walmart vs amazon...mba case competition 2016 real vision investment case study 3 profit margins...

MBA Case Study Competition 2016

Real Vision Investment Case Study

Walmart vs Amazon

Team Single Voice

Brigham Young University Matt Drage

Chace Jones

Holly Preslar

MBA Case Competition 2016


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Introduction

The internet has initiated a transformation in the retail industry that is affecting nearly every

segment of the market. Amazon has historically dominated the online retail space, but Walmart is

far from becoming irrelevant. In fact, insights into the retail market have shown that it is Walmart,

not Amazon that is better positioned to be successful in an online era. Though online e-commerce

is important, what is essential is a company’s ability to integrate online techniques with a physical

presence to provide customers with an “omnichannel” experience. Companies that are able to

combine both aspects of shopping into an intertwined experience are those that will ultimately

provide the most value to investors. Walmart’s impressive global presence, its understanding of

core customers, and its ability to continually provide profits and dividends to shareholders secure

its position as the better long-term investment in an internet age.

Company Profiles

Walmart was founded in 1962 based on a model of providing low prices, creating economies of

scale, and minimizing operating costs. Walmart experienced almost immediate success – by 1970

it became a publicly traded company and by 1990 had spread internationally. Brick and mortar

retail operations have remained incredibly strong through the decades – Walmart has an imposing

physical presence (11,526 retail stores and 158 distribution centersi) and has continued to develop

and maintain a significant competitive advantage through that physical footprint. Financially

speaking the company has also had a long history of providing positive earnings and dividend

returns with a YoY growth of 3% on its stock price from 2000 to 2014ii.

Amazon.com was founded in 1994 by its current CEO, Jeff Bezos. It became publicly traded in

1997 and has experienced impressive growth in both revenue and stock price from 2000 to 2014.

Despite this growth, however, Amazon has yet to be considered profitable due to extremely low



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profit margins that consistently hover around zero. Observed growth in stock price cannot be

related to current profitability, since profitability has historically been nonexistent, but instead is a

result of analyst expectations that, due in part to Amazon’s proven track record of innovation,

Amazon will continue to have high revenue growth and will soon begin to generate a profit.

Financial Analysis

Since January 2015, both Walmart and Amazon have experienced significant changes in stock

price impacting the overall market value of each company. Amazon’s stock price has risen 112%

YTD as of November 6, 2015 while Walmart’s price has dropped 32%. Amazon’s trailing P/E

ratio is 945 while Walmart’s is 12iii. Based on this information it would appear likely that each

company is mispriced – Amazon overvalued, and Walmart undervalued. Surprisingly the

conclusion of the analyses below shows that each is reasonably priced in relation to peer companies

based on projected growth and earnings expectations.

We have compared both Walmart and Amazon market multiples to five of the best comparable

companies (see Appendix A for tables). This analysis placed Walmart on the low end of both the

EV/Sales and EV/EBITDA multiples, when compared directly with its most relevant peers,

suggesting undervaluation. In Amazon’s case, when compared to selected peers, it is reasonably

priced when looking at EV/EBITDA and is undervalued when looking at EV/Sales. The EV/Sales

analysis does not account for a company’s ability to generate profit, and can be misleading in this

case given Amazon’s current lack of profits. Amazon may wrongly appear undervalued using this

method since the majority of Amazon’s peers have higher profit margins despite lower sales.

In order to better understand the effect of profitability and growth on these valuations, we have

taken a two-variable approach and charted both Walmart and Amazon with a larger pool of

comparable companies in the graphs below. The first is a graph of Walmart’s and its comparable



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companies’ Enterprise Value (EV) to trailing twelve months (TTM) sales ratio, plotted against its

TTM EBITDA margin. This is a direct comparison between a company’s ability to sell product

and its ability to generate profit. Companies with higher sustainable margins should sell for a

higher price per dollar of sales; by using two variables this approach offers a better benchmark

than simply comparing Walmart’s sales multiple to the average. Walmart is just below the trend

line of its peers signifying a reasonable price point based on this method (see the orange data

point).

The second is a graph of Walmart’s and its comparable companies’ Enterprise Value (EV) to

EBITDA ratio, plotted against its projected five year average analyst projected revenue growth

provided by Bloomberg. This graph directly compares an ability to generate profit with an ability

to grow. Companies with higher expected growth should sell for higher EBITDA multiples; again,

by using two variables this approach is a much better method than simply comparing Walmart’s

EBITDA multiple to the average. Walmart is right on the trend line – again signifying a reasonable

price point (see the orange data point).

Company Name EBITDA Margin EV/Sales

Costco Wholesale Corporation 4.1% 0.6x

Target Corp. 10.0% 0.8x

Best Buy Co., Inc. 5.4% 0.3x

PriceSmart Inc. 6.5% 0.9x

METRO AG 3.5% 0.2x

Wumart Stores Inc. 3.7% 0.2x

Olympic Group Corporation 2.4% 0.4x

Companhia Brasileira de Distribuicao 5.7% 0.3x

Dollar General DG US Equity 11.3% 1.2x

Dollar Tree Inc DLRT US Equity 13.6% 2.3x

Wal-Mart 7.3% 0.5x

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0.50

1.00

1.50

2.00

2.50

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Wal-Mart Comparables - EV/Sales to EBITDA Margin



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To reiterate, both graphs demonstrate a comparison to peers that shows Walmart’s reasonable

price. We have performed this same analysis with Amazon and its comparable companies as shown

in the two graphs below.

Company Name 5 Yr Growth EV/EBITDA

Costco Wholesale Corporation 7.8% 14.6x

Target Corp. 1.8% 8.0x

Best Buy Co., Inc. 1.5% 4.7x

PriceSmart Inc. 9.3% 13.9x

METRO AG 9.2% 5.4x

Wumart Stores Inc. 8.0% 5.4x

Olympic Group Corporation 15.8% 15.2x

Companhia Brasileira de Distribuicao 14.8% 5.4x

Dollar General DG US Equity 9.0% 10.2x

Dollar Tree Inc DLRT US Equity 26.2% 16.9x

Wal-Mart 2.2% 6.5x

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2.00

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6.00

8.00

10.00

12.00

14.00

16.00

18.00

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Wal-Mart Comparables - EV/EBITDA to 5 yr Growth

Company Name EBITDA Margin EV/Sales

Alphabet Inc. 32.5% 5.9x

eBay Inc. 29.9% 2.0x

Facebook, Inc. 43.5% 18.7x

Yahoo! Inc. 12.9% 5.8x

Expedia Inc. 13.9% 3.1x

Netflix, Inc. 5.8% 6.9x

The Priceline Group Inc. 37.2% 8.5x

Etsy, Inc. 6.7% 4.1x

TripAdvisor Inc. 28.2% 8.6x

MERCADOLIBRE INC 30.9% 7.2x

ALIBABA GROUP HOLDING-SP ADR 36.3% 15.2x

Amazon.com, Inc. 7.6% 3.0x -

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Amazon Comparables - EV/Sales to EBITDA Margin

Company Name 5 Yr Growth EV/EBITDA

Alphabet Inc. 14.2% 18.7x

eBay Inc. 5.3% 7.3x

Facebook, Inc. 31.3% 42.8x

Yahoo! Inc. 4.0% 60.6x

Expedia Inc. 14.9% 27.2x

Netflix, Inc. 23.4% 120.2x

The Priceline Group Inc. 15.3% 22.8x

Etsy, Inc. 31.1% 224.3x

TripAdvisor Inc. 23.6% 34.0x

MERCADOLIBRE INC 20.2% 23.4x

ALIBABA GROUP HOLDING-SP ADR 18.1% 45.8x

Amazon.com, Inc. 17.9% 42.5x -

50.00

100.00

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200.00

250.00

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Amazon Comparables - EV/EBITDA to 5 yr Growth



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These two graphs show that Amazon is also reasonably priced in comparison to its most relevant

peers.

In addition to peer-based analyses, we created a discounted cash flow (DCF) model to evaluate the

viability of Walmart’s and Amazon’s current stock prices. Please refer to Appendix B for details.

This analysis shows that there is significant potential upside for Walmart based on low

expectations currently priced into the stock. On the other hand, if Amazon can achieve the high

expectations for sales growth and profit built into its stock price, then the price seems reasonable.

These three analyses show that both companies are reasonably priced based on analyst projections

and expectations.

Walmart and Amazon are in very different stages of company life cycle – Walmart is a mature

company, and Amazon is still growing. Both view profitability as important, but for different

reasons. Walmart’s profitability is key to both increasing share price and providing dividends to

shareholders. Amazon, however, uses operating profits generated from a few business segments

to fund growth through investing in research and development. Profitability “matters” for Walmart

because its investors expect it. Amazon’s investors, however, are more concerned about growth

and building a successful company through execution of real options – for them, traditional

profitability is much less of a short-term concern.

Walmart has paid a quarterly dividend and has recognized positive net income for over 20 years.

Walmart also has a share repurchase program, which increases the value of investors’ shares.

Although it recently announced a significant investment into wages and e-commerce, which will

likely result in lower earnings per share (EPS) in the short-term, Walmart is still projecting positive

earnings. Additionally, these investments will decrease costs related to employee turnover,

improve customer service and brand image, and enhance the “omnichannel” experience. With the



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current stock price at a three-year low and a P/E ratio lower than industry average, Walmart is a

great value buy. Furthermore, history shows that lower P/E stocks tend to outperform higher P/E

stocks in the long runiv.

As a growth-focused company, Amazon places profits second in priority to revenue and market

share growth and any profits achieved are generally reinvested in the company to fund new growth.

For Amazon, profitability has not yet mattered – historically, stock price has appreciated without

a showing in profitability due to expectations for Amazon’s continued growth. However, in Q3 of

2015 Amazon exceeded expectations by reporting a slight profit when a loss was expected. The

market has realized that Amazon is indeed capable of generating profits and formerly patient

investors will soon begin to expect profitability. If Amazon were to shift its focus to becoming

profitable, it may not be able to innovate and pursue new businesses at the same level. An

expectation of profits is not consistent with Amazon’s current business model and that expectation

could severely impact the growth projections of the company.

Apple is an example of an innovative company that has recently struggled to generate successful

new ideas. Many competitors have entered the market and are competing to develop inventive

products. As competition increases, it will be much more difficult for companies to be first to

market with consistently new and innovative products. However, in Apple’s case, stock price has

continued to grow despite a struggle to introduce innovative products. This price appreciation is

primarily due to the company’s impressive profit margins on key product segments. In contrast to

Apple, Amazon does not have significant profitable segments to drive stock appreciation. If the

company struggles to develop new, innovative, and profitable business segments the stock price

will likely fall.



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In summary, the financial analysis shows that both companies are reasonably priced based on peer

comparables and current projections. However, the performance assumptions included within the

stock prices are very different for Walmart and Amazon – Walmart’s price accounts for very low

expectations, while Amazon’s expectations are very high. It is much more reasonable to assume

that a company will achieve and exceed low expectations, than that a company will execute with

precision to an extremely high level of expectation. On a risk adjusted basis, Walmart is a better

investment.

Qualitative Analysis

Financial analysis alone is not sufficient to fully consider the value of an investment over a ten

year period. Investors must also consider qualitative factors that could allow or prevent a company

from realizing market projections. As the retail industry has evolved into the internet age, the battle

for online retail dominance has moved to center stage. However, this battle is only a sideshow to

the true issue facing the industry, and store-based retail cannot be ignored. Last year, the global

retailing market was valued at $14.1 trillion, and store-based retailing accounted for an enormous

91% of this valuev.

A.T. Kearney recently explained that while the fight for e-commerce success is justified, “Physical

stores remain the preferred shopping channel and where the most significant value continues to be

created, as customers are able to touch and feel products, be immersed in brand experiences, and

engage with sales associates. Two-thirds of the customers purchasing online use a physical store

either before or after the transaction.”vi To be truly successful in the internet age, companies must

capitalize on physical presence to provide an “omnichannel” experience – a mixture of both online

and brick and mortar shopping. No company is better positioned to provide that experience than

Walmart.



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Walmart has a massive physical footprint – Walmart stores are currently located within 5 miles of

70% of the U.S. populationvii and international stores number 6,256viii. This proximity to customers

is essential for operating in an “omnichannel” environment. Additionally, whether consumers

choose to buy online then pick up their purchases at a physical store location or have those items

home delivered through mail, bike messengers (used in densely populated urban areas), or drones,

physical footprint will greatly simplify any chosen delivery method. Current news has revealed

that Amazon, Google, and Walmart are all planning to test drone delivery.ix Without drone

exclusivity for one company, the company with the furthest physical reach will win – Walmart.

Walmart is investing heavily in e-commerce segments – sales from Walmart.com have consistently

grown over the past five years, and growth is projected to continue. Walmart is also working to

better leverage its aforementioned impressive physical presence to provide better delivery services.

It is currently piloting a similar program called Shipping Pass – a direct competitor to Amazon

Prime that provides free home delivery within 3 days but costs half as much as Amazon’s service.

Though Walmart is best positioned to achieve success in the retail market, one way that Amazon

can turn its ubiquity into profitability is through Amazon Web Services (AWS). AWS is an on

demand delivery of IT resources and applications via the internet with pay-as-you-go pricingx. It

is a cloud computing platform consisting of Software as a Service (SaaS), Platform as a Service

(PaaS), and Infrastructure as a Service (IaaS)xi. In Q3 2015 Amazon reported a 25% profit margin

from their AWS business, with revenues representing ~8% of total sales and a 78% growth over

the prior year’s Q3xii. This segment could provide Amazon with the profitability it has been unable

to achieve in the past. However, cloud computing is continuing to play a larger role throughout the

tech space, and there are many major companies competing for market share. Amazon and



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Microsoft are the clear leaders in this market for the time being, but with Google and other

innovative leaders in the race it is unclear whether or not Amazon can maintain this advantage.

Based on the factors discussed above, Walmart will easily outperform the 3% consensus growth

rate estimate. In the case of a recession, Walmart will outperform the market partly due to its low-

cost focus. For example, during the recession of 2007-2009, the S&P 500 fell 38% while

Walmart’s stock price rose 18%xiii. If economy improves, Walmart will do better than analyst

expectations. Even if Walmart only grows at the rate of the economy, global GDP is expected to

grow at approximately 3% through 2016xiv with an additional average 2% increase in inflation per

year based on historical data. Total economic growth is then 5% annually, which is higher than

analyst expectations of 3% growth for Walmart.

Amazon, on the other hand, will find it difficult to achieve 18% average consensus growth over

the next 5 years. This growth rate implies that Amazon’s revenues will more than double from less

than $90 billion in 2014 to $236 billion in 2020. This intensive growth would require Amazon to

either steal substantial market share from existing competitors or create significant new businesses.

This is not reasonable given the fierce competition in the technology sector. For every innovative

idea Amazon develops, Apple, Google, Microsoft, and others will not be far behind.

Conclusion

It is highly unlikely that either Walmart or Amazon will become obsolete in the next 10 years. The

question is not which company will succeed long-term, but rather which company will be a better

long-term investment. Based on our analysis, Walmart is in a much better position to provide a

long-term return from a stockholder’s perspective. Amazon is a risky investment – it is priced to

perfection and would have to execute with absolute precision in order to achieve market

expectations. Walmart, on the other hand, is a highly resilient company with a proven ability to



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understand, gain, and retain customers. Due to its physical presence, history of profitability, and

ability to succeed in an “omnichannel” environment, we maintain the position that Walmart is a

better investment choice to exceed current market expectations and recommend a simple long

position to structure the investment.



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APPENDIX

Appendix A: Comparable Companies Analysis

The Data provided below was obtained from Capital IQ as of October, 30, 2015.

Wal-Mart:

Amazon:

Appendix B: Discounted Cash Flow (Perpetuity and Exit Multiple)

Using a Bloomberg Discounted Cash Flow (DCF) model and 5 year revenue projections for each

company, we evaluated the current stock price with the results from the Perpetuity Growth

Method and the Exit Multiple Method. The perpetuity growth method calculates terminal value

by growing the year 5 free cash flows at an assumed constant growth rate. Walmart’s assumed

growth rate is 2%. Amazon’s growth rate is 5.9%. The terminal value is calculated using the

formula below:

Terminal Value =

FCF5 * (1+g)

(r-g)

Wal-Mart

Comparable Companies Benchmark (Data pulled from Capital IQ as of 10/30/15)

Enterprise Value/ Enterprise Value/

Total Revenue EBITDA P/E Ratio Enterprise Value Revenue EBITDA Net Income Diluted EPS Shares Share Price Mark Cap

Costco 0.6x 14.6x 29.4 69,412.7 116,199.0 4,751.0 2,377.0 5.37 437.4 158.12 69,162.7

Target 0.8x 8.0x 16.9 58,475.2 73,550.0 7,353.0 (901.0) 4.57 628.4 77.18 48,502.2

Best Buy 0.3x 4.7x 14.8 10,184.3 40,327.0 2,187.0 919.0 2.37 344.6 35.03 12,070.3

Dollar General 1.2x 10.2x 18.1 22,651.7 19,678.0 2,228.7 1,127.3 3.74 294.7 67.77 19,969.1

Dollar Tree 2.3x 16.9x 43.8 22,413.7 9,758.6 1,328.9 311.0 1.50 234.7 65.49 15,371.7

Mean 1.0x 10.8x

Median 0.8x 10.2x

High 2.3x 16.9x

Low 0.3x 4.7x

Wal-Mart 0.5x 6.5x 11.9 230,701.1 485,621.0 35,267.0 15,493.0 4.79 3,205.9 57.24 183,508.1

Amazon

Comparable Companies Benchmark (Data pulled from Capital IQ as of 10/30/15)

Enterprise Value/ Enterprise Value/

Total Revenue EBITDA P/E Ratio Enterprise Value Revenue EBITDA Net Income Diluted EPS Shares Share Price Mark Cap

Google 6.1x 18.7x 33.0 435,523.2 71,763.0 23,305.0 16,408.0 22.32 687.7 737.39 507,121.7

Alibaba 15.2x 45.8x 21.9 206,110.8 13,532.0 4,497.7 9,820.3 3.80 2,512.4 83.37 209,461.1

Facebook 18.7x 42.8x 103.6 273,329.1 14,640.0 6,384.0 2,738.0 0.98 2,817.5 101.97 287,305.1

Ebay 2.0x 7.3x 11.2 35,636.2 17,705.0 4,889.0 2,271.0 2.48 1,200.7 27.90 33,498.2

Yahoo! 5.8x 60.6x 138.1 28,900.8 4,948.0 477.1 242.2 0.26 941.4 35.62 33,532.3

Mean 9.6x 35.0x

Median 6.1x 42.8x

High 18.7x 60.6x

Low 2.0x 7.3x

Amazon 3.0x 42.5x 896.5 297,557.1 100,588.0 7,007.0 328.0 0.7 468.8 625.90 293,398.1



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The exit multiple method uses a company’s terminal year EBITDA to determine future cash flow

based on comparable companies LTM trading multiples. Walmart’s exit multiple is 10.5x.

Amazon’s exit multiple is 24.9x. Terminal value was determined based on the formula below:

Terminal Value = EBITDA5 * Exit Multiple

Using the Perpetuity Growth Method and the Exit Multiple Method each company’s DCF was

determined below:

Wal-Mart:

Ticker Currency

Name Data

Jan 10 A Jan 11 A Jan 12 A Jan 13 A Jan 14 A Jan 15 A Jan 16 E Jan 17 E Jan 18 E Jan 19 E Jan 20 E Jan 21 E Trend

Revenue (Estimate Comparable) 408,214 421,849 446,950 469,162 476,294 485,651 485,126 497,700 512,287 528,383 543,576 582,802

% YoY Growth 3% 6% 5% 2% 2% 0% 3% 3% 3% 3% 7%

EBITDA 31,419 33,183 34,872 36,338 36,752 36,569 34,079 34,644 35,644 36,685 38,446 39,472

% Margin 8% 8% 8% 8% 8% 8% 7% 7% 7% 7% 7% 7%

Free Cash Flow 14,913 10,428 13,396 13,970 11,271 17,435 12,409 13,012 13,625 14,469 16,387 16,733

% Margin 4% 2% 3% 3% 2% 4% 3% 3% 3% 3% 3% 3%

Perpetuity Growth Terminal EBITDA Multiple

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 139.70 165.20 202.29 261.19 369.19 4.2% 80.96 95.90 110.84 125.79 140.73

Discount 4.7% 118.69 136.94 161.96 198.34 256.13 Discount 4.7% 78.94 93.53 108.12 122.71 137.30

Rate 5.2% 102.69 116.33 134.24 158.79 194.48 Rate 5.2% 76.98 91.22 105.47 119.72 133.96

(WACC) 5.7% 90.11 100.65 114.04 131.61 155.69 (WACC) 5.7% 75.07 88.98 102.90 116.81 130.72

6.2% 79.95 88.31 98.65 111.79 129.03 6.2% 73.21 86.80 100.39 113.98 127.57

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 138% 181% 244% 344% 528% 4.2% 38% 63% 89% 114% 139%

4.7% 102% 133% 176% 237% 336% 4.7% 34% 59% 84% 109% 134%

5.2% 75% 98% 128% 170% 231% 5.2% 31% 55% 79% 104% 128%

5.7% 53% 71% 94% 124% 165% 5.7% 28% 51% 75% 99% 122%

6.2% 36% 50% 68% 90% 120% 6.2% 25% 48% 71% 94% 117%

DCF Estimated Upside 79%

DCF Estimated Value per Share (USD) 105.47DCF Estimated Value per Share (USD)

DCF Estimated Upside

134.24

128%

TradingWMT

Wal-Mart Stores Inc Adjusted (If available)

Summary Analysis

Summary Analysis Input Calculation Output Analysis

In Millions of USD

Perpetuity Growth Method EBITDA Multiple Method

Current Price (USD)

Consensus Price Target

Current Price (USD) 58.78

Consensus Price Target 62.48

58.78

62.48



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5.2% 8.7% 6.8% 5.2%

-2.2% -1.8% 2.0% 2.0% (Perpetuity Growth Method only)

10.5x NA 5.6x 6.0x 7.9x 10.5x (EBITDA Multiple Method only)

In Millions of USD Jan 10 A Jan 11 A Jan 12 A Jan 13 A Jan 14 A Jan 15 A Jan 16 E Jan 17 E Jan 18 E Jan 19 E Jan 20 E Jan 21 E Year 5


% YoY Growth Edit Row 3% 6% 5% 2% 2% 0% 3% 3% 3% 3% 7%

(-) Cost of Revenue 304,444 315,287 335,127 352,488 358,069 365,086 367,473 377,317 388,390 400,673 411,487 442,930

% of Revenue 75% 75% 75% 75% 75% 75% 76% 76% 76% 76% 76% 76%

(=) Gross Profit 103,641 106,562 111,823 116,674 118,225 120,565 117,653 120,384 123,897 127,710 132,089 139,872

% Margin Edit Row 25% 25% 25% 25% 25% 25% 24% 24% 24% 24% 24% 24%

(-) Operating Expenses/Income 79,379 81,020 85,081 88,837 90,343 93,169 92,493 94,891 97,672 100,741 103,637 111,116

% of Revenue Edit Row 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

% YoY Growth 2% 5% 4% 2% 3% -1% 3% 3% 3% 3% 7%

(=) Operating Income 24,262 25,542 26,742 27,837 27,882 27,396 25,159 25,493 26,225 26,969 28,452 28,756

% Margin 6% 6% 6% 6% 6% 6% 5% 5% 5% 5% 5% 5%

(-) Tax on Operating Income 8,268 8,695 8,709 8,634 9,189 8,829 8,192 8,301 8,539 8,782 9,264 9,364

% Tax Rate Edit Row 34% 34% 33% 31% 33% 32% 33% 33% 33% 33% 33% 33%

(=) NOPAT 15,994 16,847 18,033 19,203 18,693 18,567 16,967 17,192 17,686 18,188 19,187 19,393

% Margin 4% 4% 4% 4% 4% 4% 3% 3% 3% 3% 4% 3%

(+) Depreciation & Amortization 7,157 7,641 8,130 8,501 8,870 9,173 8,920 9,151 9,419 9,715 9,995 10,716


% YoY Growth 7% 6% 5% 4% 3% -3% 3% 3% 3% 3% 7%

(-) Capita l Expenditure 12,184 12,699 13,510 12,898 13,115 12,174 12,879 12,915 12,796 12,776 12,708 12,815


% YoY Growth 4% 6% -5% 2% -7% 6% 0% -1% 0% -1% 1%

(-) Changes in Net Working Capita l (4,452) 2,535 437 587 3,581 (1,081) 1,313 1,018 1,157 1,300 788 1,273

% of Revenue Edit Row -1% 1% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0%

(+) Changes in Net Long Term Deferred Tax Liabi l i ties (506) 1,174 1,180 (249) 404 788 714 602 474 642 701 713


(+) Other User Estimated Non-Cash Adjustments - - - - - -

% of Revenue Edit Row 0% 0% 0% 0% 0% 0%

(=) Free Cash Flow 14,913 10,428 13,396 13,970 11,271 17,435 12,409 13,012 13,625 14,469 16,387 16,733 16,653

% Margin Edit Row 4% 2% 3% 3% 2% 4% 3% 3% 3% 3% 3% 3%

% YoY Growth -30% 28% 4% -19% 55% -29% 5% 5% 6% 13% 2%

% of the Free Cash Flow to be discounted 23% 100% 100% 100% 100% 77%

Period for Discount Factor (Mid-Year Convention) 0.12 0.73 1.73 2.73 3.73 4.62

Discount Factor @ 5.2% WACC 0.99 0.96 0.92 0.87 0.83 0.79

Present Value of Free Cash Flow (5 Years) 2,873 12,538 12,479 12,597 13,562 10,158

EBITDA 31,419 33,183 34,872 36,338 36,752 36,569 34,079 34,644 35,644 36,685 38,446 39,472 39,233

% Margin Edit Row 8% 8% 8% 8% 8% 8% 7% 7% 7% 7% 7% 7%

% YoY Growth 6% 5% 4% 1% 0% -7% 2% 3% 3% 5% 3%

Input Peers Px Implied Tgt Implied DefaultCurrent

Choice

Weighted Average Cost of Capital

Perpetuity Growth Rate

Exit Enterprise Value / EBITDA

Input Calculation



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Free Cash Flow at Year 5 16,653 Terminal EBITDA at Year 5 39,233

WACC 5.2% WACC 5.2%

Perpetuity Growth Rate 2.0% Exit Enterprise Value / EBITDA 10.5x

Perpetuity Value at End of Year 5 530,803 Terminal Va lue at End of Year 5 411,949

Present Value of Perpetuity (@ 5.2% WACC) 411,959 Present Value of Terminal Va lue (@ 5.2% WACC) 319,716

(+) Present Value of Free Cash Flows (@ 5.2% WACC) 64,207 (+) Present Value of Free Cash Flows (@ 5.2% WACC) 64,207

(=) Current Enterprise Value (=) Current Enterprise Value

Short Term Debt 6,689 Short Term Debt 6,689

(+) Long Term Debt 43,692 (+) Long Term Debt 43,692

(-) Cash and Marketable Securi ties 9,135 (-) Cash and Marketable Securi ties 9,135

(-) Current Net Debt 41,246 (-) Current Net Debt 41,246

(-) Current Preferred and Minori ty Interest 4,543 (-) Current Preferred and Minori ty Interest 4,543

(=) Equity Value 430,377 (=) Equity Value 338,134

Shares outstanding 3,206 Shares outstanding 3,206

Estimated Value per Share (USD) Estimated Value per Share (USD)

Current Price (USD) 58.78 Current Price (USD) 58.78

Estimated Upside Estimated Upside

Enterprise Value in Millions of USD Enterprise Value in Millions of USD

Incremental change Perpetuity Growth Terminal EBITDA Multiple

0.5% 1.5x 0.5%

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 493,664 575,410 694,314 883,161 1,229,381 4.2% 305,329 353,237 401,145 449,053 496,961

Discount 4.7% 426,291 484,813 565,008 681,657 866,923 Discount 4.7% 298,864 345,639 392,414 439,189 485,964

Rate 5.2% 375,004 418,750 476,166 554,849 669,295 Rate 5.2% 292,576 338,250 383,923 429,597 475,271

(WACC) 5.7% 334,666 368,457 411,381 467,719 544,923 (WACC) 5.7% 286,458 331,062 375,665 420,269 464,873

6.2% 302,118 328,901 362,060 404,182 459,466 6.2% 280,506 324,069 367,633 411,196 454,760

Value in USD Value in USD

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 139.70 165.20 202.29 261.19 369.19 4.2% 80.96 95.90 110.84 125.79 140.73

4.7% 118.69 136.94 161.96 198.34 256.13 4.7% 78.94 93.53 108.12 122.71 137.30

5.2% 102.69 116.33 134.24 158.79 194.48 5.2% 76.98 91.22 105.47 119.72 133.96

5.7% 90.11 100.65 114.04 131.61 155.69 5.7% 75.07 88.98 102.90 116.81 130.72

6.2% 79.95 88.31 98.65 111.79 129.03 6.2% 73.21 86.80 100.39 113.98 127.57

Upside Potential Upside Potential

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 138% 181% 244% 344% 528% 4.2% 38% 63% 89% 114% 139%

4.7% 102% 133% 176% 237% 336% 4.7% 34% 59% 84% 109% 134%

5.2% 75% 98% 128% 170% 231% 5.2% 31% 55% 79% 104% 128%

5.7% 53% 71% 94% 124% 165% 5.7% 28% 51% 75% 99% 122%

6.2% 36% 50% 68% 90% 120% 6.2% 25% 48% 71% 94% 117%

Implied Exit EV / EBITDA Multiple Implied Perpetuity Growth

1.0% 1.5% 2.0% 2.5% 3.0% 7.5x 9.0x 10.5x 12.0x 13.5x

4.2% 13.40 15.96 19.68 25.59 36.43 4.2% -1.4% -0.5% 0.2% 0.6% 1.0%

4.7% 11.59 13.46 16.03 19.78 25.72 4.7% -0.9% 0.0% 0.6% 1.1% 1.5%

5.2% 10.21 11.64 13.53 16.11 19.87 5.2% -0.4% 0.5% 1.1% 1.6% 2.0%

5.7% 9.12 10.26 11.70 13.60 16.19 5.7% 0.0% 0.9% 1.6% 2.1% 2.5%

6.2% 8.24 9.17 10.31 11.76 13.66 6.2% 0.5% 1.4% 2.1% 2.6% 3.0%

EBITDA Multiple Method - Value per Share

EBITDA Multiple Method - Sensitivity AnalysisPerpetuity Growth Method - Sensitivity Analysis

Output Analysis

Incremental change

383,923.3 476,166

134.24

128% 79%

105.47

Perpetuity Growth Method - Value per Share



16

Amazon:

Ticker Currency

Name Data

Dec 09 A Dec 10 A Dec 11 A Dec 12 A Dec 13 A Dec 14 A Dec 15 E Dec 16 E Dec 17 E Dec 18 E Dec 19 E Dec 20 E Trend


% YoY Growth 40% 41% 27% 22% 20% 20% 21% 20% 16% 15% 15%

EBITDA 1,558 1,974 1,945 2,910 4,010 5,094 5,168 7,153 9,306 12,446 18,903 24,726

% Margin 6% 6% 4% 5% 5% 6% 5% 6% 6% 7% 9% 10%

Free Cash Flow 2,511 2,032 1,155 157 1,528 349 3,239 4,127 5,273 7,106 11,413 15,323

% Margin 10% 6% 2% 0% 2% 0% 3% 3% 3% 4% 6% 6%

Perpetuity Growth Terminal EBITDA Multiple

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% 525.28 583.28 657.39 755.42 891.14 9.5% 779.38 827.89 876.40 924.91 973.42

Discount 10.0% 470.44 516.23 573.19 645.96 742.22 Discount 10.0% 762.49 809.91 857.32 904.74 952.16

Rate 10.5% 425.48 462.42 507.38 563.31 634.78 Rate 10.5% 746.05 792.40 838.75 885.11 931.46

(WACC) 11.0% 387.97 418.30 454.57 498.73 553.66 (WACC) 11.0% 730.04 775.36 820.68 865.99 911.31

11.5% 356.20 381.48 411.27 446.89 490.27 11.5% 714.45 758.76 803.07 847.39 891.70

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% -20% -12% 0% 15% 35% 9.5% 18% 26% 33% 40% 48%

10.0% -29% -22% -13% -2% 13% 10.0% 16% 23% 30% 37% 44%

10.5% -35% -30% -23% -15% -4% 10.5% 13% 20% 27% 34% 41%

11.0% -41% -37% -31% -24% -16% 11.0% 11% 18% 24% 31% 38%

11.5% -46% -42% -38% -32% -26% 11.5% 8% 15% 22% 29% 35%

DCF Estimated Upside 27%

DCF Estimated Value per Share (USD) 838.75DCF Estimated Value per Share (USD)

DCF Estimated Upside

507.38

-23%

TradingAMZN

Amazon.com Inc Adjusted (If available)

Summary Analysis

Summary Analysis Input Calculation Output Analysis

In Millions of USD

Perpetuity Growth Method EBITDA Multiple Method

Current Price (USD)

Consensus Price Target

Current Price (USD) 659.37

Consensus Price Target 725.11

659.37

725.11



17

10.5% 9.2% 8.8% 10.5%

7.0% 7.4% 5.9% 5.9% (Perpetuity Growth Method only)

24.9x 24.9x 19.1x 21.3x 30.8x 24.9x (EBITDA Multiple Method only)

In Millions of USD Dec 09 A Dec 10 A Dec 11 A Dec 12 A Dec 13 A Dec 14 A Dec 15 E Dec 16 E Dec 17 E Dec 18 E Dec 19 E Dec 20 E Year 5


% YoY Growth Edit Row 40% 41% 27% 22% 20% 20% 21% 20% 16% 15% 15%

(-) Cost of Revenue 18,978 26,561 37,288 45,971 54,181 62,582 72,836 86,698 102,833 118,782 136,013 153,420

% of Revenue 77% 78% 78% 75% 73% 70% 68% 67% 66% 66% 66% 65%

(=) Gross Profit 5,531 7,643 10,789 15,122 20,271 26,406 34,276 42,702 52,975 61,191 70,067 82,611

% Margin Edit Row 23% 22% 22% 25% 27% 30% 32% 33% 34% 34% 34% 35%

(-) Operating Expenses/Income 4,351 6,237 9,927 14,371 19,514 26,058 33,392 40,725 49,901 55,944 59,408 67,326


% YoY Growth 43% 59% 45% 36% 34% 28% 22% 23% 12% 6% 13%

(=) Operating Income 1,180 1,406 862 751 757 348 884 1,977 3,074 5,247 10,659 15,285

% Margin 5% 4% 2% 1% 1% 0% 1% 2% 2% 3% 5% 6%

(-) Tax on Operating Income 263 330 268 435 235 1,336 292 652 1,014 1,732 3,518 5,044

% Tax Rate Edit Row 22% 24% 31% 58% 31% 384% 33% 33% 33% 33% 33% 33%

(=) NOPAT 917 1,076 594 316 522 (988) 592 1,324 2,060 3,516 7,142 10,241

% Margin 4% 3% 1% 1% 1% -1% 1% 1% 1% 2% 3% 4%

(+) Depreciation & Amortization 378 568 1,083 2,159 3,253 4,746 4,284 5,176 6,232 7,199 8,243 9,441


% YoY Growth 50% 91% 99% 51% 46% -10% 21% 20% 16% 15% 15%

(-) Capital Expenditure 373 979 1,811 3,785 3,444 4,893 4,284 5,176 6,232 7,199 8,243 9,441


% YoY Growth 162% 85% 109% -9% 42% -12% 21% 20% 16% 15% 15%

(-) Changes in Net Working Capital (1,607) (1,371) (1,295) (1,562) (1,074) (1,484) (2,650) (2,804) (3,212) (3,532) (4,259) (5,066)

% of Revenue Edit Row -7% -4% -3% -3% -1% -2% -2% -2% -2% -2% -2% -2%

(+) Changes in Net Long Term Deferred Tax Liabilities (18) (4) (6) (95) 123 - 3- 1- 2 58 12 17


(+) Other User Estimated Non-Cash Adjustments - - - - - -

% of Revenue Edit Row 0% 0% 0% 0% 0% 0%

(=) Free Cash Flow 2,511 2,032 1,155 157 1,528 349 3,239 4,127 5,273 7,106 11,413 15,323 14,744.63

% Margin Edit Row 10% 6% 2% 0% 2% 0% 3% 3% 3% 4% 6% 6%

% YoY Growth -19% -43% -86% 870% -77% 828% 27% 28% 35% 61% 34%

% of the Free Cash Flow to be discounted 15% 100% 100% 100% 100% 85%

Period for Discount Factor (Mid-Year Convention) 0.07 0.65 1.65 2.65 3.65 4.57

Discount Factor @ 10.5% WACC 0.99 0.94 0.85 0.77 0.69 0.63

Present Value of Free Cash Flow (5 Years) 476 3,868 4,473 5,455 7,929 8,269

EBITDA 1,558 1,974 1,945 2,910 4,010 5,094 5,168 7,153 9,306 12,446 18,903 24,726 23,864.36

% Margin Edit Row 6% 6% 4% 5% 5% 6% 5% 6% 6% 7% 9% 10%

% YoY Growth 27% -1% 50% 38% 27% 1% 38% 30% 34% 52% 31%

Input Peers Px Implied Tgt Implied DefaultCurrent

Choice

Weighted Average Cost of Capital

Perpetuity Growth Rate

Exit Enterprise Value / EBITDA

Input Calculation



18

DCF Inputs: Weighted Average Cost of Capital

In order to calculate a Weighted Average Cost of Capital (WACC) for each of the two

companies, we calculated the Cost of Equity and Cost of Debt as shown below, and weighted

those based on the percentage of debt and equity with each company. The formula’s for

calculating each are as follows:

Cost of Equity = Risk Free Rate + Beta * (Expected Market Return – Risk Free Rate)

Free Cash Flow at Year 5 14,745 Terminal EBITDA at Year 5 23,864

WACC 10.5% WACC 10.5%

Perpetuity Growth Rate 5.9% Exit Enterprise Value / EBITDA 24.9x

Perpetuity Value at End of Year 5 339,447 Terminal Value at End of Year 5 595,351

Present Value of Perpetuity (@ 10.5% WACC) 206,044 Present Value of Terminal Value (@ 10.5% WACC) 361,378

(+) Present Value of Free Cash Flows (@ 10.5% WACC) 30,470 (+) Present Value of Free Cash Flows (@ 10.5% WACC) 30,470

(=) Current Enterprise Value (=) Current Enterprise Value

Short Term Debt 3,600 Short Term Debt 3,600

(+) Long Term Debt 12,489 (+) Long Term Debt 12,489

(-) Cash and Marketable Securities 17,416 (-) Cash and Marketable Securities 17,416

(-) Current Net Debt (1,327) (-) Current Net Debt (1,327)

(-) Current Preferred and Minority Interest - (-) Current Preferred and Minority Interest -

(=) Equity Value 237,842 (=) Equity Value 393,176

Shares outstanding 469 Shares outstanding 469

Estimated Value per Share (USD) Estimated Value per Share (USD)

Current Price (USD) 659.37 Current Price (USD) 659.37

Estimated Upside Estimated Upside

Enterprise Value in Millions of USD Enterprise Value in Millions of USD

Incremental change Perpetuity Growth Terminal EBITDA Multiple

0.5% 1.5x 0.5%

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% 244,902 272,092 306,835 352,785 416,407 9.5% 364,018 386,757 409,496 432,235 454,974

Discount 10.0% 219,198 240,662 267,361 301,476 346,596 Discount 10.0% 356,100 378,327 400,553 422,780 445,007

Rate 10.5% 198,123 215,437 236,515 262,734 296,235 Rate 10.5% 348,392 370,120 391,849 413,577 435,306

(WACC) 11.0% 180,538 194,754 211,758 232,459 258,208 (WACC) 11.0% 340,888 362,131 383,375 404,618 425,862

11.5% 165,648 177,496 191,459 208,160 228,492 11.5% 333,581 354,353 375,124 395,895 416,667

Value in USD Value in USD

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% 525.28 583.28 657.39 755.42 891.14 9.5% 779.38 827.89 876.40 924.91 973.42

10.0% 470.44 516.23 573.19 645.96 742.22 10.0% 762.49 809.91 857.32 904.74 952.16

10.5% 425.48 462.42 507.38 563.31 634.78 10.5% 746.05 792.40 838.75 885.11 931.46

11.0% 387.97 418.30 454.57 498.73 553.66 11.0% 730.04 775.36 820.68 865.99 911.31

11.5% 356.20 381.48 411.27 446.89 490.27 11.5% 714.45 758.76 803.07 847.39 891.70

Upside Potential Upside Potential

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% -20% -12% 0% 15% 35% 9.5% 18% 26% 33% 40% 48%

10.0% -29% -22% -13% -2% 13% 10.0% 16% 23% 30% 37% 44%

10.5% -35% -30% -23% -15% -4% 10.5% 13% 20% 27% 34% 41%

11.0% -41% -37% -31% -24% -16% 11.0% 11% 18% 24% 31% 38%

11.5% -46% -42% -38% -32% -26% 11.5% 8% 15% 22% 29% 35%

Implied Exit EV / EBITDA Multiple Implied Perpetuity Growth

4.9% 5.4% 5.9% 6.4% 6.9% 21.9x 23.4x 24.9x 26.4x 27.9x

9.5% 14.09 15.88 18.18 21.21 25.40 9.5% 6.5% 6.7% 6.9% 7.0% 7.1%

10.0% 12.71 14.16 15.96 18.26 21.31 10.0% 7.0% 7.2% 7.3% 7.5% 7.6%

10.5% 11.57 12.77 14.22 16.03 18.35 10.5% 7.5% 7.7% 7.8% 8.0% 8.1%

11.0% 10.63 11.63 12.83 14.29 16.11 11.0% 8.0% 8.2% 8.3% 8.5% 8.6%

11.5% 9.82 10.68 11.68 12.89 14.36 11.5% 8.4% 8.6% 8.8% 9.0% 9.1%

EBITDA Multiple Method - Value per Share

EBITDA Multiple Method - Sensitivity AnalysisPerpetuity Growth Method - Sensitivity Analysis

Output Analysis

Incremental change

391,848.7 236,515

507.38

-23% 27%

838.75

Perpetuity Growth Method - Value per Share



19

Cost of Debt = Total Debt * (1 – Effective Tax Rate) * Bond Yield

The Risk Free Rate used is based on the current 10 year Treasury Yieldxv. The Beta is derived

by comparing the weekly performance of the company’s stock to that of the S&P over the past

five years. We used the raw beta in the calculation because it has not been modified from the

historical data. The Expected Market Return is provided by Bloomberg and consistent across all

companies within the market.

For the cost of debt we used a reasonable tax rate based on historical averages. We used the 10

year US Corporate Bond yield for a bond rating of AAxvi (Walmart is AA, and Amazon is AA-)

for both short term and long term debt. The long term yield is used as a proxy for a series of

short term loans. No debt adjustment factor was used.

WACC Inputs – Wal-Mart:



20

WACC Inputs – Amazon:

i Walmart Locations - http://corporate.walmart.com/our-story/our-locations ii Bloomberg – financial analysis data on Walmart iii Yahoo Finance iv The 8 Rules of Dividend Investing - http://www.suredividend.com/8rules/ v EuroMonitor Retailing Industry - http://www.portal.euromonitor.com.erl.lib.byu.edu/portal/magazine/homemain vi Global Retail E-Commerce Keeps on Clicking https://www.atkearney.com/consumer-products-retail/e-commerce-

index/full-report/-/asset_publisher/87xbENNHPZ3D/content/global-retail-e-commerce-keeps-on-

clicking/10192?_101_INSTANCE_87xbENNHPZ3D_redirect=%2Fconsumer-products-retail%2Fe-commerce-

index vii Reuters http://www.reuters.com/article/2015/10/27/us-wal-mart-stores-drones-exclusive-

idUSKCN0SK2IQ20151027 viii Walmart Locations - http://corporate.walmart.com/our-story/our-locations ix Tech Times – The Drone Delivery Race Begins - http://www.techtimes.com/articles/103406/20151105/the-drone-

delivery-race-begins-%E2%80%93-google-amazon-bestbuy-and-wal-mart-all-want-to-deliver-to-your-doorstep-via-

drone.htm x Amazon.com https://aws.amazon.com/what-is-cloud-computing/ xi Rackspace http://www.rackspace.com/knowledge_center/whitepaper/understanding-the-cloud-computing-stack-

saas-paas-iaas xii Amazon.com Press Release http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-

newsArticle&ID=2100418 xiii Sure Dividend - http://www.suredividend.com/wal-mart-wmt-is-deeply-undervalued/ xiv IMF Projections - http://www.imf.org/external/pubs/ft/survey/so/2015/RES100615A.htm xv Treasury Yields - http://www.treasury.gov/resource-center/data-chart-center/interest-

rates/Pages/TextView.aspx?data=yield xvi US Corporate Bond Yields - http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php

http://corporate.walmart.com/our-story/our-locations

http://www.suredividend.com/8rules/

http://www.portal.euromonitor.com.erl.lib.byu.edu/portal/magazine/homemain

https://www.atkearney.com/consumer-products-retail/e-commerce-index/full-report/-/asset_publisher/87xbENNHPZ3D/content/global-retail-e-commerce-keeps-on-clicking/10192?_101_INSTANCE_87xbENNHPZ3D_redirect=%2Fconsumer-products-retail%2Fe-commerce-index




http://www.reuters.com/article/2015/10/27/us-wal-mart-stores-drones-exclusive-idUSKCN0SK2IQ20151027

http://www.reuters.com/article/2015/10/27/us-wal-mart-stores-drones-exclusive-idUSKCN0SK2IQ20151027

http://corporate.walmart.com/our-story/our-locations

http://www.techtimes.com/articles/103406/20151105/the-drone-delivery-race-begins-%E2%80%93-google-amazon-bestbuy-and-wal-mart-all-want-to-deliver-to-your-doorstep-via-drone.htm



https://aws.amazon.com/what-is-cloud-computing/

http://www.rackspace.com/knowledge_center/whitepaper/understanding-the-cloud-computing-stack-saas-paas-iaas

http://www.rackspace.com/knowledge_center/whitepaper/understanding-the-cloud-computing-stack-saas-paas-iaas

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-newsArticle&ID=2100418

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-newsArticle&ID=2100418

http://www.suredividend.com/wal-mart-wmt-is-deeply-undervalued/

http://www.imf.org/external/pubs/ft/survey/so/2015/RES100615A.htm

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

http://www.bondsonline.com/Todays_Market/Composite_Bond_Yields_table.php

walmart vs amazon...mba case competition 2016 real vision investment case study 3 profit margins...

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