Portfolio Analysis

Amazon.com, Inc. was chosen as the company for this statistical study because it is the market leader in the crucial and established online retail sector. B2C electronic commerce is a rapidly expanding industry with plenty of room for innovative technological applications to improve peoples’ daily lives. New information technologies have led to management, logistics, and marketing optimization, which has sped up, reduced the cost, and improved the convenience of shopping in many nations. A company’s journey from an online book vendor to the biggest internet retailer in the world is really inspiring.

On July 5, 1994, Jeff Bezos established The Amazon.com, Inc. (formerly known as Cadabra, Inc.), a publicly traded business. Around the other key figures in company top management are Tom Alberg, Blig Gordon, Jamie Gorelick, Patty Stonesifer. That people are related to media, universities, hard- and software companies.

The headquarter is based in Seattle, Washington, served area is a whole world. Currently company has widely diversified structure of products it sells on-line: “DVDs, Blu-rays, CDs, video downloads/streaming, MP3 downloads/streaming, audiobook downloads/streaming, software, video games, electronics, apparel, furniture, food, toys, and jewelry”. The other business directions are a consumer electronic production (Kindle e-readers, Fire tablets, Fire TV, and Echo), selling of low-end products (AmazonBasics), and cloud infrastructure services (IaaS and PaaS), where Amazon is a larger provider in the world. Around next plans announced by company is buying of one of the biggest US retail chains, what would make it a strong competitor to Walmart.

The geographic and language politic of the company leads to the number of separate retail web-sites for the United States, the United Kingdom and Ireland, France, Canada, Germany (has Dutch, Polish, and Turkish language since 2016), Italy, Spain, Netherlands, Australia, Brazil, Japan, China, India, and Mexico. International shipping to other countries is available for a limited range of products.

As a public company, Amazon.com, Inc. issued its IPO of stock on May 15, 1997, trading under the NASDAQ stock exchange symbol AMZN, at a price of US$18.00 per share ($1.50 after three stock splits in the late 1990s).

Today market capitalization of the company is the highest around USA retailers (the second is a Walmart). In the global perspective, the Amazon.com, Inc. is on the 4th place by public company value and at the same time the largest Internet Company by revenue. The company has high position in USA as an employer as well (8th in the top by the number of employees). More financial data is presented in a Table 1 in Appendix A. From the table is easy to notice, that net sales of the company are growing year by year, as well as operating income. However in 2012 and 2014 there are net loses, therefore the company is not earning money for its shareholders stable every year. With time total assets and long-term obligations of the company also grows, what tells about growing scale of the business and its development.

The Amazon.com, Inc. actively investing in a new businesses and building subsidiaries, as it understand importance of all system elements development. For example, to enhance its competence in on-line commerce, marketing and infrastructure in 2008 the company invested in Engine Yard, PaaS and in 2010 in LivingSocial, a local deal site. The enterprise also actively investing in India, as it see their growing market with a high potential.

Well-developed net of subsidiaries (over 40 companies) allows Amazon.com, Inc. better market in particular segments and focus on some perspective directions what are not central for business, but may be supportive for it or let company to get very new markets and diversify the business.

Around such subsidiaries helpful in logistic management are Amazon Maritime, Inc., what has a Federal Maritime Commission license and can operate as a non-vessel-owning common carrier (NVOCC). By that business Amazon.com, Inc., optimize shipping of trading items on the route US-China. The other company, Beijing Century Joyo Courier Services that applied for a Freight forwarding license with the US Maritime Commission will also serve the goal to level up standards in items transportation to the client by both trucking and airfreight. With that mix of subsidiaries, Amazon.com, Inc. can compete such leaders of delivery services as FedEx and UPS.

Number of related companies are involved in marketing of the Amazon.com, Inc. For example there are social cataloging websites (Goodreads and Shelfari), what promote books on the basis of viral or partisan marketing. Goodreads (established in 2006-07 by Otis and Elizabeth Chandler), what Amazon bought in 2013, allows users to search books in a large database, constructed by the other users and supported by reviews and annotations. In the personal account, every registered user can build its own library

The website allows individuals to freely search Goodreads’ extensive user-populated database of books, annotations, and reviews. Users can sign up and register books to generate library catalogs and reading lists. They can also create their own groups of book suggestions and discussions. In December 2007, the site had over 650,000 members and over 10 million books had been added. Amazon bought the company in March 2013.[72]

Shelfari[edit]

Shelfari is a social cataloging website for books. Shelfari users build virtual bookshelves of the titles which they own or have read and they can rate, review, tag and discuss their books. Users can also create groups that other members may join, create discussions and talk about books, or other topics. Recommendations can be sent to friends on the site for what books to read. Amazon bought the company in August 2008.[72] Shelfari continued to function as an independent book social network within the Amazon until January 2016, when Amazon announced that it would be merging Shelfari with Goodreads and closing down Shelfari.[73][74]

ComiXology[edit]

ComiXology is a cloud-based digital comics platform with over 200 million comic downloads as of September 2013. It offers a selection of more than 40,000 comic books and graphic novels across Android, iOS, Fire OS and Windows 8 devices and over a web browser. Amazon bought the company in April 2014.[71]

The third group of subsidiaries are producers of media, what company can sell (spoken audio entertainment, information and educational programming, audiobooks, video).

Audible.com[edit]

Audible.com is a seller and producer of on the Internet. Audible sells digital audiobooks, radio and TV programs and audio versions of magazines and newspapers. Through its production arm, Audible Studios, Audible has also become the world’s largest producer of downloadable audiobooks. On January 31, 2008, Amazon announced it would buy Audible for about $300 million. The deal closed in March 2008 and Audible became a subsidiary of Amazon.[66]

Brilliance Audio[edit]

Brilliance Audio is an publisher founded in 1984 by Michael Snodgrass in Grand Haven, Michigan.[67] The company produced its first 8 audio titles in 1985.[67] The company was purchased by Amazon in 2007 for an undisclosed amount.[68][69] At the time of the acquisition, Brilliance was producing 12–15 new titles a month.[69] It operates as an independent company within Amazon.

In 1984, Brilliance Audio invented a technique for recording twice as much on the same cassette.[70] The technique involved recording on each of the two channels of each stereo track.[70] It has been credited with revolutionizing the burgeoning audiobook market in the mid-1980s since it made unabridged books affordable.[70]

Twitch[edit]

Twitch is a live streaming platform for video, primarily oriented towards video gaming content. The service was first established as a spin-off of a general-interest streaming service known as Justin.tv. Its prominence was eclipsed by that of Twitch, and Justin.tv was eventually shut down by its parent company in August 2014 in order to focus exclusively on Twitch.[75] Later that month, Twitch was acquired by Amazon for $970 million.[76] Through Twitch, Amazon also owns Curse, Inc., an operator of video gaming communities and a provider of VoIP services for gaming.[77] Since the acquisition, Twitch began to sell games directly through the platform,[78] and began offering special features for Amazon Prime subscribers.[79]

The site’s rapid growth had been boosted primarily by the prominence of major esports competitions on the service, leading GameSpot senior esports editor Rod Breslau to have described the service as ”the ESPN of esports“.[80] As of 2015, the service had over 1.5 million broadcasters and 100 million monthly viewers.[81]

As clear from the data above the company is growing and developing, and having strong opportunities for getting bigger shares on highly competitive and profitable markets, however fundamental factors only does not give a best view on the share price perspective. To make a technical statistical analysis I took a data from Morningstar website for closing prices of company shares on the horizon of 1 year as well as such data for its strong competitor EBay. Based on the data have been done some statistical tests (one and two sample hypothesis tests) and calculated descriptive statistics: mean, variance, standard deviation.

Next, I will give short description to statistical parameters I have counted and the process of their calculation. Notice, that for all calculations been used MS Excel on PC with its embedded functions and statistical analysis packages.

First, I evaluated mean or average for a market data set with Amazon.com shares prices on closing. Mean in statistic is ”a central value of a discrete set of numbers: specifically, the sum of the values divided by the number of values” (stat). That parameter allows comparing discrete sets or data on a long period and summarize information about prices. The drawback of that method is a lost information and potentially misunderstood facts, so is better to use with other parameters. To calculate mean for our data set I used formula of arithmetic mean, embedded in an Excel function ”average”, the value I got – $860.32. For portfolio management mean value gives a direction for future expectations in profitability.

Second parameter I calculated, variance, by definition is ”the expectation of the squared deviation of a random variable from its mean” (stat). The sense of parameter is a distance of elements of dataset from the mean value. It is related to the other measure – standard deviation (square of it). To calculate the variance in MS Excel I used embedded function ”var.s”, the value I got – 7935.73.

Next parameter, standard deviation, is ”a measure that is used to quantify the amount of variation or dispersion of a set of data values” (stat). It is a square root of deviation. The high value of that parameter means wide spreading of dataset elements around the mean value, while low value in our case shows that all prices are close. To calculate standard deviation in MS Excel I used embedded function ”stdev.s”, the value I got for Amazon data – 89.08. Both variance and standard deviation in portfolio management are helpful for evaluation of risks related to investment in particular shares.

Based on values I got above next been done some statistical tests. First, calculated Z-scores (and associated probability) for three potential cases: price of Amazon will be between the mean and 5% price increase, will drop by more than 7%, and will drop by more than 3% or rise by 4%. By definition Z-score is ”the signed number of standard deviations by which the value of an observation or data point is above the mean value of what is being observed or measured” (stat). The standard score is a dimensionless quantity. To calculate it in MS Excel I subtracted the population mean from an individual raw score and then divided the difference by the population standard deviation (results are 0.48, -0.67, -0.29 and 0.38). To get an associated probability I used special table with Z-distribution (Labelled Standard Normal Probability Distribution).

Next part of testing is a confidence interval calculation, that measure provides ”a type of interval estimate (of a population parameter) that is computed from the observed data” (stat). For investor that mean a range of prices Amazon share will stay within most of the time. To calculate confidence interval I used embedded function ”Descriptive Statistics”. Around parameters I have adjusted for calculation in Excel, there is the confidence level, the frequency of possible confidence intervals that contain the true value of their corresponding parameter, that parameter for our case is 95%. For Amazon.com share prices lower bound is $849.47 and upper bound – $871.18.

Next test, One Sample Hypothesis Test, been done to answer the question if ”it is reasonable to expect that the ‘inherent’ or ‘fundamental’ price of the stock could be 3% more than its current average”. The test is two tailed, H0 in this test is ”fundamental price is 3% more than a current average”, and H1 is fundamental price is not 3% more than a current average. To perform test I counted a test value – 886.13, then used embedded analysis tool ”T-Test: Two Sample Assuming Unequal Means”. The test results show that absolute value of measured t is higher than critical one, therefore H0 should be rejected, H1 is accepted - fundamental price is not 886.13.

And the last test, Two Sample Hypothesis Test,

The significance of the statistics (both numerically and what relevance the test has)

Conclusions based on research – Is the company a good one to purchase

References

Amazon.com, Inc (2016) Annual report http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

Morningstar http://www.morningstar.com/stocks/xnas/amzn/quote.html

Ebay

Wiki

Appendix A

Table 1 - Selected consolidated financial data by Amazon.com, Inc. annual report (2016)