This report analyzes the performance of Amazon.com stock relative to their financial performance. The report focuses on the current state of the capital market, Amazon’s earnings trends, ratio analysis, and analyst recommendations. The report concludes with an investment recommendation based on the information obtained by the analysis.
All ratios were computed using financial information obtained from Amazon’s 10-K filings from 1999-2002. 2003 financial information was obtained from Amazon’s 10Q for the quarter ended September 30, 2003.
The United States economy is still experiencing a significant recession, which has weakened the capital markets. Over the past five years stock prices have experienced massive fluctuations. This is especially pertinent to technology stocks such as Amazon. The graph below illustrates Amazon’s stock performance over the past five years.
Amazon’s stock has fluctuated drastically since 1999. In light of the current economy, it is reasonable to assume that this stock will continue this trend, and begin declining soon.
The graph below shows Amazon’s net income since 1999:
Amazon has reported net losses in every year of operations. While the amount of losses has been decreasing since 2000, it is not likely that the Company will report earnings in 2003. The market tends to react poorly to reported losses. While Amazon’s stock may continue to rise through year-end, the price is likely to decline significantly when Amazon reports net losses early in 2004.
The following section examines trends in Amazon’s liquidity, solvency, and profitability ratios since 1999.
Liquidity ratios measure Amazon’s ability to meet its short-term debt and include the current ratio and quick ratio. The following chart illustrates trends in Amazon’s liquidity ratios:
Amazon’s current ratio and quick ratio have been increasing since 1999. This indicates an increasing ability to meet short-term debt. However, with ratios under 2.0, Amazon’s liquidity strength is relatively low. A ratio of 2.0 is generally preferred.
Solvency ratios measure Amazon’s ability to meet its long-term debt and include debt to equity and leverage. The following table shows Amazon’s solvency ratios.
Debt to Equity 8.26 -3.21 -2.14 -2.47 -2.51
Leverage 9.26 -2.21 -1.14 -1.47 -1.51
Amazon’s solvency ratios become negative in 2000. This is the result of negative stockholder’s equity reported in their financial statements. Since Amazon has never generated profits, its accumulated deficit has continued to rise, driving this negative equity.
These negative solvency ratios indicate that Amazon will not be able meet its long-term debt. Amazon has been dependent on long-term debt and stock offerings to finance its operations. If Amazon is unable to meet its long-term debt, its ability to raise capital will be seriously hindered. Consequently, Amazon will have difficulty sustaining its operations.
Profitability ratios measure Amazon’s ability to generate profits and include return on assets, return on equity, profit margin, earnings per share, and price to earnings. The following table lists each of these ratios from 1999-2003. The table also lists industry averages obtained from MultexInvestor.com.
1999 2000 2001 2002 2003 Industry Averages
ROA -0.46 -0.61 -0.30 -0.08 -0.02 7.70
Profit Margin -0.44 -0.51 -0.18 -0.04 -0.01 6.70
EPS ($2.20) ($4.02) ($1.56) ($0.39) ($0.10) 38.73
PE Ratio -34.60 -3.87 -6.94 -48.44 -484.30 38.96
Amazon’s profitability ratios are negative because they have not been able to generate profits. Amazon’s ROE can not be calculated in 2000-2003 because both earnings and equity are negative.
Amazon’s profitability ratios are far below industry averages and indicate that the company is not able to use its resources effectively to generate profits.
The most important of these ratios is price to earnings because it indicates how the stock market values Amazon relative to the Company’s earnings. Generally, a negative number indicates that the stock is overvalued; therefore, the larger the negative ratio, the greater the disparity between stock price and earnings. Currently Amazon’s stock is grossly out of proportion with its earnings. Over time, it is not likely that Amazon stock will continue to remain overvalued, and the Company’s stock will decline in the near future in order to more directly correspond to the Company’s earnings
Analyst reports usually provide a good measure of the market’s current assessment of a stock’s performance. The following graph illustrates analyst recommendations over the past four months:
Current Month Last Month Two Months Ago Three Months Ago
In the current month, no analysts recommend Amazon stock as a strong buy, while the majority recommend holding. This signals that analysts do not have great confidence that Amazon stock will continue to experience dramatic growth.
Investment in Amazon.com is not recommended at this time. The current state of the capital market suggests that Amazon’s stocks will likely decline in the near future. This decline in stock value is even more probable considering the market’s reaction to reported losses. Ratio analysis reveals that Amazon is in poor financial condition, and has not been able to effectively use its resources to generate profits. Furthermore, Amazon’s stock is extremely overvalued. Finally, analyst opinions support this recommendation.
In conclusion, investment in Amazon.com is not recommended until the Company displays an ability to generate profits.
II) Current State of Capital Markets