Question

1. Examine the financial ratios, stock valuation and news about Amazon. Do you see the firm’s share price rising/decreasing in the near-, intermediate- and long-term? Do you believe the firm has a stable future of sustainable growth, currently stagnant, or is heading for financial failure? Why?

2. Would you invest in Amazon? Why or why not?

Answer 1

(1): The current financial ratios of Amazon show the following:

Profit margin of 3.56% and operating margin of 4.72%.

Return on assets of 4.37% and return on equity of 18.58% (both on TTM basis).

Total debt/equity of 119.73, current ratio of 1.08 and book value per share of 130.81

The news about Amazon in recent times has been encouraging, especially after the out-break of the Covid 19 pandemic (or the Corona pandemic). Covid -19 has disrupted the stock market and the businesses and industries overall but Amazon is well insulated thanks to its unique positioning. Secondly news reports shows that growth in e-commerce segment is continuously out-pacing the sales growth being witnessed by brick and mortar stores. Thirdly cash flows and profits from Amazon’s cloud computing service will continue to grow.

On the basis of the quantitative ratios and the recent news related to Amazon I see the firm’s share price to rise in the immediate future as well as in the long term. It will remain stable in the near term or the short term.

I also believe that the firm has a stable future of sustainable growth and this is due to its business model. The company’s cloud computing service will continue to grow by leaps and bounds in future as well.

(2): Yes, I will invest in Amazon as I believe that in the long run there is a high up-side to this stock. While the profits will decline in future in percentage terms, the absolute value of profits will continue to grow thanks to the company’s growing revenue levels. In future new avenues of growth will be available for Amazon from smart homes, healthcare, private label goods etc. All these new avenues will also enable Amazon to shore up its margins besides increasing its market share.