Case Questions 1. Use the Amazon financial statements presented in Table III to calculate the following metrics for 2012-2016: the sales growth rate, the operating profit margin, the effective tax rate, the capital turnover ratio, and the return on invested capital. 2. Calculate the five-year compounded annualized growth rate in Amazons sales and operating margin from the end of 2011 through the end of 2016. 3. If Amazons overall firm sales growth rate and its operating margins remain fixed at 2016 levels throughout the five-year forecast period, does the resulting valuation support the bull case or the bear case for Amazons stock? 4. If Amazons individual segment sales growth rates and operating margins remain fixed at 2016 levels throughout the five-year forecast period, does the resulting valuation support the bull case or the bear case for Amazons stock? Why does the overall firm sales growth rate accelerate and the overall firm operating margin expand during the forecast period despite the fact that segment margins and growth rates are not improving? 5. Propose at least one scenario for Amazons segment sales growth rates and operating margins in the forecast period that roughly justify the stock price. The estimated intrinsic values per share resulting from the scenarios do not have to exactly equal the stock price, but they should be between $800 and $900 per share. Use at least one piece of outside market data (either data provided in Table II or data that you find yourself) in your analysis. Explain to the members of the investment committee why this is a plausible scenario. 6. While Russ did not ask the team to provide their own opinion of Amazons valuation, the team members suspect that other members of the investment committee are likely to ask for it. Prepare your own valuation of Amazon and explain your key assumptions.

Table III: Amazon Income Statements and Balance Sheets (Data from Amazon 10Ks, Morningstar, and authors calculations) Income Statements (USD in millions) 2011 2012 2013 2014 2015 2016 Revenue $48,077 $61,093 $74,452 $88,988 $107,006 $135,987 Cost of revenue $37,288 $45,971 $54,181 $62,752 $71,651 $88,265 Gross profit $10,789 $15,122 $20,271 $26,236 $35,355 $47,722 Fulfillment $4,576 $6,419 $8,585 $10,766 $13,410 $17,619 Marketing $1,630 $2,408 $3,133 $4,332 $5,254 $7,233 Technology and content $2,909 $4,564 $6,565 $9,275 $12,540 $16,085 General and administrative $658 $896 $1,129 $1,552 $1,747 $2,432 Other operating expense, net $154 $159 $114 $133 $171 $167 Total Operating Expenses $47,215 $60,417 $73,707 $88,810 $104,773 $131,801 Operating income $862 $676 $745 $178 $2,233 $4,186 Interest Expense $65 $92 $141 $210 $459 $484 Interest and other income, net $137 -$40 -$98 -$79 -$206 $190 Income before income taxes $934 $544 $506 -$111 $1,568 $3,892 Provision for income taxes $291 $428 $161 $167 $950 $1,425 Equity Method Income -$12 -$155 -$71 $37 -$22 -$96 Net income $631 -$39 $274 -$241 $596 $2,371 Balance Sheets (USD in millions) 2011 2012 2013 2014 2015 2016 Cash and marketable securities $9,576 $11,448 $12,447 $17,416 $19,808 $25,981 Accounts receivable $2,922 $3,817 $4,767 $5,612 $5,654 $8,339 Inventories $4,992 $6,031 $7,411 $8,299 $10,243 $11,461 Total current assets $17,490 $21,296 $24,625 $31,327 $35,705 $45,781 Property, plant and equipment, net $4,417 $7,060 $10,949 $16,967 $21,838 $29,114 Goodwill and other long-term assets $3,371 $4,199 $4,585 $6,211 $7,204 $8,507 Total assets $25,278 $32,555 $40,159 $54,505 $64,747 $83,402 Accounts payable $11,145 $13,318 $15,133 $16,459 $20,397 $25,309 Accrued liabilities $3,751 $5,684 $6,688 $9,807 $10,372 $13,739 Unearned revenue $0 $0 $1,159 $1,823 $3,118 $4,768 Total current liabilities $14,896 $19,002 $22,980 $28,089 $33,887 $43,816 Long-term debt $255 $3,084 $3,191 $8,265 $8,227 $7,694 Capital and financial lease obligations $1,160 $746 $1,990 $4,224 $5,948 $7,519 Deferred taxes and other non-current liabilities $1,210 $1,531 $2,252 $3,186 $3,301 $5,088 Total liabilities $17,521 $24,363 $30,413 $43,764 $51,363 $64,117 Total stockholders' equity $7,757 $8,192 $9,746 $10,741 $13,384 $19,285 Total liabilities and stockholders' equity $25,278 $32,555 $40,159 $54,505 $64,747 $83,402