Apr 18, 2021
[2 min Read]
There are quite a few crucial risks involved for Amazon Inc. that have influenced my decision as to why I believe that the stock price of this big firm is bound to drop in the near future.The first factor is that there can exist potential misalignment of consumer preferences that can affect demand due to many of Amazon's services running through the online platform. Even though the terms of delivery and prices seem to be attractive to consumers, there is a low switching cost to move with other competitors. For instance, consumers can opt out of the monthly subscription service of Amazon Prime Video to Netflix.
Furthermore, since the internet helps increase the level of competition across different markets, Amazon must be consistently innovative against competitors. Moreover, the expansion into the international markets places significant strain on the management, operations and finances. Even though the company has been observed to have great economies of scale, Amazon's major market is centered around North America as compared to the rest of the world; roughly 80% of Amazon's Revenue was contributed by customers in the U.S, therefore it still needs to be consistent with managing growth in the international markets, to avoid long term opportunity costs in this dynamic and merciless industry.
Diving into a more technical glance, due to the fact that the DCF Model suffers from some deficiencies, mainly because free cash flows do not measure the value-added from the operations, they only tend to focus on cash brought in from operations i.e the value of the firm is solely dependent on a cash basis and excludes any events of accrual accounting. Thus, one cannot rely solely on the DCF Model and it is due to this crucial reason that a Residual Earnings Model was designed to capture value missed from the DCF Model. Hence the intrinsic value of the stock computed using this model is around $2,381. Compared to the DCF Model's intrinsic value of $2,576, both models suggest a SELL recommendation; taking into consideration that a generous "Optimistic" 4% perpetual growth rate was used.
These computed figures are based on my own analyses of Amazon Inc. that I have conducted over the past few months, although one vital point worth mentioning is that it is inevitable that consumers have depended heavily on the goods and services provided by this empire during these past couple of years for a variety of reasons, but can this demand still be maintained if not exceeded once the pandemic is over?!