Valuation Winter 2010 By Michael Swiericzuk Amazon.com, Inc.

Amazon’s offerings 20,000ft Offers web-based services to: Consumers Product Sellers Web Business Developers + “Manufactures” the Kindle Swiericzuk - Amazon.com Valuation March 2010

Sources: Books and Music (media) Product Sales (electronics etc) Seller Branded Websites Co-branded credit card agreements Marketing and promotional services Online advertising Revenue Swiericzuk - Amazon.com Valuation March 2010

Two operational segments: 1.North America 2.International Three sales segments: 1.Media 2.Electronics and General Merchandise 3.Other Organizational Structure Swiericzuk - Amazon.com Valuation March 2010

Sales year over year 2009 North America: 20% International: 37% Consolidated: 29% (ex. Exchange Rates) Acquisitions November 2009 – Zappos 2009 February 2010 – Touchco Growth Swiericzuk - Amazon.com Valuation March 2010

International N. America 2009 Revenue: $24.5B International N. America 2008 Revenue: $19.1 B N. America International 2007 Revenue: $14.8 B Swiericzuk - Amazon.com Valuation March 2010

Sales Proportions Swiericzuk - Amazon.com Valuation March 2010

Revenue and Net Income Swiericzuk - Amazon.com Valuation March 2010

Why is Amazon so successful? Management - stable and experienced Systems Focused - constant Improvement Customer Focused - shipping and easy use - security Product Prices - not the cheapest Swiericzuk - Amazon.com Valuation March 2010

Amazon’s Management Performance Consistent Growth International Expansion Cost control Growth – really strong growth Beat the “Street” Paid down Debt Swiericzuk - Amazon.com Valuation March 2010

Consistent Growth Stable Growth Cost Control International Expansion Constant Improvement Lead in ecommerce Customer satisfaction Amazon.com Strategy Swiericzuk - Amazon.com Valuation March 2010

Where’s the Debt? What does this do to WACC? EquityDebt Preferred StockCapital Market Value55,850*425** - $56.275B Weight % Cost11.17%5.38%0.00%11.13% *Market Cap 03/03/2010 according to CNBC.com **Market Value of Debt Swiericzuk - Amazon.com Valuation March 2010

Amazon’s Risks Competition (BKS, EBAY, WMT, AAPL) Business Model Publishers and Record Companies Growth Invest away from core competencies Swiericzuk - Amazon.com Valuation March 2010

Amazon today Price: $ (03/03/2010) 52 week range: $59.82-$ Beta: * PE:61.5 PEG:1.46 Market Cap:$55.8 Billion Shares: ROA (5 yr):8.20 ROE (5yr):36.06 *Taken from CNBC.com, Morningstar and Reuters.com 03/03/2010* Amazon – 12 month chart Swiericzuk - Amazon.com Valuation March 2010

What is Amazon worth? Valuation Model and Considerations: FCFF 3 stage model (high growth → stable growth → perpetuity) Growth rates Cap Ex and Depreciation Tax Rate Pre-tax operating margin Amazon’s Debt (borrowing? cost?) Long Term Bond Rate – 4.4% Risk Premium – 5.17% Swiericzuk - Amazon.com Valuation March 2010

High Growth Period Current pre-tax operating margin4.61% Pre-tax operating margin at end of period7.00% % of debt in financing investments2% Growth rate in CAPEX & depreciation25.00% Working capital (% of revenues)8.00% Real tax rate21.78% Beta1.05 Current long term bond rate4.40% Historical market risk premium5.17% Cost of borrowing money4.50% Stable Period2015-Perpetuity CAGR at Perpetuity4.00% Pre-tax operating margin in perpetuity7.00% Return on capital in perpetuity8.00% % of Debt used in financing investments10.00% Average interest rate of debt7.50% Beta1.00 Model Inputs Swiericzuk - Amazon.com Valuation March 2010

Valuation for Amazon.com, Inc. Value of Firm $ 69,726 + Cash and marketable securities = $ 3,444 - Value of Debt $ 425 Value of Equity $ 72,745 - Value of Equity options issued by firm $ 2,210 Value of Equity per Share $ $ is 36% above today’s value – BUY! Swiericzuk - Amazon.com Valuation March 2010

FCFF Model Sensitivity Beta0.9 $ $ $ $ % Debt (Growth Period)1% $ % $ % $ % Debt (Stable Period)1% $ % $ % $ % $ Cost of Debt in Perpetuity4% $ % $ % $ Swiericzuk - Amazon.com Valuation March 2010

Proposed Growth Rates AMAZON.com Year International Growth 38% 37% 36%35%27%25%22%20%17%14%11%9%7%5%4% International Portion of Amazon's revenue 48%50%52%54%56%58%60%62%64%66%68%70%72%74%76%78%80% North American Growth 20% 19% 17%15%13%11%9%8%7%6%5%4% North American Portion of Amazon's revenue 52%50%48%46%44%42%40%38%36%34%32%30%28%26%24%22%20% Consolidated growth rate 29% 28%24%22%20%18%15%13%10%8%6%5%4% Growth rates used in the model Swiericzuk - Amazon.com Valuation March 2010

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