Amazon continues to be one of the most impressive growth stories of recent years, with remarkable growth in the AWS business as the retail business grows. The existence of this monster covers many areas ranging from online retailing, technology, cloud computing, grocery and logistics. The company reported solid double-digit revenue growth across all its divisions and regions, which is commendable given its large base year-on-year. Amazon will surpass 200 billion U.S. dollars by 2018, up from 175 billion U.S. dollars in 2017.
However, the company operates most of its non-AWS businesses with low margins, with North American EBITDA margins of 9-10% and international markets of 3-4%. Therefore, its net income and earnings per share are proportional to its income base in recent years. Nonetheless, stock prices have risen sharply due to revenue growth and product diversification, and Amazon’s P / E has fluctuated between 150 and 250 over the past eight quarters. Amazon’s price-earnings ratio in the end of 2015 500-700 or even higher, while the company’s previous quarter net profit was negative.
Despite the seemingly high-priced shares, the company still has tremendous growth potential in all segments as non-AWS businesses may eventually become more profitable. Going forward, if Amazon’s newly acquired Whole Foods and technology products (Alexa-Echo Ecosystem) integrate seamlessly into the company’s previous products and upgrade its user experience faster, it may help boost profits Speed, more than expected. Amazon’s ability to raise margins is very important to its valuation. We created an interactive model detailing how changes in North American EBITDA margins affect a company’s value.
You can change assumptions, such as changes in expected EBITDA margins or net margins, to see how earnings per share or estimated valuation changes. The chart below shows one of the key steps Amazon is taking to North America’s sensitivity to changes in EBITDA margins. We detail how changes in EBITDA margins affect the total EBITDA and then affect earnings per share and subsequent valuations (assuming no change in P / E multiples).
We estimate that the North American North American EBITDA margin increased by 1.2% in 2018, which means the recent valuation is up nearly 5%. We estimate the estimated EPS and the multiple of the forecast PE. Our sensitivity analysis assumes that EBITDA margin expansion will not affect the company’s forward PE. However, if you disagree with this assumption, all input variables can be changed on the interactive dashboard platform to assess the impact on any changes to price estimates and earnings per share.