In writing the requested report for this valuation project, it is important that you

clearly incorporate relevant data (which may include charts and/or numeric tables) and explain numeric

aspects of the requested valuation within the scope of your written report. The most likely way to fail

this project is to provide insufficient numeric detail within your written report. Continue to read below

for the specific assignment!

Scenario:

On Friday, November 15, 2019, Amazon.com Inc. (ticker: AMZN) stock closed at a price of

$1,739.49 per share, and its market cap of equity was approximately $862 billion. Over its 22-

year history as a publicly-traded company, Amazon.com has impressed the equity markets.

However, its stock price performance in 2019 has fallen behind the other U.S. tech behemoths

(e.g., Apple, Microsoft, and Alphabet). In general, Amazon.coms ability to enter new market

spaces, generate revenue growth, and improve its profitability has been a driver of Amazon.com

shareholder value. Amazon disclosed its most recent quarterly results on October 24, and filed

its 10-Q with the SEC on October 25.

Because of your performance on earlier valuation-related work, your boss, D.A. Webb, at the

equity research firm, FCF Value Partners, has entrusted you to justify the markets current price

of Amazon.com by constructing a free cash flow forecast model and valuation of its stock. She

would like you to provide a relatively concise written discussion as to what assumptions may be

necessary about Amazons business and valuation fundamentals that would cause the markets

to price Amazon at its current level of approximately $1,740 per share.

From your valuation course at PSU, you learned that value is a function of expected free cash

flow, cost of capital, and terminal value. Certain big-picture assumptions affect company value

through their effects on corporate free cash flow and terminal value. As such, you plan to write

your report such that all of your big-picture numeric assumptions are apparent for Ms. Webb.

Ms. Webb has a very strong opinion that Amazon has the potential to reach $1,000 billion (YES!

thats $1 TRILLION!) in revenue in calendar year 2028. As a result, she has specifically asked you

to construct your revenue forecast to be consistent with her thoughts on Amazons revenue

potential. She has an equally strong opinion about market risk premiums, and has instructed you

to use Professor Aswath Damodarans implied market risk premium of 5.44% (which reflects his

most recent estimates using the S&P 500 as of November 1, 2019). Ms. Webb trusts you to do a

thorough job of estimating beta as part of the cost of equity estimation process.

To begin your financial statement forecast to create a value estimate, Ms. Webb has provided

you with an Excel worksheet consisting of Amazons historic annual financial statements from

2004 2018.

Amazons business model has undergone a significant change in recent years. While most

people view Amazon as primarily an online retail company (with the relatively low profit margins

associated with retail enterprises), its Amazon Web Services (AWS) operating segment has

become a significant driver of profitability and growth since 2013. Ms. Webb has created a small

Excel file from Amazons segment disclosures (a footnote filing in its 10-K) that shows annual

information on sales, operating income, assets, and capital expenditures from Amazons

operating segments (including AWS). She suggests that you should find some value in

forecasting future revenues and margins by segment to help guide your assumptions about

overall profit margins in the valuation model for Amazon on a consolidated basis. Specifically,

she wants you suggest a growth pattern of AWS (and the other two segments) in terms of

revenue and operating profits that allows for sufficiently high corporate-level profit margins to

correspond with the level of future margins necessary to justify Amazons price as being

probable (or even possible).

Ms. Webb has given you three weeks to complete a short report (MAXIMUM of 5 pages of

double-spaced text...approximately 1,500 words maximum) PLUS an executive summary of no

more than 200 words. Ms. Webb loves data exhibits (such as tables and charts) that help explain

the theme of the valuation. However, she also gets upset if data exhibits are not focused on

supporting the story, and has suggested that this report should contain a maximum of 8 good

exhibits.

Ms. Webb has provided you with the following information (

). You are free to gather any other

relevant information that is available to you through public or PSU library sources (examples:

Compustat database in WRDS, Bloomberg, SEC filings, Yahoo!Finance, Damodarans website,

PSU library resources for company and industry analysis, etc.). Please make sure to properly cite

sources of additional information in your report and provide a bibliography.

o

Spreadsheet files:

Amazon annual financial statements for 2004 - 2018 as downloaded from

Compustat using WRDS.

Operating segment disclosures from Amazon (as gathered from Amazons four

most recent 10-K filings) for North American, International, and AWS operating

segments from 2013 - 201