John Ross, Andy Ladygin, Dayne Jervis Tuck School of Business at Dartmouth November 9, 2015

Transcription

1 Strong Cash Flows at a Modest Valuation with an Option on the Seamless Omni-channel Retail Experience of the Future: A Case for Walmart Outperformance over the Next Decade John Ross, Andy Ladygin, Dayne Jervis November 9, 2015

2 I. Executive Summary: Wal-Mart Stores, Inc. represents an attractive opportunity to own a stable and growing cash flow profile with growing dividends and a large share repurchase program at a compelling valuation. At current levels, the market has not accounted for the upside opportunity in Walmart s stock price that stems from management s investment in delivering the world s first seamless omnichannel retail experience at scale. In addition to this, stable cash flows, a market dominating position, and untapped opportunities to leverage its ecommerce channel make Walmart a compelling investment over the next decade. Amazon, at current valuation, has priced in unreasonably high growth expectations for the company limiting its potential upside and exposing investors to considerable downside risk. II. Industry Overview Global Retail Growth: Global Retail Sales topped $22.5 trillion by the end of 2014 and is expected to continue steady but slowing growth going into the future. In aggregate, research estimates project that worldwide retails sales will increase by 25% to $28.3 trillion representing a CAGR of 5.93%. In order to make sense of the global estimate for retail sales growth it is important to consider the breakdown by region. Through 2018 it is expected that strongest growth will be seen in Asia accelerating from current growth of 4.1% yoy to 4.8%. This is a direct result of a rapidly expanding middle class in the region and represents the most significant portion of the world s population. North America will continue to see steady growth 2.4% and Europe will see retail sales contraction turn into very modest growth of 0.9%. Latin America, Middle East and Africa Page 1 of 18

3 will see an acceleration in growth for the very small proportion of total global sales that they account for. Global ecommerce Growth: In 2014 ecommerce accounted for 5.9% of global retail sales and is expected to account for 8.8% by China and the US are the leading ecommerce markets together accounting for 55% of global ecommerce in China is expected to continue rapid growth in this space and will potentially account for 40% of global ecommerce by When considering ecommerce it is important to keep overall retail sales in the picture. Ecommerce will still only represent a small fraction of total retail sales as the strength of in-store purchases is expected to persist. The continued strength of in store sales will contribute to the deceleration of ecommerce growth year over year. When considering ecommerce growth as a percentage of retail sales, China will still outpace all other countries. For example approximately 63% of the US population will make a purchase online, but only 6.5% of US retail sales are expected to come from ecommerce, while Page 2 of 18

4 approximately 28% of the Chinese population will make a purchase online, with more than 10% of all retail purchases coming from ecommerce. Page 3 of 18

5 III. Business Overviews Wal-Mart Stores, Inc. Walmart is a global retailer with operations focused in physical stores and web based sales. The company is split into three divisions, Walmart US, Walmart International, and Sam s Club. Walmart s focus is to provide the consumer with access to everyday low prices and they strive to achieve this by operating at low cost. Management continues to be clear in this philosophy as can be seen in a recent letter from CEO Doug McMillon to associates, There will be no better place in retail. As of the fiscal year ending January 31 st 2015 net sales were $482B of which Walmart US accounted for 60%, Walmart International accounted for 28%, and Sam s club accounted for 12%. Profit margins have been consistently between 3-4% for the past 20 years showing notable consistency. Walmart currently has $49.7B in debt representing 37.2% of total capital, $78.9B in common equity representing 59.4% of total capital, and $3.3B in minority interest representing 3.3% of total capital. Walmart s return on assets is 8.1% and return on equity is 19.3%. Amazon.com Amazon.com is a North American and International online retailer. Its business and revenue streams are sourced from consumers, its sellers and also from enterprises. For its consumers Amazon facilitates sales of its own and third party products. Third party sales accounts for about 45% of its retail business and the remainder represents sales of its own products. Amazon delivers the lowest possible prices and timely customer service. For sellers, Amazon facilitates sales through Amazon.com and also provides fulfillment services for sellers. Amazon charges its sellers through different fee structures including fixed fees, revenue share fees, per unit fees, or a combination of all. Amazon also provides enterprise solutions through Amazon Web Services Page 4 of 18

6 (AWS). The services provided include computing, storage, database, analytics, applications and deployment services. 60% of Amazon s $89B in sales were from the US and 40% are from international sales in Media accounts for 25%, electronics and general merchandise accounts for 68%, and Other (including AWS) accounts for 7% of net sales. Amazon does not operate as a consistently profitable business. As of the most recent earnings report on September 30 th 2015 Amazon realized net income of $79M representing a margin of 0.3%. Amazon currently has $18.6B in debt representing 60% of total capital, and $12.4B in equity representing the other 40%. Amazon s return on assets and equity have also been inconsistent. As of the last filing ROA was 2.2% and ROE was 2.9%. Amazon s Profitability: In order to analyze Amazon s profitability it is best to compare it to a competitor with a business model more similar to its own. The best option is Alibaba. While the business may appear to be similar on the surface, there are differences between their fundamental philosophies and business models that explain why Alibaba is so much more profitable than Amazon. Amazon s management team has maintained that their mission is to provide the customer with the best possible price even at the expense of alienating its sellers. This philosophy drives Amazon to operate its retail business at razor thin margins in order to satisfy its customer base. Alibaba s focus is to help small businesses grow through providing a platform that allows them to grow their sales. Since they are less focused on pricing for the consumers benefit, Alibaba maintains healthier margins on sales which has had no perceivable drag on their growth. When considering their business models the most significant difference is that third party sales account for 45% of Amazon s retail business while all of Alibaba s sales are third party. Facilitating third party sales is less capital intensive than developing and selling your own Page 5 of 18

7 products, and is hence a more profitable business. Alibaba also has its customers cover fulfillment expenses while Amazon spends significantly in this aspect. Income Statement ( avg) % of Tot % of Tot AMZN Sales BABA Sales Total Sales 74, , Cost of sales 54, % 15, % Fulfillment 8, % - 0% Marketing 3, % 5, % Technology and content 6, % 6, % General and administrative 1, % 4, % III. Investment Thesis: Wal-Mart Stores, Inc. ( Walmart or WMT ) offers an attractive cash flow profile at a low valuation relative to competitor Amazon.com ( Amazon or AMZN ). We believe that Walmart s impressive return on equity, strong dividend and share repurchase programs and Page 6 of 18

8 quality cash flow generation at an attractive valuation multiple make Walmart a highly attractive investment. However, the Walmart story does not end there. We believe that the current investment program being undertaken by Walmart management offers strong potential for meaningful value creation. These investments are aimed at delivering a next generation retail experience combining omni-channel retail across in-store, online and mobile platforms. They are making these investments alongside reinvestment in exceptional instore experiences and an engaged and productive workforce. With stable cash flow, a market dominating position, and considerable opportunity to leverage its ecommerce channel, there is a compelling investment opportunity over the next decade. Walmart is well positioned to capitalize on the future of retail and is taking steps now to build on its massive brick and mortar presence, string distribution platform, and the millions of relationships the company already has with customers around the world to win the future of retail in North America and globally. It will not be without challenges. Competition is coming at Walmart from all sides. Increasing pressure from other mass retailers such as Target and Costco, tightening margins from hard discounters such as Dollar General, and innovative and nimble strategies from the pure e- commerce players such as Amazon. Walmart is facing a very challenging retail environment moving forward. Walmart will succeed in meeting these challenges and its success will rest on the key differentiating strengths that it has developed. First, 260 million customers shop with Walmart each week across all three channels (stores, clubs, and online). Second, a world class supply chain that continues to grow with significant Page 7 of 18

9 investment to support ecommerce growth. Third, a reputation for value and global brand awareness. Fourth, a strong cash flow profile and long history of dividend growth. Walmart has added considerable talent to its e-commerce business with top tech hires from Silicon Valley. By traffic, Walmart is one of the top three online retailers and the Walmart US app is among the top three apps in retail with tens of millions of regular users. Walmart has the plans in place and has committed to significant investment in ensuring the success of these plans. The plan is as follows: 1. Improve the store experience by improving store appearance, investing in employee wages to improve engagement and quality, and enabling seamless in-store and digital transactions through new technology. a. Improve supercenters b. Win at Neighborhood Market and Grocery pickup 2. Invest in the supply chain to leverage the world class logistics and fulfillment platform already in place to serve stores to meet the needs of a growing ecommerce business. a. Ability to move individual items b. Connecting distribution centers and stores to improve inventory accuracy and efficiency, reducing handling and transportation costs as well as working capital investment c. Optimizing inventory also helps reduce markdown costs 3. Most importantly, build a seamless digital relationship with customers that spans in-store, online or mobile shopping experiences. Page 8 of 18

10 The winner of the digital retail revolution will not only be the pure ecommerce players but the retail players that can offer seamless in-store, online and mobile experiences that allow consumers to shop when they want on the platform that they want. If you believe that there will be a more seamless in-store and digital retail paradigm in the future, we ask you to think about who is best positioned for success in that domain? We offer that the answer is Walmart. With its massive store network and formidable supply chain capabilities already in place, the company will need to add considerable digital capabilities and improve the flexibility of its supply chain. We think that this is achievable. Walmart is already excelling in ecommerce today. Currently, Walmart s ecommerce sales total $12 billion. The ecommerce channel has doubled in size over the last three years and is expected to grow between 20% and 30% over the next three years. Recently, Walmart re-platformed Walmart.com to improve the customer experience and do so across all platforms. Further, the Pangea platform significantly expands the opportunity to host third party merchants on the site. The platform will also enhance the ability of Walmart to strategically price items. Online fulfillment has also been well invested in. The company has recently added or has committed to add eight new fulfillment centers near large population centers and had invested in state of the art automation in these facilities. The company is testing an unlimited shipping pass service (similar to Amazon Prime). Grocery represents a major opportunity for Walmart going forward. Opportunity for new customer acquisition but also management sees the marriage of ecommerce and grocery as a game changer. Opportunity is to do more than just pure e-commerce. The opportunity to Page 9 of 18

11 differentiate Walmart is to seamlessly integrate the digital and in-store experiences and to do so at scale. Walmart is focused on delivering returns for its shareholders and has grown its dividend every year for 42 years. Further, management has recently announced a $20 billion share repurchase program and is aiming to use the allocation over the next two years. At its current valuation, Walmart represents an attractive opportunity to be a part of an impressive upside story with limited downside at the current valuation given the underlying strengths of the company s mature but still robust brick and mortar retail business. As for Amazon, the stock has performed impressively over a considerable period and we expect that it will continue to do so into the future. However, with thin margins and uncertain prospects for future profitability we find it challenging to take a position in Amazon at its current valuation. Our valuation model scenarios suggest that the potential downside to Amazon stock price is much higher than the potential upside, given that the upside hinges on continued exceptional execution and substantial improvement in operating margins during the next decade. Page 10 of 18

12 IV. Valuation Methodologies We approached valuing Walmart and Amazon in several ways. First, we compared the valuation multiples of the two companies. CURRENT VALUATION & METRICS WALMART AMAZON Share Price $ as of: 11/6/ /6/2015 Shares Outstanding (mm) 3, Market Capitalization (mm) $ 188,445 $ 309,088 Plus: Net Debt 43,940 4,159 Plus: Minority Interest 3,253 - Enterprise Value $ 235,638 $ 313,247 EV as a Multiple of: Revenue 0.5x 3.1x EBITDA 6.7x 44.7x EBITDA - CapEx 10.2x 121.3x Market Cap as a Multiple of: Trailing Net Income 12.2x 942.3x Memo: Revenue $ 485,621 $ 100,588 EBITDA 35,267 7,007 Capex 12,105 4,425 Trailing Net Income 15, Dividend yield 3.33% N/A % of 52 Week High 65% 100% % of 52 Week Low 104% 231% Memo: 52 Week High $ $ Week Low $ $ Page 11 of 18

13 The valuation multiples for the two companies are so different as to make comparison difficult. However, relative to their peer group, we are offered a sense of how the market values Walmart relative to other mass-retailers of scale. As is highlighted in the table below, Walmart currently trades at a discount to peers such as Costco and Target. WALMART - COMPARABLE COMPANIES ANALYSIS Market Cap. Revenue TEV / Revenue TEV / EBITDA P / E TEV / Forward EBITDA Forward P / E Company Costco $ 68,913 $ 116, x 14.6x 29.3x 13.6x 27.9x Target 48,527 73, x 8.0x 16.9x 7.9x 15.7x Best Buy 12,201 40, x 4.7x 14.9x 4.5x 13.0x PriceSmart 2,676 2, x 14.3x 30.1x 13.2x 26.0x Carrefour SA 23,993 83, x 9.0x 21.6x 8.7x 17.8x METRO AG 10,022 67, x 5.4x 40.6x 4.9x 18.1x Wumart Stores 937 3, x 5.4x 17.3x 4.5x 14.0x Wal-Mart Stores $ 188,445 $ 485, x 6.7x 12.3x 7.2x 13.7x Note: Forward estimates based on consensus Wall Street estimates. The table below highlights the high valuation of Amazon relative to its peer set of fast growing ecommerce businesses. AMAZON - COMPARABLE COMPANIES ANALYSIS Market Cap. Revenue TEV / Revenue TEV / EBITDA P / E TEV / Forward EBITDA Forward P / E Company Alphabet $ 514,153 $ 71, x 19.4x 34.1x 13.5x 23.4x ebay 35,299 17, x 7.7x 11.9x 10.3x 15.3x Facebook 302,864 15, x 43.1x 107.5x 21.3x 40.7x Yahoo! 32,297 4, x 31.8x 136.6x 34.6x 66.6x Netflix 48,748 6, x 130.4x NM 96.5x NM Expedia 17,315 6, x 26.8x 20.9x 12.7x 23.9x Priceline 73,512 8, x 23.2x 32.3x 19.3x 23.3x Amazon.com $ 309,088 $ 100, x 44.7x 942.3x 23.2x 145.7x Note: Forward estimates based on consensus Wall Street estimates. Page 12 of 18

14 Secondly, we analyzed the expected future cash flows of the two companies. After considering what we believed to be likely future earnings scenarios, we determined a target price for each company. For Walmart, under our investment case, we determined a target price of $82.93 per share. Our downside valuation for Walmart is $60.91 per share. Both cases are above where Walmart trades today, making the current valuation an attractive entry point. We based our investment case analysis on the following assumptions for Walmart: Consensus estimates for next two years reflecting the planned decline in profitability as the company focuses on investment for the future After the investment period, we project a sustained but modest growth in sales reaching 4% p.a. with a return to historical margin performance of 7.7% EBITDA margins Capex levels are high in the near term consistent with management forecasts for the investment period and then coming down after the investment programs have been fully implemented Terminal growth of 2% for the out years For Amazon, under our investment case, we determined a target price of $ per share. Our downside valuation for Amazon is $ per share. We believe that this finding is consistent with our overall view of Amazon: a fantastic company with much of the upside priced in and large downside should the growth story falter. Based on the above, we believe that Walmart s low current valuation as well as its likely stable, growing cash flow profile over the foreseeable future presents a compelling return opportunity with limited downside risk. On the other hand, Amazon, currently trading high after a ~100% Page 13 of 18

15 gain over the past twelve months, provides a less compelling return with considerable downside risk should the company fail to sustain its rapid growth. Finally, we conducted a series of comparative returns analysis to highlight the relative performance of each security over the next ten years required to generate an acceptable return on investment. This sanity check reinforced our thesis as we demonstrated that Walmart need not do anything heroic to outperform even a considerable share price performance by Amazon given the relative price of the securities today. The findings of that analysis are below. COMPARATIVE RETURNS ANALYSIS - WMT VS. AMZN WALMART AMAZON 12/31/2015 $ (58.78) $ (659.37) 12/30/ (1) - 12/30/ /30/ /31/ /30/ /30/ /30/ /31/ /30/ /30/ /30/ , IRR 6.4% 6.4% Req'd Share Price Increase 41% 86% % of 52 Week High 91% 185% Note: Analysis does not include the impact of Walmart's announced $20 billion share repurchase program. (1) Dividend yield based on current share price. We believe that this conservative estimate is appropriate and it further highlights the lack of heroics required to generate return from WMT. Page 14 of 18

16 Appendix I: Walmart Investment Case Discounted Cash Flow Model DCF ANALYSIS WALMART INVESTMENT CASE Fiscal Year Ended January LTM Equivalent Calendar Year Sales $ 446,509 $ 468,651 $ 476,294 $ 485,651 $ 485,621 $ 482,642 $ 495,707 $ 509,425 $ 524,708 $ 541,761 $ 560,723 $ 581,750 $ 605,020 $ 629,221 $ 654,389 $ 680,565 % Growth n.a. 5.0% 1.6% 2.0% n.a. (0.6%) 2.7% 2.8% 3.0% 3.3% 3.5% 3.8% 4.0% 4.0% 4.0% 4.0% EBITDA $ 34,597 $ 36,203 $ 35,742 $ 36,320 $ 35,267 $ 34,390 $ 32,327 $ 32,874 $ 39,353 $ 41,716 $ 43,176 $ 44,795 $ 46,587 $ 48,450 $ 50,388 $ 52,404 % Margin 7.7% 7.7% 7.5% 7.5% 7.3% 7.1% 6.5% 6.5% 7.5% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Operating Income $ 26,491 $ 27,725 $ 26,872 $ 27,147 $ 25,963 $ 24,844 $ 22,714 $ 22,883 $ 29,063 $ 31,091 $ 32,179 $ 33,386 $ 34,721 $ 36,110 $ 37,555 $ 39,057 % Margin 5.9% 5.9% 5.6% 5.6% 5.3% 5.1% 4.6% 4.5% 5.5% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% Net Income $ 15,699 $ 16,999 $ 16,022 $ 16,363 $ 15,493 $ 14,551 $ 12,775 $ 13,268 $ 13,666 $ 15,194 $ 15,726 $ 16,316 $ 16,968 $ 17,647 $ 18,353 $ 19,087 % Margin 3.5% 3.6% 3.4% 3.4% 3.2% 3.0% 2.6% 2.6% 2.6% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% Cash Flow NOPAT (1) $ 17,881 $ 18,714 $ 18,139 $ 18,324 $ 17,525 $ 16,770 $ 15,332 $ 15,446 $ 19,617 $ 20,986 $ 21,721 $ 22,535 $ 23,437 $ 24,374 $ 25,349 $ 26,363 D&A $ 8,106 $ 8,478 $ 8,870 $ 9,173 $ 9,304 $ 9,048 $ 9,293 $ 9,551 $ 10,290 $ 10,625 $ 10,997 $ 11,409 $ 11,865 $ 12,340 $ 12,833 $ 13,347 CapEx $ (13,510) $ (12,898) $ (13,115) $ (12,174) $ (12,105) $ (13,061) $ (13,415) $ (13,786) $ (10,494) $ (10,835) $ (11,214) $ (11,635) $ (12,100) $ (12,584) $ (13,088) $ (13,611) Change in Net Working Capital $ (435) $ (564) $ (3,601) $ 1,076 $ 1,442 $ (440) $ (451) $ (464) $ (478) $ (493) $ (511) $ (530) $ (551) $ (573) $ (596) $ (620) FCF (2) $ 12,042 $ 13,730 $ 10,293 $ 16,399 $ 16,166 $ 12,318 $ 10,759 $ 10,747 $ 18,936 $ 20,282 $ 20,992 $ 21,780 $ 22,651 $ 23,557 $ 24,499 $ 25,479 Present Value $ 12,318 $ 9,916 $ 9,129 $ 14,825 $ 14,635 $ 13,961 $ 13,350 $ 12,796 $ 12,265 $ 11,757 $ 11,269 No of Periods Sum of Present Values $ 136,221 Terminal Value $ 176,837 Memo: Perpetuity Growth Rate 2.0% Discount Rate 8.5% Total Enterprise Value $ 313,058 Less: Net Debt $ 43,940 Less: Minority Interest $ 3,253 Total Equity Value $ 265,865 Shares Outstanding (mm) 3,206 Price per Share $ Memo: Sales Growth n.a. 5.0% 1.6% 2.0% n.a. (0.6%) 2.7% 2.8% 3.0% 3.3% 3.5% 3.8% 4.0% 4.0% 4.0% 4.0% EBITDA Margin 7.7% 7.7% 7.5% 7.5% 7.3% 7.1% 6.5% 6.5% 7.5% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% Operating Margin 5.9% 5.9% 5.6% 5.6% 5.3% 5.1% 4.6% 4.5% 5.5% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% Net Income Margin 3.5% 3.6% 3.4% 3.4% 3.2% 3.0% 2.6% 2.6% 2.6% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% D&A as a % of Sales 1.7% 1.8% 1.9% 2.0% 2.0% 1.9% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% CapEx as a % of sales 3.0% 2.8% 2.8% 2.5% 2.5% 2.7% 2.7% 2.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Net Working Capital as a % of Sales (0.1%) (0.1%) (0.8%) 0.2% 0.3% (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (1) Net operating profit after taxes represents EBIT*(1-.325) representing a 32.5% tax rate. (2) Does not add-back stock based compensation expensation expense. Page 15 of 18

17 Appendix II: Walmart Downside Case Discounted Cash Flow Model DCF ANALYSIS WALMART DOWNSIDE CASE Fiscal Year Ended January LTM Equivalent Calendar Year Sales $ 446,509 $ 468,651 $ 476,294 $ 485,651 $ 485,621 $ 482,642 $ 495,707 $ 509,425 $ 519,614 $ 530,006 $ 540,606 $ 551,418 $ 562,447 $ 573,696 $ 585,170 $ 596,873 % Growth n.a. 5.0% 1.6% 2.0% n.a. (0.6%) 2.7% 2.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA $ 34,597 $ 36,203 $ 35,742 $ 36,320 $ 35,267 $ 34,390 $ 32,327 $ 32,874 $ 38,971 $ 39,750 $ 40,545 $ 41,356 $ 42,184 $ 43,027 $ 43,888 $ 44,765 % Margin 7.7% 7.7% 7.5% 7.5% 7.3% 7.1% 6.5% 6.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Operating Income $ 26,491 $ 27,725 $ 26,872 $ 27,147 $ 25,963 $ 24,844 $ 22,714 $ 22,883 $ 28,781 $ 29,356 $ 29,943 $ 30,542 $ 31,153 $ 31,776 $ 32,412 $ 33,060 % Margin 5.9% 5.9% 5.6% 5.6% 5.3% 5.1% 4.6% 4.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Net Income $ 15,699 $ 16,999 $ 16,022 $ 16,363 $ 15,493 $ 14,551 $ 12,775 $ 13,268 $ 13,534 $ 13,804 $ 14,080 $ 14,362 $ 14,649 $ 14,942 $ 15,241 $ 15,546 % Margin 3.5% 3.6% 3.4% 3.4% 3.2% 3.0% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% Cash Flow NOPAT (1) $ 17,881 $ 18,714 $ 18,139 $ 18,324 $ 17,525 $ 16,770 $ 15,332 $ 15,446 $ 19,427 $ 19,816 $ 20,212 $ 20,616 $ 21,028 $ 21,449 $ 21,878 $ 22,315 D&A $ 8,106 $ 8,478 $ 8,870 $ 9,173 $ 9,304 $ 9,048 $ 9,293 $ 9,551 $ 10,190 $ 10,394 $ 10,602 $ 10,814 $ 11,030 $ 11,251 $ 11,476 $ 11,705 CapEx $ (13,510) $ (12,898) $ (13,115) $ (12,174) $ (12,105) $ (13,061) $ (13,415) $ (13,786) $ (12,990) $ (13,250) $ (13,515) $ (13,785) $ (14,061) $ (14,342) $ (14,629) $ (14,922) Change in Net Working Capital $ (435) $ (564) $ (3,601) $ 1,076 $ 1,442 $ (440) $ (451) $ (464) $ (473) $ (483) $ (492) $ (502) $ (512) $ (522) $ (533) $ (544) FCF (2) $ 12,042 $ 13,730 $ 10,293 $ 16,399 $ 16,166 $ 12,318 $ 10,759 $ 10,747 $ 16,154 $ 16,477 $ 16,806 $ 17,143 $ 17,485 $ 17,835 $ 18,192 $ 18,556 Present Value $ 12,318 $ 9,916 $ 9,129 $ 12,647 $ 11,889 $ 11,177 $ 10,507 $ 9,878 $ 9,286 $ 8,730 $ 8,207 No of Periods Sum of Present Values $ 113,685 Terminal Value $ 128,785 Memo: Perpetuity Growth Rate 2.0% Discount Rate 8.5% Total Enterprise Value $ 242,470 Less: Net Debt $ 43,940 Less: Minority Interest $ 3,253 Total Equity Value $ 195,277 Shares Outstanding (mm) 3,206 Price per Share $ Memo: Sales Growth n.a. 5.0% 1.6% 2.0% n.a. (0.6%) 2.7% 2.8% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA Margin 7.7% 7.7% 7.5% 7.5% 7.3% 7.1% 6.5% 6.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% Operating Margin 5.9% 5.9% 5.6% 5.6% 5.3% 5.1% 4.6% 4.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Net Income Margin 3.5% 3.6% 3.4% 3.4% 3.2% 3.0% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% D&A as a % of Sales 1.7% 1.8% 1.9% 2.0% 2.0% 1.9% 1.9% 1.9% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% CapEx as a % of sales 3.0% 2.8% 2.8% 2.5% 2.5% 2.7% 2.7% 2.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Net Working Capital as a % of Sales (0.1%) (0.1%) (0.8%) 0.2% 0.3% (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (1) Net operating profit after taxes represents EBIT*(1-.325) representing a 32.5% tax rate. (2) Does not add-back stock based compensation expensation expense. Page 16 of 18

18 Appendix III: Amazon Investment Case Discounted Cash Flow Model DCF ANALYSIS AMAZON INVESTMENT CASE Fiscal Year Ended December LTM Retail sales n/a n/a $ 84 $ 100 n/a $ 118 $ 137 $ 157 $ 181 $ 208 $ 233 $ 258 $ 284 $ 309 $ 334 AWS sales n/a n/a $ 5 $ 8 n/a $ 14 $ 25 $ 34 $ 41 $ 47 $ 52 $ 57 $ 63 $ 68 $ 73 Sales $ 61 $ 74 $ 89 $ 108 $ 101 $ 132 $ 162 $ 191 $ 221 $ 254 $ 285 $ 316 $ 346 $ 377 $ 407 % Growth n.a. 21.9% 19.5% 21.2% n.a. 21.9% 22.8% 18.1% 15.9% 15.0% 12.0% 10.8% 9.8% 8.8% 8.0% EBITDA $ 3 $ 3 $ 5 $ 8 $ 7 $ 12 $ 18 $ 25 $ 30 $ 35 $ 40 $ 44 $ 50 $ 56 $ 62 % Margin 4.8% 4.6% 5.5% 7.9% 7.0% 9.4% 11.2% 12.9% 13.7% 13.7% 14.1% 14.0% 14.4% 14.8% 15.2% Retail sales $ 0 $ - $ 2 $ 3 $ 5 $ 6 $ 7 $ 9 $ 10 $ 13 $ 15 $ 17 AWS sales $ 2 $ - $ 3 $ 6 $ 9 $ 12 $ 13 $ 15 $ 16 $ 18 $ 19 $ 21 Operating Income $ 1 $ 0 $ 0 $ 2 $ - $ 5 $ 9 $ 14 $ 18 $ 21 $ 24 $ 27 $ 31 $ 35 $ 39 % Margin 1.2% 0.2% 0.2% 2.1% % 5.7% 7.4% 8.1% 8.1% 8.5% 8.5% 8.9% 9.2% 9.6% Cash Flow NOPAT (1) $ 1 $ 0 $ 0 $ 2 $ - $ 3 $ 6 $ 9 $ 12 $ 14 $ 16 $ 18 $ 21 $ 23 $ 27 D&A $ 2 $ 3 $ 5 $ 6 $ - $ 7 $ 9 $ 11 $ 12 $ 14 $ 16 $ 18 $ 19 $ 21 $ 23 CapEx $ (4) $ (3) $ (5) $ (5) $ - $ (7) $ (8) $ (10) $ (11) $ (13) $ (14) $ (16) $ (17) $ (19) $ (20) Change in Net Working Capital $ 2 $ 1 $ 1 $ 1 $ - $ 1 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 $ 2 FCF (2) $ 0 $ 1 $ 1 $ 3 $ - $ 6 $ 9 $ 12 $ 15 $ 17 $ 20 $ 22 $ 25 $ 28 $ 31 Present Value $ 5 $ 8 $ 10 $ 11 $ 12 $ 12 $ 12 $ 13 $ 13 $ 14 No of Periods Sum of Present Values $ 109 Terminal Value $ 254 Memo: Perpetuity Growth Rate 3.0% Discount Rate 8.5% Total Enterprise Value $ 363 Less: Net Debt $ (6) Less: Minority Interest $ - Total Equity Value $ 369 Shares Outstanding (mm) Price per Share $ (1) Net operating profit after taxes represents EBIT*(1-.325) representing a 32.5% tax rate. (2) Does not add-back stock based compensation expensation expense. Page 17 of 18

19 Appendix IV: Amazon Downside Case Discounted Cash Flow Model DCF ANALYSIS AMAZON DOWNSIDE CASE Fiscal Year Ended December LTM Retail sales n/a n/a $ 84 $ 98 $ - $ 114 $ 130 $ 148 $ 166 $ 186 $ 205 $ 225 $ 244 $ 263 $ 280 AWS sales n/a n/a $ 5 $ 8 $ - $ 12 $ 15 $ 19 $ 22 $ 24 $ 26 $ 28 $ 30 $ 33 $ 35 Sales $ 61 $ 74 $ 89 $ 106 $ 101 $ 125 $ 145 $ 167 $ 188 $ 210 $ 231 $ 253 $ 275 $ 296 $ 315 % Growth n.a. 21.9% 19.5% 19.5% n.a. 17.8% 16.0% 14.8% 12.8% 11.4% 10.4% 9.4% 8.5% 7.6% 6.7% EBITDA $ 3 $ 3 $ 5 $ 8 $ - $ 11 $ 13 $ 17 $ 21 $ 23 $ 25 $ 27 $ 30 $ 32 $ 34 % Margin 4.8% 4.6% 5.5% 7.8% % 9.1% 10.4% 10.9% 10.9% 10.8% 10.8% 10.8% 10.8% 10.8% Retail sales $ 0 $ - $ 1 $ 2 $ 4 $ 5 $ 6 $ 6 $ 7 $ 7 $ 8 $ 8 AWS sales $ 2 $ - $ 3 $ 3 $ 4 $ 5 $ 6 $ 6 $ 7 $ 7 $ 8 $ 8 Operating Income $ 1 $ 0 $ 0 $ 2 $ - $ 4 $ 5 $ 8 $ 10 $ 11 $ 12 $ 13 $ 14 $ 16 $ 17 % Margin 1.2% 0.2% 0.2% 2.0% % 3.5% 4.9% 5.3% 5.3% 5.3% 5.3% 5.2% 5.3% 5.3% Cash Flow NOPAT (1) $ 1 $ 0 $ 0 $ 1 $ - $ 3 $ 3 $ 5 $ 7 $ 8 $ 8 $ 9 $ 10 $ 10 $ 11 D&A $ 2 $ 3 $ 5 $ 6 $ - $ 7 $ 8 $ 9 $ 10 $ 12 $ 13 $ 14 $ 15 $ 16 $ 18 CapEx $ (4) $ (3) $ (5) $ (6) $ - $ (7) $ (8) $ (9) $ (10) $ (12) $ (13) $ (14) $ (15) $ (16) $ (18) Change in Net Working Capital $ 2 $ 1 $ 1 $ 1 $ - $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 $ 1 FCF (2) $ 0 $ 1 $ 1 $ 3 $ - $ 4 $ 5 $ 7 $ 8 $ 9 $ 10 $ 10 $ 11 $ 12 $ 12 Present Value $ 3 $ 4 $ 5 $ 6 $ 6 $ 6 $ 6 $ 6 $ 6 $ 6 No of Periods Sum of Present Values $ 53 Terminal Value $ 103 Memo: Perpetuity Growth Rate 3.0% Discount Rate 8.5% Total Enterprise Value $ 156 Less: Net Debt $ (6) Less: Minority Interest $ - Total Equity Value $ 163 Shares Outstanding (mm) Price per Share $ (1) Net operating profit after taxes represents EBIT*(1-.325) representing a 32.5% tax rate. (2) Does not add-back stock based compensation expensation expense. Page 18 of 18