was found? success? Low price retail running losses Who founded it? What being financed by equity investors are the key milestones in waiting for future market power that its history? can eventually yield high dividends. In • Valuation: The stock has addition, investors bask in equity outperformed the S&P capital gains related to other investors tenfold, and Nasdaq entering later on (late adoption). seven fold in the past 5 years. Total Revenue U$ 232 Billion. Company Overview – Valuation & 7 Share performance - Company Strategy 8 • Strategy: • What is the firm focus? Retail and… • What is company management strategy? “Conquer the planet”- the planet is not only customers, but developers and sellers as well. • What makes the strategy strong? “market power and support from investors believing in the strategy. • What are the key details of the company strategy? “The corporate level strategy of the company offers a combination of differentiation and cost leadership. Besides cost leadership, the other two general strategies include differentiation and focus. The firm focuses on a specific niche, then dominates it and moves to the next niche. Company Strategy II 9 • Amazon is using hybrid business strategy, depending on the market it is dealing. • All three strategies cannot be combined on a single platform - cost, leadership and differentiation together will make no sense since differentiation is an expensive strategy method. • Even thought it already existed before, from 2009 to 2012 ‘E- book’ technology became widespread. Here, focus strategy and cost leadership were combined together. ‘Kindle’ sold more than 200 million units (Rao, 2011) thanks to the innovative model and its compactness. Company Strategy III 10 • Real estate play – since urban real estate is more expensive than rural, Amazon bases its warehouses at a cost advantage. Here the change in customer habits “buy online vs. buy local” also created this huge value (cost savings) in real estate costs. • Part of this value comes in lower wages, as rural dwellers have lower real estate costs and can afford to work for less than urban dwellers. • The cloud service is one of the profit drivers (while retail still run losses), as well as the sellers platform. SWOT 11 • Strengths: • Customer trust – local and international • Cost leadership and differentiation . • In-time use of trending technology. • Weaknesses: • Through extreme diversification, the company has spread too thin in the market. This can make the company lose its long earned trust and respect in the market. • Free (or fixed price Amazon prime) shipping may decrease its margins. • Older/rural customers resistance to the idea of online shopping. SWOT II 12 • Opportunities: • Amazon payment system leverages sellers revenue by providing customers financial/purchase data to small sellers. • Own brand products may increase sales/margins. • Global expansion to EM • Threats: • Fraud, online theft – which may increase compliance/security costs, reducing margins even further. • Aggressive pricing strategies might collapse if equity investors stop trusting/subsidizing the firm. Company Overview – Industry Data 13 Industry Data Revenue Mix % Gross (U$ mm) • Relevant industry vertical A: • Segment A: • EV/EBITDA • Segment B: • EV/Revenue • Segment C: • P/E • Relevant industry vertical B: Key Metrics: (Unit) • EV/EBITDA Operating Data • EV/Revenue Operating Data • P/E Operating Data Company Overview – Valuation & 14 Share performance - Key Valuation Statistics ($mm) • Enterprise Value • Revenue (FY18) U$ 232 B • Market Cap U$ 924 B • Ebitda (FY18) U$ 27 B • P/E - 78 • EBITDA Margin 12 • Net income U$ 10 B • Total Debt U$ 24 B Diving deeper - Pro’s and con’s of 15 EBITDA margin • Downplays the effects of non-operating or • EBITDA excludes debt in its calculations. other unique depreciation, amortization Thus, highly leveraged firms will have and tax factors. misleading indicators. After all, they have higher interest payments which are not • It is easier to compare different industries as it is a percentage of revenue captured in EBITDA Low profitability firms shouldn't use • Shows how well a company is using • their operating cash compared to the EBITDA either, as large depreciation will revenue it generates. be hidden from EBITDA • Even Forbes claimed that the EBITDA • Compare their efficiency to others was a "Great Big Lie" in 2011 - stating that (usually bigger companies) in their EBITDA makes asset-heavy companies industry. look better, is selective about debt, • E,g. small firm with less revenue but ignores working capital requirements and better EBITDA margin beats larger lacks GAAP guidelines. firm/larger revenue with a lower EBITDA • For these reasons, EBITDA should margin. generally be used alongside GAAP metrics to determine a company's overall health and position. Cash flow analysis 16 • Cash Flow from Operations – • Cash flows from financing U$ 30 B - fueled by large activities (U$ 7 Bi) small debt depreciation, due to large to a largely equity based firm investments • Change in cash at the end of the period is merely U$ 10B, • Cash flow from investing – small but more lucrative than (U$ 12 Bi) fueled by large previous 3 years, where it CAPEX hovered between U$ 1 and U$ 3 B B.S. – Asset side 17 • Assets • PP&E – Is very high, at U$ 61 Bi. • Cash U$ 31 B – Company has more Amazon is probably one of the largest cash than debt. It could pay all its holders of land in America, at least in outstanding debt upfront, now, if it terms of value and square ft. wanted to • Goodwill – U$ 15 B, up from U$ 3 Bi • Inventory U$ 17 B – Heavy inventory in 2016. It must have taken a beating at low-cost due to leverage on a deal to book all this GW. It is the negotiating with suppliers, many Whole foods deal… sellers using it as a platform, and • which also generated a whopping warehouses far away. Moreover, it is U$4 B in intangible assets, up from less than 10% of revenue, which is U$1 B in 2016. good compared to its peers. • As a final thought, the Asset side is • AR U$ 16 B – credit to customers bloated, up from U$ 64 B in 2015 to addicted to its products may result in US$162 in 2018. Whereas revenue low default rates. grew from U$ 107 B to U$ 232B in the period. It is 150% growth vs. 115% B.S. – Liability / Equity side 18 • AP – growing strong from U$ • Retained earnings – Up from 20 B to U$ 38 B. It grows U$ 2 B to U$ 19 B in less than slower than revenue and 4 years. This could be the assets, which means that moment when Amazon Amazon is generous with its decides to start increasing its suppliers and pays upfront. margins, as last year alone it • LTD is U$ 23 B, up from U$ 7 earned more profits U10 B in 2016. It is exactly the price than in its entire history - U$ of Whole Foods purchase. 8 B up to 2017. Thus it looks like a debt • But these meager profits are funded deal not what drives equity prices for Amazon. Income Statement 19 • Revenue – the crown jewel that • Estimating EBITDA – Operating drives markets’ love story with income was U$ 12 Bi + Amazon – went up from U$ 107 to Depreciation at U$ 15 B = 27 B. See U$ 232 in 4 years the importance of having the right metrics? This EBITDA figure • COGS – Went from U$ 71 to U$ shows much more depreciation 139 B from 2015-2018, rising slower than actually income. Thus, it than revenue. The former grew at reflects past investments and tax 94%, whereas the latter grew at benefits rather than actual 118% rate. Increasing margins… profitability • EBITDA Margin went up from 7% to 12% in the past 4 years. This shows more of a a rise in depreciation of 172% to U$ 15 B, rather than U$ 10 Bi in 2018 profitability.