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Pitch Book

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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 • Activity

• • 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 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 performed? 447% in • History: Amazon was 5 years. founded in 1995 in Seattle • What is the market pricing? U$ 1800 by … (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 ) 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/ 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 ($mm) • • Revenue (FY18) U$ 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 • – 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. Income Statement 20

• Operating expenses: • So, Amazon is decreasing cogs and • R&D grew from U$ 12 to U$29, increasing SGA, which means it is 130%. So the company continues to pressuring suppliers with its invest to foster future growth market power and affording more organically. The next section will comfortable sales structure for its show how meager (except for own firm personnel. whole foods) is the M&A activity • An important detail is the small • SG&A grew from U$ 20 to U$ 52, tax bill. For a U$ 232 B firm, it pays 156%. This shows that it is perhaps U$ 1 B in taxes, or 0.5% of its losing efficiency in sales, but at the revenue… same time, it is only 22%, up from • Compare this with an individual 19% of revenue. and see why many people complain about tax laws in America 21

M&A AMAZON’S TOP ACQUISITIONS 22

• 1. Whole Foods ($13.7B, 2017) dwarfs Amazon’s second-largest acquisition by more than 10x. The acquisition dramatically expanded Amazon’s brick-and-mortar footprint, as well as giving Amazon a much stronger position in grocery delivery that capitalizes on Whole Foods’ large and loyal customer base. • 2. ($1.2B, 2018) is a Wi-Fi-enabled doorbell that streams live of a home’s doorstep to a smartphone or tablet. The acquisition helped strengthen Amazon’s smart home offerings, and literally opened the door for Amazon couriers to leave packages inside customers’ houses. • 3. ($1.2B, 2009) was Amazon’s first $1B+ acquisition. Known for its unique culture and customer-centric ethos, Zappos fit neatly with Jeff Bezos’ relentless customer-focused approach and brought an online competitor into the Amazon fold. • 4. PillPack ($1B, 2018), the most recent of Amazon’s 10 largest acquisitions, notably confirmed Amazon’s long-rumored entry in healthcare. The markets reacted accordingly, with share prices for several incumbent pharma companies diving nearly 10% on the news. • 5. Interactive ($970M, 2014) is a video game platform and community. The deal raised eyebrows at the time, but Amazon has since capitalized on Twitch’s fiercely loyal fan base to gain a competitive advantage as major tech companies zero in on cloud-based gaming as a big emerging market. Top deals II 23

• 6. Kiva Systems ($775M, 2012), a robotic fulfillment system manufacturer, was the one of Amazon’s most impactful acquisitions to its long-term business — no e-commerce competitor has yet been able to rival Amazon’s warehouse automation. • 7. Souq.com ($580M, 2017), based in Dubai, gave Amazon a beachhead in the growing Middle Eastern market. International expansion remains a focal point of Amazon’s strategy, particularly in emerging markets. • 8. Quidsi ($500M, 2011), the parent company of Diapers.com, was one of Amazon’s largest acquisitions at the time. Just a few years after the deal, Quidsi co-founder and co- CEO Marc Lore left to launch Jet.com, which Walmart subsequently acquired for $3.3B in 2016. Amazon ultimately shut down Quidsi in 2017, citing profitability concerns. • 9. ($370M, 2015), an Israel-based semiconductor startup, was reportedly acquired with cloud computing in mind. Annapurna’s chip technology was subsequently used to make Amazon’s cloud business, AWS, more cost-effective to run. • 10. LOVEFiLM International ($312M, 2011) represented one of Amazon’s earlier forays into content streaming, back when the DVDs-by-mail model was still robust and online streaming was only beginning to achieve widespread popularity. Six years later, with DVD rentals all but extinct, Amazon shuttered the company. Amazon M&A 24

• At a whopping $13.7B, Amazon’s Whole Foods deal is by far its largest acquisition, more than 10x the value of Amazon’s purchases of Zappos or Ring (both $1.2B). • Amazon spent more than $20B to make its top 10 acquisitions. • Eight of Amazon’s top acquisitions were valued at $500M+, including 4 deals worth $1B+. • The top 10 deals reflect Amazon’s extremely diverse business interests: media and content (LOVEFiLM, Twitch), e-commerce (Souq, Quidsi, Zappos), computing hardware (Annapurna Labs), robotics (Kiva Systems), smart homes (Ring), and healthcare (PillPack) Conclusion 25

• We are just starting to tame the beast, to tackle the 900 pound gorilla • We saw the financials, the strategy, SWOT, and understand a little bit of what is going on right now with Amazon • We saw that it does not acquire growth, through M&A. • Rather, it makes it at home, organically, like God intended. • Amazon will acquire something, at some point, other than whole foods. And we will figure it out what they should buy here, at WSO! • Stay tuned and Happy 4th of July! Q&A Session – Any Questions?

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