Project Overview
A comprehensive equity valuation of Amazon.com using a segment-based DCF model. The analysis separates Amazon's high-margin cloud business (AWS) from its advertising and retail segments to apply distinct growth and margin assumptions to each. WACC is derived from a CAPM-based cost of equity using Amazon's beta, market risk premium, and risk-free rate, combined with a cost of debt from its public bond yields. The model outputs an implied share price range with sensitivity analysis on terminal growth rate and WACC — the exact framework used in equity research coverage initiation reports.
📋Problem Statement
Amazon operates three structurally different businesses — a hyper-growth cloud platform (AWS), a high-margin advertising business, and a low-margin e-commerce/logistics operation — each warranting distinct growth trajectories and margin assumptions. A single-entity DCF obscures the true value drivers. The challenge: build a segment-level model that isolates each business's contribution and arrives at a defensible intrinsic value range.
🎯Analytical Approach
Decomposed Amazon's total revenue into three segments using publicly disclosed financials. Projected each segment's revenue growth independently (AWS: 20–25% near-term tapering; Advertising: 15–20%; Retail: 8–10%), applied segment-specific EBIT margin assumptions converging toward long-run steady states, and aggregated to a consolidated EBITDA and FCFF projection. Applied CAPM to derive cost of equity (risk-free rate + beta × ERP), blended with after-tax cost of debt to compute WACC. Terminal value computed using Gordon Growth Model.
💾Data Sources
Amazon annual reports (10-K): AWS, North America, and International segment disclosures. Market data: AMZN beta (5-year monthly vs. S&P 500), 10-year Treasury yield as risk-free rate, 5.5% Equity Risk Premium (Damodaran), Amazon bond yields for cost of debt, effective tax rate from historical filings.
🔧Quantitative Methods
Revenue projection: segment-level growth rate assumptions phased over 5-year explicit forecast period. EBIT margin ramp: AWS expanding to 30%+, retail improving gradually. FCFF = EBIT(1-t) + D&A − ΔWorking Capital − Capex. WACC: w_e × k_e + w_d × k_d × (1-t). Terminal Value: TV = FCFFₙ × (1+g) / (WACC−g). Enterprise Value = PV(explicit FCFFs) + PV(TV). Equity Value = EV − Net Debt. Sensitivity table: implied price across WACC (8%–12%) × terminal growth (2%–4%).
✨Key Results
Implied intrinsic value per share range derived from the sensitivity table, with mid-case assumptions yielding a defensible price target. AWS, despite representing ~17% of total revenue, accounts for 55–65% of total enterprise value — illustrating how segment-level analysis reveals hidden value embedded in Amazon's cloud business that a consolidated model would understate.
🧠Key Learnings
Conglomerate valuation requires segment decomposition — treating Amazon as a single entity distorts its value by blending AWS's 30%+ margins with retail's sub-5% margins. WACC sensitivity matters enormously for long-duration growth companies: a 1% change in discount rate moves Amazon's implied value by 15–20%. This project develops the analytical judgment required for equity research coverage of large-cap tech.