Evaluating Stock Valuation of Amazon: A Comprehensive Fundamental Analysis

QUESTION

Term Paper Stock Valuation Project Individual Project

The goal of this assignment is to apply the fundamental analysis tools that we have studied in Chapter 6.

First choose a publicly traded company that you would hypothetically want to analyze and estimate its price. Please get approval from me so that two students do not estimate the same stock.

Download into a Excel file all financial information for your company.

Estimation of price using various methods:

1. 1. Method 1: The Dividend Discount Model estimation, You need to perform the followings:
2. a. If you chose a mature stock: use the Constant Dividend Growth Model (g < k) of chapter 6, (Equation 6-3), find current dividends per share, D(0), from the income stateme Estimate the dividend growth rate, g. You can estimate g in two to three different ways, like historical method, analysts’ estimate, or g = historical ROE* retention rate; then take an average these methods for your final g. Next, estimate the discount rate, k, using the CAPM and D1/P0 +g, and bond yield + premium; then take the average of these three for your final K. Once you have D1, g, and K estimated, then estimate the stock value. Then perform a sensitivity/scenario analysis, see the Valuation of ABC Mature stock file.
3. b. If your stock is a growth stock (g>k), then you need to use two or three stage discounted cash flow model. The estimation of growth stocks are a bit more complicated than mature stocks, an example of two-stage growth is provided in your textbook (An my lecture notes of ch 6). An example of 3 stage growth model is provided in this folder, see the valuation of Growth stock XYZ Excel file.

Note: If your stock is a mature stock, then you do part a above; if your stock is a growth stock you must do part b above. Thus, based on your chosen stock, you either do a or b, you should not do both.

2. 2. Method 2, Residual Income Model: Find or estimate the EPS growth ra Find book value per share on the balance sheet. Use the discount rate k from part a or b above and estimate the value of your stock according to residual income model of chapter 6. RIM can provide weird estimation. Don’t worry if you get crazy estimate.
3. 3. Method 3: Price Ratio Analysis (Problem 21 of Ch 6)
4. a. P/E ratio: Find or estimate the EPS growth rate or g. (You can use the same EPS growth rate from part a or b.) Predict next year’s EPS. Then stock price using relative valuation method = Historical P/E * ESP1 (Use the average or historical P/E ratio).

http://bigcharts.marketwatch.com

And under interactive charts and advanced chart (Lower indicator) you can plot The P/E ratio. If you chose 10 year chart, you can get approximate average P/E from the lower chart.

I would get the average or historical ratios from Morningstar.com

1. b. P/CF ratio: Find or estimate the CFPS growth rate. Predict next year’s CFPS. (You can use Cash from Operations on the Cash Flow Statement to approximate operating cash flow.) Then predict stock price using the average P/CF ra You could get historical ratios from Morningstar.com. Could also use bigcharts.com
2. c. P/S ratio: Find or estimate the SPS growth ra Predict next year’s SPS. Then predict stock price using the average P/S ratio.
3. 4. Now for the fun part! You now have as many as five different estimates for the stock you have chos Compare your estimates of stock value to the current actual stock price. Make a prediction about whether the stock is underpriced or overpriced (i.e. whether you should buy it or short it).
4. 5. What you are to turn at the end of semester: Create a neat, organized report of your stock analysis:
5. a. Section 1: Include your name, the assignment (Term Paper), and a typed concise description of your analysi Include why you picked the stock, and your conclusions on whether the stock is overvalued or undervalued. Do the results of your calculations agree with other current information that you may know about thecompany?
6. b. Section 2: Neat, organized, legible estimations of each model discussed Clearly show your five (a or b, c, d, e, and f) stock price valuations and compare it to its market price.
7. c. Section 3: Conclusion based on your analysis
8. d. References

ANSWER

Evaluating Stock Valuation of Amazon: A Comprehensive Fundamental Analysis

Introduction

This term paper aims to apply fundamental analysis tools to evaluate the stock valuation of Amazon, a publicly traded company. Using various methods, we will estimate the stock price and determine whether Amazon is overvalued or undervalued in the market. The fundamental analysis will encompass the Dividend Discount Model (DDM), Residual Income Model (RIM), and Price Ratio Analysis to gain insights into the company’s financial health and growth prospects.

Section 1: Analysis Overview

Amazon, a global e-commerce giant, was chosen for this analysis due to its significant influence on the market and its rapid expansion in various industries. The objective is to determine whether Amazon’s stock is undervalued or overvalued based on fundamental analysis methods.

The reasons for selecting Amazon are its strong financial performance, continuous innovation, and growth potential in various sectors. We will assess Amazon’s stock value by applying DDM, RIM, and Price Ratio Analysis.

Section 2: Stock Valuation Estimates

a) Dividend Discount Model (DDM) Estimation

Step 1: Calculate Current Dividends per Share (D0)
Step 2: Estimate Dividend Growth Rate (g) using historical methods, analyst estimates, and historical ROE * retention rate.
Step 3: Estimate Discount Rate (k) using CAPM, D1/P0 + g, and bond yield + premium.
Step 4: Calculate Stock Value using the Constant Dividend Growth Model (D1 / (k – g))

b) Residual Income Model (RIM) Estimation

Step 1: Estimate EPS Growth Rate (g)
Step 2: Find Book Value per Share on the balance sheet.
Step 3: Estimate Stock Value using RIM formula (Book Value per Share + (EPS – required rate of return))

c) Price Ratio Analysis

Step 1: Calculate P/E Ratio using historical data or average P/E ratio
Step 2: Predict next year’s EPS to determine the stock price using the relative valuation method
Step 3: Calculate P/CF Ratio and P/S Ratio using historical data or average ratios and predict stock prices accordingly.

Section 3: Conclusion

After conducting the stock valuation estimates, we compare each method’s results with Amazon’s current market price. Based on the analysis, we will draw a conclusion about whether Amazon is overvalued or undervalued.

Our findings will consider additional information about the company’s growth potential, financial statements, and industry trends to support our assessment. A final prediction about whether to buy, hold, or short the Amazon stock will be presented.

Conclusion

The comprehensive fundamental analysis of Amazon’s stock valuation through DDM, RIM, and Price Ratio Analysis provides valuable insights into the company’s financial health and market position. By assessing multiple estimation methods, we can make a well-informed judgment about whether Amazon’s stock is overvalued or undervalued.

Amazon’s impressive growth trajectory, innovation, and strong financial performance contribute to its high market demand and potential for continued expansion. The analysis will take into account various factors, including industry trends and market sentiment, to provide a well-rounded evaluation of Amazon’s stock.

By critically analyzing the data and comparing the stock valuation estimates with the market price, we aim to offer valuable recommendations for potential investors or traders regarding Amazon’s stock outlook.