Mid-Atlantic Institutional Research

Amazon.Com Inc. (NASDAQ: AMZN $50.00) January 30, 2008

“4Q08 Earnings update” Brian Bolan
(312) 345-1534
Long Term Rating: Market Underperform bbolan@sturdivant-co.com
Long Term Target Price: $45
Share Information
EXECUTIVE SUMMARY
Price 1/29 $50.00
52 Wk Lo-Hi $34.68-91.75
Investment Summary: Amazon.com performed very well in a very challenging macro environ-
Div Yield -
ment. After backing out the negative impacts of foreign currency, revenue was in line with our ag-
Avg. Volume 10M
gressive estimates. Cost containment helped propel the company to a bottom line surprise. Posi-
tives included increased use of the Kindle and increases in active users. Looking forward, we note Insiders Own 34%
S&P 500 845.14
that weak guidance and poor gross margins will continue to hold the stock back. We are maintain-
ing our rating of Market Underperform but increasing our target price to $45. Financial Statistics
Equity Mkt. Cap. $25B
Key Points
Net LT Debt./
Mkt. Cap. 0.1%
Revenue in line with our aggressive expectations. We had projected $7.032B on the topline
and after adding back the negative impact of foreign exchange, the company would have re- Total EV $19B
ported sales of $7.024. 10 Yr. Treasury 2.8%
‘08 FCF Yield 4.0%
Cost containment was impressive in the quarter. We were impressed by the discipline the
company showed in the quarter, as every line item of operating expense came in below our EPS
estimate. The largest surprise was the fulfillment line item which was below 8% of total EPS P/E
revenue. 2006A $0.45 111x
2007A $1.12 42x
Weaker than expected gross margins and guidance may temper enthusiasm. Gross mar- 2008A $1.52 33x
gins came in about 30 basis points below our estimate of 20.42%, down from a 23.4% level in 2009E $1.42 35x
the previous quarter. Little color was given to explain the drop, but guidance suggests that
gross margins will not return to the 23.4% level for at least a few quarters.
Free Cash Flow
Outlook is challenging and margins continue to be under pressure. Recent economic FCF/
conditions have taken a toll on Amazon.com as well as its competitors. We believe that Ama-
Share P/FCF
zon.com will gain market share from many smaller competitors as well as its main competi-
2006A $1.00 98x
tors throughout 2009. This and a few other positives from the quarter led us seriously con-
2007A $2.10 78x
sider upgrading the stock, but we decided to take a more cautious stance and increased the 2008A $1.38 36x
price target to $45. 2009E $1.50 33x

Relative Daily Price 1/30/09

Source: BigCharts, Company

Reports and Sturdivant & Co. Estimates.
Important disclosures appear on the inside cover and back of this publication.

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STURDIVANT & CO., INC.

RELATIVE STOCK PRICE PERFORMANCE

Rating and Price Target History for Amazon (AMZN )

11/17/08 1/30/09
MU: $41.75 MU: $50.00
T: $31.50 T: $45.00

Source: BigCharts.com OP: Outperform MP:Marketperform MU: Market Underperform

Mr. Bolan does own shares of Amazon

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subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the
research report. Mr. Bolan does owns shares of Amazon. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions ex-
pressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the
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Price Target Risks
Investment risks associated with the achievement of the price target include, but are not limited to, the company’s failure to achieve our earnings and revenue estimates, unforeseen
macroeconomic and/or industry events that adversely impact demand for the company’s products or services, product obsolescence, changes in investor sentiment regarding the
specific company or industry, intense and rapidly changing competitive pressures, the continuing development of industry standards, the company’s ability to compete for talent,
and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of the company’s shares, refer to the most recent form 10-Q or 10-K
that the company has filed with the SEC.

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 Table of Contents
Earnings Overview 4

Balance Sheet 4

Guidance 5

Valuation 5

4Q08 Income Statement review 6

Institutional Contacts 8

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STURDIVANT & CO., INC.

Earnings Overview

Amazon.com posted a solid quarter in what was a very difficult macro environment. Revenue of
$7.024B was negatively impacted by foreign exchange (FX) in the amount of $320M, and was inline
with our aggressive estimate of $7.032B. Gross profit of $1.407B also incurred a negative affect of FX
in the amount of $59M and was slightly below our estimate of $1.436B.

We estimated that gross margins would be lower due to significant discounting during the holiday
season. Gross margins of 20.03% (before negative impacts of FX) were below our estimate of 20.42%.
We were not surprised that gross margins were weaker than expected as retail sales numbers came in
below expectations. Management opted not to provide much color on the discounting besides noting
that they are in a large and very competitive market.

Operating Expenses were lower than expected which drove the outperformance on the bottom line.
Fulfillment was the biggest surprise on the expense side as its percentage of net revenue was less than
8%. We believe that the Kindle was largely responsible for this as Amazon.com noted that Kindle
owners on average bought the same number of physical books they normally would have and an
additional 1.6-1.7 electronic books. There are now 230,000 titles available, with 103 out of the 112
current “New York Times” best sellers available as well. After accounting for a negative impact of FX,
operating expenses were 6.4% below our estimate.

Earnings per share of $0.52 were ahead of our estimate of $0.45 due mostly to the cost containment.
The company also benefited from an “opportunistic” repurchase of 2.2M shares costing approximately
$100M averaging out to $45.45. There is still approximately $900M remaining in the stock buyback
program.

Segment Analysis

Media accounted for 54.3% of revenue in the quarter, down from 58.5% in the previous quarter and
61.9% in the previous year. On a year over year basis, Media grew 8%, well below our estimate of
21%.

Electronics and other general merchandise (EGM) was responsible for 43.1% of revenue, up from
38.5% in the prior quarter and 35.9% in the year ago period. EGM grew 48% from the prior year,
surprisingly stronger than our estimate of 33%.

Other revenues of $175M grew by 46% on a year-over-year basis and were ahead of our expectations.
We are surprised by the strength in this line item as cloud computing would logically have followed the
macro environment, but clearly showed some resilience. Looking ahead, we believe this line item will
get more attention despite its relatively small size.

Balance Sheet

At the end of the year Amazon.com had $3.73B in cash, an increase of $615M from the prior quarter.
The company has $468M in debt. Inventory increased 17% to $1.4B and turns were down by one half
turn to 12.2 as the company moved to increase selection. Accounts payable increased 29% to $3.59B
and payable days increased to 62 from 57 in the year ago period.

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STURDIVANT & CO., INC.

Guidance

Amazon.com gave guidance of $4.525B—$4.925B for the topline, in line with our $4.7B estimate.
Operating income guidance of $243M (midpoint) implies 5.1% margin, down 110 basis points from
the year ago period.

Valuation

A solid quarter in a very difficult macro environment denotes the excellent execution of Amazon.com
management. Previous concerns that technology services were not being well received by enterprises
seems to be abating and could drive outperformance throughout 2009.

Our estimates for Media were too aggressive, but the meager 8% growth is worrisome. We believe the
macro environment is the primary reason for the weakness in the Media line item. Trends suggest that
the weakness will continue.

FX had some significant negative impacts in the quarter. We believe that 1Q09 will not have as servere
an impact but will still be subject to large swings in currency valuations.

The basis of our recommendation has been weakened by the performance in 4Q08. Gains in market
share and outperformance by the technology segment deserves a premium valuation. Fulfillment by
Amazon and the increase in active users suggests that Amazon.com is widening the gap between itself
and eBay. We believe that 1Q09 will show more gains in market share from smaller competitors.

We are hesitant to remove our Market Underperform rating on shares of Amazon due to the weak
operating income guidance and the weaker than expected gross margins. It is apparent that giving
consumers the best possible price and selection will continue to cost the company on the short term.
Over the long term, we believe that there is opportunity for Amazon.com to increase its margins.

We are increasing out target price due the positives in the quarter, not the least of which include share
gains, increase in active users and the future potential of the Kindle. Our new target price of $45 is
based on a multiple of 31x our 2009 estimate of $1.42. This also happens to be the average price that
management paid in the fourth quarter with its share buy back.

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 Exhibit I

AMAZON.COM, INC.
INCOME STATEMENTS
(in millions, except per share data) % Change Effect of Currency % Change
4Q07 3Q08 4Q08E 4Q08A Yr/Yr Qtr/Qtr Estimate Estimate
Net sales $ 5,673 $ 4,264 $ 7,032 $ 6,704 18% 57% -5% -320 $ 7,024 -0.1%
STURDIVANT & CO., INC.

Cost of sales 4503 3,265 5,596 5,356 19% 64% -4%

Gross profit 1,170 999 1,436 1,348 15% 35% -6% -59 $ 1,407 -2.0%
20.62% 23.43% 20.42% 20.11% -3% -14% -2% 20.03% -1.9%
Operating expenses:
Fulfillment 478 393 620 549 15% 40% -11%
Marketing 133 108 170 169 27% 56% -1%
Technology and content 221 264 300 278 26% 5% -7%
General and administrative 64 73 85 72 13% -1% -15%
Other operating expense (income) 3 7 10 8 167% 14% -20%
Total operating expenses 899 845 1,185 1,076 20% 27% -9% -33 $ 1,109 -6.4%

Income (loss) from operations 271 154 251 272 0% 77% 8% -26 $ 298 18.8%

6
Interest income 28 21 12 16 -43% -24% 33% 23 $ (7) -158.3%
Interest expense (21) (17) (14) (12) -43% -29% -14%
Other income (expense), net 1 24 24 26
Remeasurement and other 2 - - -
Total non-operating income (expense) 10 28 22 30 200% 7% 36%

Income (loss) from operations 281 182 273 302 7% 66% 11%

Provision (benefit) for income taxes 74 59 75 79 7% 34% 5%

26% 32% 27% 26%
Income before cumulative effect change in accounting principle 207 123 198 223 8% 81% 13% -2 $ 225 13.7%

Equity Method Investment Activity (5) 2

Diluted earnings (loss) per share:
$ 207 $ 118 $ 198 $ 225 9% 91% 14%
Stock based comp 54 70 76 79
Non GAAP EPS $ 0.48 $ 0.27 $0.45 $ 0.52 6% 91% 15% -0.01 $ 0.53 16.9%
Weighted average shares used in computation
427 436 439 436 2% 0% -1%

Source: Company Reports & Sturdivant & Co.

STURDIVANT & CO., INC.

Sturdivant & Co.’s

Businessman’s Approach to Value Philosophy

Sturdivant & Co. uses the businessman’s approach to evaluating stocks. This philosophy is predicated on looking at a
company as a prudent man would were he to consider making a reasoned investment in a business. We focus on a
company’s strategy, the competitive position a company has versus its peers, quality of management, risk factors, its
prospect for growth, as well as critical catalysts and milestones as evidence of progress. Finally, of course, we look at a
company’s valuation to determine where we feel the stock is priced attractively.

Chairman

Albert A. Sturdivant
Asturdivant@sturdivant-co.com
856-751-1331 ext. 108

Fundamental Research

Richard A. Verdi Beth Ann Loewy, CFA Brian Bolan

Rverdi@sturdivant-co.com Bloewy@sturdivant-co.com Bbolan@sturdivant-co.com
856-751-1331 ext. 109 856-751-1331 ext. 114 312-345-1534
Industrials Food Technology
Consumer Staples
Retail

Institutional Sales

Carl R. Gibbs, Jr. Terry Williams

Cgibbs@sturdivant-co.com Twilliams@sturdivant-co.com
856-751-1331 ext. 107 856-751-1331 ext. 101

Institutional Trading

Harvey R. de Krafft Debra L. Bailey James Campanella

Hdekrafft@sturdivant-co.com Dbailey@sturdivant-co.com Jcampanella@sturdivant-co.com
800-486-1515 or 800-486-1515 or 800-486-1515 or
856-751-1331 ext. 112 856-751-1331 ext. 110 856-751-1331 ext. 115

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 STURDIVANT & CO., INC.

Date Price Rating Target

AMZN 11/17/08 41.75 MU $31.50

01/30/09 50.00 MU $45.00

Total Technology Group

Outperform Marketperform Underperform

25% (1) 50% (2) 25% (1)

Investment Banking Relationship

Outperform Marketperform Underperform

0 0 0

US – Technology Industry

Investment Rating Company Ticker Analyst

Market Outperform
Google GOOG Brian Bolan
Market Perform
Yahoo! YHOO Brian Bolan
eBay EBAY Brian Bolan
Market Underperform
Amazon AMZN Brian Bolan

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