Amazon has set the bar so high that it would be extremely difficult for a company to reproduce their success. Amazon was first developed when e-commerce was in an infancy stage. This gave Amazon the opportunity to create and expand on the platform that we know today. It would prove to be very difficult if a similar firm were to try and duplicate the same success as Amazon. A similar firm would need to develop the credibility and reputation that Amazon has taken years to develop. Then it would need to establish a large client base that can bring together both buyers and sellers.
One of the second major tools that a new firm would need to be competitive with Amazon is large amounts of capital. If a firm was to borrow capital the result would cause the company to become highly leveraged, which would mean that the margin of error would have to be very slim. High leverage a slim margin for error, thus in turn reduces pricing power and lowers profit margin. Within the past decade investment capital for online companies has become extinct sense the great boom of the . Com era (Smith, 2015).
This has left the playing fields wide open for venture capitalist seeking an opportunity or the next big thing. Within this paper we will take a look at how a vast company such as Amazon raises financing for debt, and review risk factors if the economy were to worsen. Company’s finance debt or leverage themselves for many different reasons, such as maintaining ownership, tax deductions, lower interest rates. Companies will also issue bonds which are loans between an investor and a corporation. Generally the investor will agree On the time and periodic interest payments.
Unlike a bank loan, the one advantage of issuing bonds is lower interest rates. Also the interest paid can affect corporate profits and impasses are in business to make a profit. Issuing bonds also gives companies freedom to operate as they wish, as there are often restrictions attached to bank loans (Smith, 2015). In December 2014 Amazon issued $6 billion worth of debt that shocked much of the industry. The amount of debt issued is twice the amount issued in 2012 to purchase its Seattle headquarters and new warehouses to make delivery to customers more efficient (Lashing’s, 2012).
The debt issued gives Amazon the opportunity to increase their financial leverage. The increase in financial leverage means that Amazon is growing its business and in turn we onto see bottom line growth. Instead we will see top line growth which will result in increased revenues. Amazon’s primary purpose for issuing debt in this case is to fund drones, television programming, and smartness. Bondholders look for primary purposes such as these when lending their money (Smith, 2015). Amazon’s current debt issuance acts as a way of limiting its equity exposure.
Also issuing debt over equity signals a company board’s confidence that an investment is profitable and also sends a signal to equity holders that their owner ship stake is strong (Smith, 2015). Amazon’s five year price trend reflects strong growth. Amazon has been trading on the high end Of their historical range. Its expected price growth is over 29% for the next five years, which is much higher than its competitors (Charles_Carnivals, 2013). Amazon is expected to reach a return rate of over one hundred billion in revenues (amigo bulls, 2015). Amazon remains to be the leader in its industry.
The chart below shows Best Buys five year price history. Best Buys five year trend shows pricing dips within the years of 201 2, 201 3, and part of 2014. This is partly due to its largest competitor Amazon. Amazon wants to conquer the technology landscape and they drive toward their goal by aggressively investing in its future growth (Steersman, 2014). Amazon does not distribute dividends so we are using a different solution to find the intrinsic value. STOW Amazon STOW analysis 2013 Strengths Weaknesses 1 . Cost leadership strategy 2. Superior quality services and products 3. Strategic acquisitions 4.
Efficient distribution chain and logistics 5. Economies of scope 1. Only online presence 2. Selling at zero margins 3. Negative publicity Opportunities The reads 1. Online payment system 2. Release more its own brand products and services . Increase services and product portfolio through acquisitions 4. Open more online stores in other countries 5. Physical presence 1. Online security 2. Lawsuits 3. Strategic alliances 4. Legislation against tax avoidance 5. Regional low cost online retailers (Currencies, 2015) One of Amazon’s greatest strengths is that it has a broad product portfolio which provides a diversified customer base.
Amazon’s large customer base and array of products, gives them the opportunity to provide the lowest prices possible for products and services. Another strength that Amazon has is that they are a customer centric business. Through technical advances customers can track their orders monitor order status and this results in higher customer loyalty. Amazon also has a strong business model that enhances its business operations through expanding its business areas to different products. Amazons current business model operates small lean warehouses in different locations.
Amazons weaknesses include both debt obligations and legal proceedings. For 2013 the company recorded a total of $5,181 ,OHO in debt which was an increase of 35. 3% from the previous year. Taking on too much debt could restrict the flexibility of a company and it can also place limits on how they respond to changing market conditions and create additional exposure when market conditions are slow. Another disadvantage of financing debt is the company would need to set aside large portions of their cash flow to make payments on debt.
In turn this could limit opportunities for expansion and product offerings (Amazon. Com, Inc. 2014). Another weakness that Amazon has would be legal proceedings which can lead to a drain on financial capital. Lawsuits can come from anything from employee relations to product liability. Amazon alone with its strengths and weaknesses has several opportunities. Some of Amazons opportunities are expansion initiatives, which provide an opportunity for them to strengthen their presents and expand their product base.
Other opportunities would be growth prospects within e-commerce and strategic acquisitions. Amazon’s acquisition provides them the opportunity to grow and expand its business (Amazon. Com, Inc, 2014). Some of the risk or threats are foreign exchange risk, market competition, and stringent government regulations. Amazon does business in several different countries such as Asia and Europe which creates foreign exchange risk. Amazon does transactions with British pounds, US Dollars, Euros, and Japanese Yen. Weak exchange rates pose a major risk to Amazon.