How Changes In Amazon’s International Margins Impact Its Stock Price

Amazon (NASDAQ:AMZN) has had a very strong 2017, with its stock price surging from $750 at the beginning of the year to over $1,200 at the end of the year. The internet giant derives over 50% of its total value from Amazon Web Services, per Trefis estimates, despite generating an estimated 10% of net revenues in 2017. This is largely due to the fact that AWS is a high margin business (30-35% EBITDA margin) while non-AWS business streams operate at thin margins. Amazon’s North America EBITDA margins stand at around 9-10% while Amazon International operates at 3-4% EBITDA margin, due to which the company-wide net income margin (net income as a % of net revenue) for 2017 is an estimated 1.2%.

Looking ahead, if Amazon’s aggressive international plans – particularly in India and Japan – reap benefits sooner than expected, it could help drive near-term profitability. Moreover, if customers in international markets subscribe to Amazon Prime and adapt to the Alexa-Echo ecosystem at a rapid pace, it would help drive margins higher. Amazon’s ability to improve margins is important for its valuation. We have created an interactive model that details how a change in its International EBITDA margin can impact the company’s value.

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

We find that a 1.5% improvement in Amazon’s International EBITDA margin for 2018 would imply a nearly 3% upside to its near-term valuation, which we estimate using projected EPS and a forward P/E multiple. Our sensitivity analysis assumes that the increase in EBITDA margin would not impact the company’s forward P/E multiple, which currently stands at just over 105 based on Trefis estimates (P/E based on full year EPS). However, if you disagree with that assumption, you can make changes to all input variables on the interactive dashboards platform to gauge the impact of all changes on our price estimate and EPS.

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