Microsoft Excel LibreOffice Calc

Amazon.com Inc. (AMZN)


Present Value of Free Cash Flow to the Firm (FCFF)

Difficulty: Intermediate

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

Amazon.com Inc., free cash flow to the firm (FCFF) forecast

USD $ in millions, except per share data

Microsoft Excel LibreOffice Calc
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 16.98%
01 FCFF0 6,421 
1 FCFF1 6,707  = 6,421  × (1 + 4.45%) 5,733 
2 FCFF2 7,203  = 6,707  × (1 + 7.39%) 5,263 
3 FCFF3 7,947  = 7,203  × (1 + 10.33%) 4,964 
4 FCFF4 9,002  = 7,947  × (1 + 13.27%) 4,806 
5 FCFF5 10,461  = 9,002  × (1 + 16.21%) 4,775 
5 Terminal value (TV5) 1,570,337  = 10,461  × (1 + 16.21%) ÷ (16.98%16.21%) 716,728 
Intrinsic value of Amazon.com Inc.’s capital 742,269 
Less: Debt (fair value) 49,438 
Intrinsic value of Amazon.com Inc.’s common stock 692,831 
Intrinsic value of Amazon.com Inc.’s common stock (per share) $1,410.48
Current share price $1,861.69

Based on: 10-K (filing date: 2019-02-01).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Weighted Average Cost of Capital (WACC)

Amazon.com Inc., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 914,468  0.95 17.79%
Debt (fair value) 49,438  0.05 2.08% = 2.80% × (1 – 25.61%)

Based on: 10-K (filing date: 2019-02-01).

1 USD $ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 491,202,890 × $1,861.69 = $914,467,508,284.10

   Debt (fair value). See Details »

2 Required rate of return on equity is estimated by using CAPM. See Details »

   Required rate of return on debt. See Details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (10.63% + 20.20% + 36.61% + 60.59% + 0.00%) ÷ 5 = 25.61%

WACC = 16.98%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Amazon.com Inc., PRAT model

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Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD $ in millions)
Interest expense 1,417  848  484  459  210 
Net income (loss) 10,073  3,033  2,371  596  (241)
Effective income tax rate (EITR)1 10.63% 20.20% 36.61% 60.59% 0.00%
Interest expense, after tax2 1,266  677  307  181  210 
Interest expense (after tax) and dividends 1,266  677  307  181  210 
EBIT(1 – EITR)3 11,339  3,710  2,678  777  (31)
Current portion of long-term debt 1,371  100  1,056  238  1,520 
Current portion of capital lease obligation 7,720  5,839  3,997  3,027  2,013 
Current portion of finance lease obligations 411  282  144  99  67 
Long-term debt, excluding current portion 23,495  24,743  7,694  8,235  8,265 
Long-term capital lease obligations, excluding current portion 9,650  8,438  5,080  4,212  3,026 
Long-term finance lease obligations, excluding current portion 6,642  4,745  2,439  1,736  1,198 
Stockholders’ equity 43,549  27,709  19,285  13,384  10,741 
Total capital 92,838  71,856  39,695  30,931  26,830 
Ratios
Retention rate (RR)4 0.89 0.82 0.89 0.77
Return on invested capital (ROIC)5 12.21% 5.16% 6.75% 2.51% -0.12%
Averages
RR 0.84
ROIC 5.30%
Growth rate of FCFF (g)6 4.45%

Based on: 10-K (filing date: 2019-02-01), 10-K (filing date: 2018-02-02), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-01-29), 10-K (filing date: 2015-01-30).

2018 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,417 × (1 – 10.63%) = 1,266

3 EBIT(1 – EITR) = Net income (loss) + Interest expense, after tax
= 10,073 + 1,266 = 11,339

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [11,3391,266] ÷ 11,339 = 0.89

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 11,339 ÷ 92,838 = 12.21%

6 g = RR × ROIC
= 0.84 × 5.30% = 4.45%


FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (963,906 × 16.98%6,421) ÷ (963,906 + 6,421) = 16.21%

where:
Total capital, fair value0 = current fair value of Amazon.com Inc.’s debt and equity (USD $ in millions)
FCFF0 = last year Amazon.com Inc.’s free cash flow to the firm (USD $ in millions)
WACC = weighted average cost of Amazon.com Inc.’s capital


FCFF growth rate (g) forecast

Amazon.com Inc., H-model

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Year Value gt
1 g1 4.45%
2 g2 7.39%
3 g3 10.33%
4 g4 13.27%
5 and thereafter g5 16.21%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 4.45% + (16.21%4.45%) × (2 – 1) ÷ (5 – 1) = 7.39%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 4.45% + (16.21%4.45%) × (3 – 1) ÷ (5 – 1) = 10.33%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 4.45% + (16.21%4.45%) × (4 – 1) ÷ (5 – 1) = 13.27%