Real Vision Investment Case Study - The Economist

Real Vision Investment Case Study

For Amazon and Walmart

Team SFSU

Max Gerrit Zschoch Sargis Sargsyan Xiaorui Wang

San Francisco State University November 2015

Table of Content

Introduction ........................................................................................................................................................... 3 Macro Economic Trends..................................................................................................................................... 4 The Industries ....................................................................................................................................................... 5

Retail ................................................................................................................................................................................................. 5 Traditional Retail ............................................................................................................................................................... 5 E-Commerce Retail........................................................................................................................................................... 6

Cloud Infrastructure Services ................................................................................................................................................. 6 The Companies ...................................................................................................................................................... 7

Amazon............................................................................................................................................................................................. 7 Walmart .........................................................................................................................................................................................10 Financial Forecasting and Valuation ...........................................................................................................12 DCF Model...................................................................................................................................................................................12 Multiplier.......................................................................................................................................................................................18 Investment Decision..........................................................................................................................................19 Appendix ...............................................................................................................................................................20 Forecasting ................................................................................................................................................................................... 20 WACC .............................................................................................................................................................................................22 DCF ................................................................................................................................................................................................. 23 Multiplier Method......................................................................................................................................................................25 References ............................................................................................................................................................26

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Introduction On July 23rd 2015, Amazon surpassed Walmart as the world's biggest retailer based on market capitalization. However, Wal-Mart still outperforms Amazon in regards to annual revenue by more than five times. Considering the ambiguity of these numbers as well as the 10-year stock holding period, we are compelled to valuate both stocks not only on their financial performance, but all the more on each company's current strategic direction and vision.

This reports starts with a brief analysis of major macro-economic trends and becomes more detailed and tailored with every following chapter. After identifying global trends, we take a closer look at key industries and analyze both companies in regards to their business models in order to make educated assumptions. The subsequent financial forecasts will be based on our prior research and different global economic scenarios. We will present the results of our DCF Analysis, tailored to each company's strategic direction, before finishing with our final investment recommendation.

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Macro Economic Trends We decided on three global aspects, which will have a significant influence on our investment. Increasing US interest rates, possibility of a global economic turndown and India as the next major market.

We're expecting the end of cheap money within the next ten years, along with the effects it will have on our investment. Without going into much detail, we have to consider the effect on the stock market, the US GDP, and on borrowing rates. Readjusting our analysis will be necessary to maintain its accuracy.

We also discussed a potential economic turndown, both domestically and internationally. Rising global debt and unstable political situations around the worlds are strong indicators for darker economic times. Considering its dramatic effect on our investment, we decided to forecast and calculate an additional scenario.

India, as one of the fastest growing economies in the world, might be the most important market for long-term investment in the upcoming years. China is no longer in the center of the world's attention due to its decreasing economic growth rate. India in comparison has kept its GDP growth rate high and has a mostly undeveloped market.

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The Industries

Retail Global retail markets have maintained a steady growth over the past and developed similar to each country's GDP. After growth rates in China and Brazil decreased, India is once again in the global spotlight.

GDP Growth Rate

40%

30%

20%

10%

0% -10%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-20%

-30%

Brazil India

China Mexico

United Kingdom United States

Traditional Retail We saw leading retailers such as Walmart and Carrefour entering global markets and

implementing international expansion plans years ago. Traditional retailers experience mature domestic retail markets with low economic growth, aging populations, market saturation and the increasing operating costs. Globalization is a necessary step to take. Many emerging markets started to realize the importance of economic integration and are currently easing the easing limitation on foreign investment in retail business; therefore we are still mostly bullish for the future of retail.

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