# Amazon.com Inc. (NASDAQ:AMZN)

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

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

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 12.93%
01 FCFF0 20,779
1 FCFF1 22,694 = 20,779 × (1 + 9.21%) 20,096
2 FCFF2 24,920 = 22,694 × (1 + 9.81%) 19,542
3 FCFF3 27,515 = 24,920 × (1 + 10.41%) 19,107
4 FCFF4 30,544 = 27,515 × (1 + 11.01%) 18,782
5 FCFF5 34,090 = 30,544 × (1 + 11.61%) 18,563
5 Terminal value (TV5) 2,888,083 = 34,090 × (1 + 11.61%) ÷ (12.93%11.61%) 1,572,690
Intrinsic value of Amazon.com Inc.’s capital 1,668,780
Less: Debt (fair value) 67,058
Intrinsic value of Amazon.com Inc.’s common stock 1,601,722

Intrinsic value of Amazon.com Inc.’s common stock (per share) \$3,162.71
Current share price \$3,343.63

Based on: 10-K (filing date: 2021-02-03).

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)

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 1,693,350 0.96 13.34%
Debt (fair value) 67,058 0.04 2.47% = 3.06% × (1 – 19.25%)

Based on: 10-K (filing date: 2021-02-03).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 506,440,520 × \$3,343.63
= \$1,693,349,715,887.60

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
= (11.84% + 16.99% + 10.63% + 20.20% + 36.61%) ÷ 5
= 19.25%

WACC = 12.93%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Amazon.com Inc., PRAT model

Average Dec 31, 2020 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Interest expense 1,647  1,600  1,417  848  484
Net income 21,331  11,588  10,073  3,033  2,371

Effective income tax rate (EITR)1 11.84% 16.99% 10.63% 20.20% 36.61%

Interest expense, after tax2 1,452  1,328  1,266  677  307
Interest expense (after tax) and dividends 1,452  1,328  1,266  677  307

EBIT(1 – EITR)3 22,783  12,916  11,339  3,710  2,678

Current portion of lease liabilities, finance leases 10,374  9,884  7,720  5,839  3,997
Current portion of long-term debt 1,155  1,305  1,371  100  1,056
Long-term lease liabilities, finance leases, excluding current portion 18,060  17,095  9,650  8,438  5,080
Long-term debt, excluding current portion 31,816  23,414  23,495  24,743  7,694
Stockholders’ equity 93,404  62,060  43,549  27,709  19,285
Total capital 154,809  113,758  85,785  66,829  37,112
Financial Ratios
Retention rate (RR)4 0.94 0.90 0.89 0.82 0.89
Return on invested capital (ROIC)5 14.72% 11.35% 13.22% 5.55% 7.22%
Averages
RR 0.88
ROIC 10.41%

FCFF growth rate (g)6 9.21%

Based on: 10-K (filing date: 2021-02-03), 10-K (filing date: 2020-01-31), 10-K (filing date: 2019-02-01), 10-K (filing date: 2018-02-02), 10-K (filing date: 2017-02-10).

2020 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 1,647 × (1 – 11.84%)
= 1,452

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 21,331 + 1,452
= 22,783

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [22,7831,452] ÷ 22,783
= 0.94

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 22,783 ÷ 154,809
= 14.72%

6 g = RR × ROIC
= 0.88 × 10.41%
= 9.21%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (1,760,408 × 12.93%20,779) ÷ (1,760,408 + 20,779)
= 11.61%

where:

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

#### FCFF growth rate (g) forecast

Amazon.com Inc., H-model

Year Value gt
1 g1 9.21%
2 g2 9.81%
3 g3 10.41%
4 g4 11.01%
5 and thereafter g5 11.61%

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)
= 9.21% + (11.61%9.21%) × (2 – 1) ÷ (5 – 1)
= 9.81%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.21% + (11.61%9.21%) × (3 – 1) ÷ (5 – 1)
= 10.41%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.21% + (11.61%9.21%) × (4 – 1) ÷ (5 – 1)
= 11.01%