Equity Value Per Share for Amazon using FCFF (Free Cash Flow to Equity)

Mini Project 1
Name Course Instructor Date
1 In the financial information “key stats” table, it provides the estimated total revenue growth rates for year 2020-2022. Also, in the Free Cash Flow Valuation model, you need to project the FCFF growth rates after 2025. Please provide an analysis report for Amazon to support your projection of future growth rates, and to justify whether the estimated total revenue growth rates for 2020-2022 are reasonable. Make sure your analysis report to include the impact of Covid-19 and US-China trading war, and any other factors you think may affect Amazon’s future business. (20 points)
Revenue
The revenue growth rates are forecasted as -76.53%, 10.60% and 15.79% in 2020, 2021 and 2022. The average revenue growth rate is -16.71% in the three years partly because of the effect of Covid-19 on the company’s operations. It is estimated that a modest growth of 4% based on growing competition and the demand for American made products that are more expensive, and the company would likely operate on even lower margins. Amazon is one of the biggest players in e-commerce in the US domestic market and international markets and will remain so because it can leverage the economies of scale and wide distribution network. However, in China, Alibaba has realized huge growth in the past few years, and combined with restriction against foreign companies, Alibaba will increase its market share in China and the Asia Pacific region.
In the past 10 years the average growth rate in revenue has been 26.5%, but Amazon reported losses in 2012 and 2014 even when reporting growth in revenue. Amazon has also recorded federal operating loss carryforwards indicating that revenue growth does not always translate to huge profits. Growing competition in China and lawsuits in Europe are likely to slow down some of the company’s operations in Europe and Asia. In the US, there is greater demand for more wages and this would reduce the profitability levels as Amazon maintains a huge workforce across different locations in the US and internationally.
In 2019, the current-dollar GDP increased 4.0 % and 5.5 % in 2018, but this is expected to decline (FRED | St. Louis Fed, 2020). The annual inflation rates in the US were 2.14%, 2.44% and 1.81% in 2017, 2018 and 2019, respectively (FRED | St. Louis Fed, 2020). In 2020, the inflation rate is estimated to be less than 1%. Changes in the interest rates, inflation rates and economic growth will likely affect the company’s growth prospects in the US as macroeconomic variables affect consumer demand, consumer spending.
The Gordon model to determine stock value assumes that the constant growth that is less than the constant growth of equity in a dividend paying company. Amazon’s cost of equity is 9.46%, and as such, Gordon’s model works as the growth is less than 9.46%. However, since Amazon does not pay dividends and this means that the model would be unsuitable for determining the company’s stock value.
Covid-19 and Amazon's future business
In the financial year 2020, there has been increased use in online retail, but Covid-19 has resulted in job losses and reduced consumer expenditure. Covid-19 prevention measures h...