acquisition - KBRO

8/7/2019 acquisition - KBRO

1/6

Amazon.com Inc. (NASDAQ: AMZN, $171.99 ) HOLnternet Media & Commerce Price Target: $145.

ayuresh Masurekar, [email protected]

STOCK DATA52-Week Range $172.53 - $105.80YTD Stock Return 27.85%YTD S&P Return 9.70%Daily Volume 6,369,235Shares Outstanding 449.000MMMarket Cap $77,223.5MMEnterprise Value $71,502.5MMNet Cash Per Share $12.74Tangible Book Value $4,628.00Dividend Yield 0.00%Book Value 6,397.00Balance Sheet Date 09/30/2010Net Cash $5,721.0MM

ESTIMATES

2009A 2010E 2011ERevenue (Net)

March $4,889.0A $7,131.0A Previous

June $4,651.0A $6,566.0A Previous

Sept $5,449.0A $7,560.0A Previous

Dec $9,519.0A $12,794.0 Previous

FY $24,508.0A $34,051.0 $43,549.0EV/Revenue 2.9x 2.1x 1.6x

EPS (Net)

March $0.53A $0.85A Previous

June $0.54A $0.69A

Previous Sept $0.62A $0.72A

Previous Dec $1.07A $1.02

Previous FY $2.78A $3.28 $4.68

P/E 61.9x 52.4x 36.8x

PF EPS. GAAP EPS estimates are $2.34 in 2010, $3.46 in2011.

Q3 Q1 Q2 Q380

100120140

160180

2010 2011

1 Year Price History for AMZN

Created by BlueMatrix

COMPANY DESCRIPTION

Amazon.com, Inc., is the largest e-commerce retailcompany globally. In the U.S., Amazon offers itscustomers a wide array of media, electronic andgeneral merchandise spanning 19 distinctcategories. The company also operates in sixcountries.

Thoughts on Quidsi Acquisition

KEY POINTS

AMZN announced acquisition of Quidsi (parent of Diapers.com and Soap.cofor approximately $545M

Expect $480M-$520M in incremental revenues for 2011 (1.5 point benefit togrowth)

No direct benefit to operating profit as Quidsi business running at breakeve

Large market segment with small and growing online presence

Potential synergies from less aggressive pricing, customer acquisition

Reiterate HOLD thesis on strong top-line growth and continued marginpressure

DETAILS

Announced acquisition of Quidsi. On Monday morning, Amazon announcedacquisition of Quidsi, the parent company of Diapers.com and Soap.com, for $50in cash and $45M in debt and other obligations. The deal is expected to close inDec. 2010. Diapers.com, launched in 2005, sells a variety of baby products, whileSoap.com, launched in mid-2010, sells household consumable products.

Impact on financials. Diapers.com had 2009 revenues of $182M, with 2010Erevenues of $300M (up 65% Y/Y). (See page 2 for historical revenues). We expeQuidsi (which also includes Soap.com) to post revenues of $480M-$520M in 201indicating a 1.5 point benefit to Amazon's annual growth rate. We note that Quidsbusiness has been running at breakeven, as the company reinvested for growth,especially in marketing. We do not expect any material benefit to Amazon'soperating income for 2011. We will update our forecasts once the acquisition clos

We view this acquisition as a long-term positive, as: 1) Amazon increases itsexposure to a large market segment (baby products), which is young in terms of online presence; and 2) the deal has synergies in various areas including pricinggiven the recent strong price wars between these two companies; marketing, givethe aggressive search spend (see page 2) as well as customer acquisition acrossplatforms. We view baby products as a category with an attractive demographic,with frequent and relatively high order value purchases. Though the purchase primay seem high at 1.8x 2010 sales, we view it as reasonable given the high growrate - implying 1.1x 2011 sales and 0.7x 2012 sales.

Margins in the baby products business: We note that Diapers.com has had logross margins at 4% initially, 7%-9% in early 2010 and the business should contito have comparatively low margins due to the need to stay price-competitive and

shipping costs from big, bulky items and fast, free shipping. The key to future maexpansion lies in the ability to cross-sell higher margin discretionary baby producto loyal consumable customers.

Reiterate HOLD. We continue to believe that while Amazon has excellent long-tegrowth prospects, the stock should trade sideways over the next 12 months due margin pressure, fully priced valuation and uncertainty around the shift to digitalformat in media. The Quidsi acquisition fits into our overall thesis of strong top-lingrowth with continued margin pressure. That said, we believe Amazon deserveskudos for being able to grow at a high rate despite a very large base. Our $145 ptarget implies a 31x P/E on 2011 PF EPS, or 1.0 PEG.

November 9, 20

ease see pages 5-6 of this document for important disclosures.
mailto:[email protected]:[email protected]


2/6

Diapers.com revenue growth

2.5 1135

89

182

300

450

630

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010E 2011E 2012E

0%

50%

100%

150%

200%

250%

300%

350%

400%

Diapers.com revenues Revenue Y/Y growth rate

Source: News reports, KBRO estimates

Note: Numbers above do not include revenues from recently launched Soap.com

Recent marketing wars between Amazon and Diapers.com

Source: Google, Business Insider



3/6

Amazon.com (AMZN) KBIncome Statement Rev 0 7360 12304 Mayuresh Masurekar (212) 292-8

EBITDA 0 -- 851 2359 30

($ in mil, except per share) EPS $0.00 $0.79 $1.37 3.82 4

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 2008 2009 2010E 2011

North America Sales $2,578 $2,451 $2,843 $4,956 $3,780 $3,590 $4,126 $7,036 $10,227 $12,828 $18,532 $24,

International Sales 2,311 2,200 2,606 4,563 3,351 2,976 3,434 5,758 8,939 11,680 15,519 19,4

Net Sales 4,889 4,651 5,449 9,519 7,131 6,566 7,560 12,794 19,166 24,508 34,051 43,5

Cost of Sales 3,741 3,518 4,176 7,543 5,501 4,957 5,786 10,078 14,896 18,978 26,322 33,5

Gross Profit 1,148 1,133 1,273 1,976 1,630 1,609 1,774 2,716 4,270 5,530 7,729 10,0

Operating Expenses

Fulfillment 407 389 444 732 528 558 657 1,087 1,596 1,972 2,830 3,5

Marketing 124 124 144 268 196 204 234 422 468 660 1,056 1,3

Technology & Content 239 253 267 298 319 350 386 448 883 1,057 1,503 1,8

General & Administrative 56 63 68 81 80 91 96 128 230 268 395 4

Stock-Based Compensation 67 85 90 100 87 111 107 141 276 342 446 6

Amort/Other 11 60 9 21 26 25 26 38 (24) 101 115 1

Total Operating Expenses 904 974 1,022 1,500 1,236 1,339 1,506 2,265 3,429 4,400 6,346 7,9

Operating Income - GAAP 244 159 251 476 394 270 268 452 841 1,130 1,384 2,0

Operating Income - Pro Forma 322 304 350 597 507 406 401 631 1,093 1,573 1,945 2,8

EBITDA 409 388 440 709 626 535 551 887 1,381 1,946 2,599 3,5

Total Non-Operating Expenses 4 20 11 (5) 7 27 24 4 58 30 62

Pre-Tax Income 248 179 262 471 401 297 292 456 899 1,160 1,446 2,1Taxes 69 39 60 85 100 80 79 121 246 253 380 5

GAAP Net Income 177 142 199 384 299 215 231 335 653 907 1,066 1,5

Pro Forma Net Income 233 239 275 483 384 314 328 467 824 1,230 1,493 2,1

GAAP EPS $0.41 $0.32 $0.45 $0.85 $0.66 $0.47 $0.51 $0.73 $1.51 $2.05 $2.34 $3

Pro Forma EPS $0.53 $0.54 $0.62 $1.07 $0.85 $0.69 $0.72 $1.02 $1.91 $2.78 $3.28 $4

Basic Shares 429 431 432 440 445 447 448 450 423 433 447

Fully-Diluted Shares 437 440 441 450 454 455 456 458 432 442 456

Y/Y % Change

or mer ca aes

International Sales 15% 16% 33% 48% 45% 35% 32% 26% 33% 31% 33% 2

International - ex FX 28% 28% 35% 37% 40% 40% 41% 37% 31% 33% 37% 2

Net Sales 18% 14% 28% 42% 46% 41% 39% 34% 29% 28% 39% 2

Net Sales - ex FX 25% 20% 29% 37% 42% 42% 40% 40% 28% 29% 41% 2

Gross Profit 20% 17% 27% 47% 42% 42% 39% 37% 27% 30% 40% 3

Operating Expenses 18% 15% 20% 39% 36% 45% 49% 51% 27% 25% 46% 2PF Operating Profits 25% 24% 52% 66% 57% 34% 15% 6% 29% 44% 24% 4

PF Net Income 26% 33% 62% 67% 65% 32% 19% -3% 34% 49% 21% 4

EBITDA 27% 23% 43% 63% 53% 38% 25% 25% 26% 41% 34% 3

Pro Forma EPS 23% 30% 60% 62% 58% 27% 15% -5% 32% 46% 18% 4

Expenses - % of Sales

COGS 76.5% 75.6% 76.6% 79.2% 77.1% 75.5% 76.5% 78.8% 77.7% 77.4% 77.3% 77

Fulfillment 8.3% 8.4% 8.1% 7.7% 7.4% 8.5% 8.7% 8.5% 8.3% 8.0% 8.3% 8

Marketing 2.5% 2.7% 2.6% 2.8% 2.7% 3.1% 3.1% 3.3% 2.4% 2.7% 3.1% 3

Technology and Content 4.9% 5.4% 4.9% 3.1% 4.5% 5.3% 5.1% 3.5% 4.6% 4.3% 4.4% 4

G&A 1.1% 1.4% 1.2% 0.9% 1.1% 1.4% 1.3% 1.0% 1.2% 1.1% 1.2% 1

Amort as % of Revs 0.2% 1.3% 0.2% 0.2% 0.4% 0.4% 0.3% 0.3% -0.1% 0.4% 0.3% 0

SBC as % of Revs 1.4% 1.8% 1.7% 1.1% 1.2% 1.7% 1.4% 1.1% 1.4% 1.4% 1.3% 1

Total Op. Expense (PF) 16.9% 17.8% 16.9% 14.5% 15.7% 18.3% 18.2% 16.3% 16.6% 16.1% 17.0% 16

Tax Rate 27.8% 21.8% 22.9% 18.0% 24.9% 26.9% 27.1% 26.5% 27.4% 21.8% 26.3% 25

Margins

Gross Margin 23.5% 24.4% 23.4% 20.8% 22.9% 24.5% 23.5% 21.2% 22.3% 22.6% 22.7% 23EBITDA Margin 8.4% 8.3% 8.1% 7.4% 8.8% 8.1% 7.3% 6.9% 7.2% 7.9% 7.6% 8

PF Operating Margin 6.6% 6.5% 6.4% 6.3% 7.1% 6.2% 5.3% 4.9% 5.7% 6.4% 5.7% 6

GAAP Operating Margin 5.0% 3.4% 4.6% 5.0% 5.5% 4.1% 3.5% 3.5% 4.4% 4.6% 4.1% 4

Pro Forma Net Income Margin 4.8% 5.1% 5.1% 5.1% 5.4% 4.8% 4.3% 3.6% 4.3% 5.0% 4.4% 5

Incremenatal PF Opr. Margin 8.5% 10.0% 10.0% 8.5% 8.3% 5.3% 2.4% 1.0% 5.6% 9.0% 3.9% 9

Source: Kaufman Bros. estimates, Company data.



4/6

Mayuresh Masurekar, CFA (212) 292-8149

KBROAmazon.com (AMZN)Revenue Breakdown 7,560 12,794$ in millions, except per share) Revenues 0 7360 12304 33342 416

#DIV/0! 2.7% 4.0% 2.1% 4.5

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 2008 2009 2010E 2011E

Revenues

Net Sales 4,889 4,651 5,449 9,519 7,131 6,566 7,560 12,794 19,166 24,508 34,051 43,5

Y/Y chg 18% 14% 28% 42% 46% 41% 39% 34% 29% 28% 39% 28

FX benefit (loss) -268 -227 -41 354 185 -48 -83 -497 127 -182 -443 4

Foreign Exchange Impact -6% -6% -1% 5% 4% -1% -2% -5% 1% -1% -2%

Net Sales (ex FX) 5,157 4,878 5,490 9,165 6,946 6,614 7,643 13,290 19,039 24,690 34,493 43,1

Net Sales (ex FX) 25% 20% 29% 37% 42% 42% 40% 40% 28.3% 28.8% 40.7% 26.

North AmericaN. America Media $1,305 $1,148 $1,412 $2,099 $1,597 $1,324 $1,591 $2,351 $5,349 $5,964 $6,863 $7,6

as % of total revenue 27% 25% 26% 22% 22% 20% 21% 18% 28% 24% 20% 18

Y/Y chg 8% 0% 13% 20% 22% 15% 13% 12% 16% 11% 15% 1

Q/Q chg -25% -12% 23% 49% -24% -17% 20% 48%

N. America Electronics & Other (EGM) 1,172 1,187 1,293 2,662 2,024 2,090 2,326 4,392 4,429 6,314 10,832 15,1


Y/Y chg 42% 29% 36% 54% 73% 76% 80% 65% 41% 43% 72% 4

Q/Q chg -32% 1% 9% 106% -24% 3% 11% 89%

N. America Other 101 116 138 195 159 176 209 293 449 550 837 1,2


Y/Y chg 6% 16% 29% 33% 57% 52% 51% 50% 37% 22% 52% 4

Q/Q chg -31% 15% 19% 41% -18% 11% 19% 40%

North America Sales Total 2,578 2,451 2,843 4,956 3,780 3,590 4,126 7,036 10,228 12,829 18,533 24,0as % of total revenue 53% 53% 52% 52% 53% 55% 55% 55% 53% 52% 54% 55

Y/Y chg 21% 13% 24% 36% 47% 46% 45% 42% 26% 25% 44% 3

Q/Q chg -29.0% -4.9% 16.0% 74.3% -23.7% -5.0% 14.9% 70.5%

nternational

nt'l Media $1,418 $1,294 $1,517 $2,580 $1,833 $1,550 $1,759 $2,890 $5,734 $6,809 $8,032 $9,1


Y/Y chg 6% 3% 21% 37% 29% 20% 16% 12% 24% 19% 18% 13

Y/Y chg ex FX 17% 12% 22% 26% 23% 21% 18% 23% 22.4% 20.8% 21.7% 10.5

Q/Q chg -25% -9% 17% 70% -29% -15% 13% 64%

nt'l EGM 874 882 1,064 1,947 1,489 1,399 1,644 2,823 3,112 4,767 7,355 10,2

as % of total revenue 18% 19% 20% 20% 21% 21% 22% 22% 16% 19% 22% 23%

Y/Y chg 33% 44% 54% 68% 70% 59% 55% 45% 50% 53% 54% 39%

c g ex

Q/Q chg -24% 1% 21% 83% -24% -6% 18% 72%

nt'l Other 19 24 25 36 29 27 31 45 93 104 132 1

as % of total revenue 0% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Y/Y chg 19% -8% 9% 29% 53% 13% 24% 26% 63% 12% 27% 22%

Y/Y chg ex FX 40% 10% 14% 18% 47% 18% 33% 37% 61.3% 13.9% 31.1% 19.4%

Q/Q chg -32% 26% 4% 44% -19% -7% 15% 46%

Total International 2,311 2,200 2,606 4,563 3,351 2,976 3,434 5,758 8,939 11,680 15,519 19,48

Total International 47% 47% 48% 48% 47% 45% 45% 45% 47% 48% 46% 45%Y/Y chg 15% 16% 33% 48% 45% 35% 32% 26% 33% 31% 33% 26%

Y/Y chg ex FX 28% 28% 35% 37% 37% 38% 35% 37% 31% 33% 37% 23

FX Benefit (Loss) (268) (227) (41) 354 185 (48) (83) -497 127 -182 -443 447

Consolidated Sales

Total Media 2,723 2,442 2,929 4,679 3,430 2,874 3,350 5,240 11,083 12,773 14,894 16,7


Y/Y chg 7% 1% 17% 29% 26% 18% 14% 12% 20% 15% 17% 13

Total EGM 2,046 2,069 2,357 4,609 3,513 3,489 3,970 7,215 7,541 11,081 18,187 25,4


Y/Y chg 38% 35% 44% 60% 72% 69% 68% 57% 45% 47% 64% 4

Total Other 120 140 163 231 188 203 240 338 542 654 969 1,3


Y/Y chg 8% 11% 25% 32% 57% 45% 47% 46% 41% 21% 48% 44

Source: Kaufman Bros. estimates, Company data.



5/6

Rating and Price Target History

Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q30

40

80

120

160

200

2008 2009 2010 2011

03/26/09I:H:$69

04/24/09H:$74

05/26/09H:$83

07/24/09H:$87

10/23/09H:$120

12/29/09H:$155

01/27/10B:$155

01/29/10B:$160

04/27/10UR:NA

08/19/10H:$135

10/22/10H:$145

Rating and Price Target History for: Amazon.com Inc. (AMZN) as of 11-08-2010

Created by BlueMatrix

Guide to Kaufman Bros. Ratings - Distribution and Definitions*IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [B] 35 70.00 0 0.00

HOLD [H] 15 30.00 1 6.67

SELL [S] 0 0.00 0 0.00

BUY: We believe the stock will outperform its peer group over the next 12 months due to superior fundamentals and/orpositive catalysts.

HOLD: We believe the stock will perform in line with its peer group over the next 12 months due to full valuation and/or lack ocatalysts.SELL: We believe the stock will underperform its peer group over the next 12 months due to overvaluation, deterioratingfundamentals, and/or negative near-term catalysts.

* Excludes stocks with ratings under review.

Analyst Certification

I, Mayuresh Masurekar, CFA, hereby certify that the views expressed in this research report accurately reflect my personaviews about any and all of the subject securities or issuers referred to in this document. Furthermore, no part of mcompensation was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in this repor

Research Disclosures

Kaufman Bros., L.P. makes a market in AMZN.

800 Third Avenue, 30 th Floor, New York, NY, 10022 Tel: 212.292.8100 Fax: 212.292.8103 KBRO Trading Desk: 1.800.437.5276

www.kbro.com
http://www.kbro.com/http://www.kbro.com/


6/6

Disclaimers

This report is for informative purposes only. Under no circumstances is it to be construed as an offer to sell or a solicitation buy any security. The information contained herein has been obtained from sources believed to be reliable, but its accuracand completeness, and that of the opinions based thereon, are not guaranteed. Kaufman Bros., L.P., its affiliates ansubsidiaries, and/or its officers and employees may from time to time acquire, hold, or sell a position in the securitiementioned herein. Kaufman Bros., L.P. may also perform investment banking or other services for, or solicit investmenbanking or other business from, any company mentioned in this report.

The analyst(s) responsible for preparing this report may receive compensation based upon various factors including the firm

overall profitability, a portion of which is derived from investment banking revenues.

Our equity research product is deemed to be a consulting service.

Valuation Methodology

Kaufman Bros., L.P., methodology for valuation analysis, including the assigning of ratings and price targets, may take intaccount many factors including, but not restricted to, the following: market capitalization, maturity of business, volatility business and security, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, casflow (CF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium(discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 1months.

Risk Relating to Our Price Target and Rating

The financial instruments discussed in this report will not be suitable for all investors and should generally be viewed aspeculative. Investors must make their own financial decisions based upon their specific investment objectives and financia

situation. Past performance of the financial instruments discussed in this report should not be taken as an indication of futuresults. The price, value of and income from any of the financial instruments mentioned in this report can rise as well as faand could be affected by many factors including but not limited to changes in economic, financial and political factorcompetitive dynamics, and any event that impacts the company being discussed including overall market conditions. If financial instrument is denominated by a currency other than the investor's home currency, fluctuations in exchange ratecould adversely affect the price of, value of or income derived from the financial instruments described in this report. addition, investors in securities whose values are affected by the currency of the underlying security, effectively assumcurrency risk.

2010 KAUFMAN BROS., L.P. All rights reserved. Reproduction without permission is prohibited. Additional informatioavailable upon request.

800 Third Avenue, 30 th Floor, New York, NY, 10022 Tel: 212.292.8100 Fax: 212.292.8103 KBRO Trading Desk: 1.800.437.5276

www.kbro.com
http://www.kbro.com/http://www.kbro.com/

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acquisition - KBRO