How Sensitive Is Amazon’s Stock To Changes In Its North America EBITDA Margin?

Amazon (NASDAQ:AMZN) has continued to be one of the most impressive growth stories in recent years, as it has followed its retail business growth with impressive growth in the AWS business. The behemoth has a robust presence across multiple verticals, ranging from online retail, technology, cloud computing, grocery and logistics. The company has reported strong double-digit growth in revenue across segments and geographies, which is commendable given the large base for year-over-year comparisons. Amazon is on course to cross $200 billion in revenues for 2018, up from an estimated $175 billion in 2017.

However, the company operates most of its non-AWS businesses on thin margins, with an EBITDA margin of 9-10% for North America and 3-4% for the International segments. As a result, its net income and EPS have remained relatively low in recent years in proportion to its revenue base. Still, the stock price has surged based on its revenue growth and diversified offerings, with Amazon’s trailing P/E ratio fluctuating between 150 and 250 over the last eight quarters. Amazon’s P/E ratio was even higher at 500-700 in late 2015, while the company reported negative net income in the preceding quarters.

Despite being a seemingly high-priced stock, the company still has significant growth potential across segments, as the non-AWS businesses will likely eventually become more profitable. Looking forward, if Amazon’s newly acquired ventures (Whole Foods) and technology offerings (Alexa-Echo ecosystem) integrate seamlessly into the company’s prior offerings and enhance its user experience at a more rapid pace, it could help drive profitability even faster than expected. Amazon’s ability to improve margins is important for its valuation. We have created an interactive model that details how a change in its North America EBITDA margin can impact the company’s value.

You can modify assumptions such as changes in expected EBITDA margins or net margins to see how the EPS or estimated valuation changes. The image below shows one of the key steps in identifying Amazon’s valuation sensitivity to changes in its North America EBITDA margin. We detail how changes in segment EBITDA margin impacts total EBITDA, which then impacts EPS and subsequently the valuation (assuming the P/E multiple doesn’t change).

We estimate that a 1.2% improvement in Amazon’s North America EBITDA margin for 2018 would imply a nearly 5% upside to its near-term valuation, which we estimate using projected EPS and a forward P/E multiple. Our sensitivity analysis assumes that the EBITDA margin expansion would not impact the company’s forward P/E multiple. However, if you disagree with that assumption, you can make changes to all input variables on the interactive dashboard platform to gauge the impact of any changes to our price estimate and EPS.

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