The question posed in the title of this article might seem a particularly appropriate one if you take into account the news that was on many lips in the second week of August 2017 and that was about the just definitely announced merger between Amazon and Whole Foods. It was not surprising that this was the case, with Amazon announcing that it would, in the course of the merger be paying no less than US$42 per share to give a whole value of no less than US$13.7 billion. This is certainly a number to conjure with but the consensus opinion among observers was that the impact on the bottom line was in all likelihood not a major factor in the decision to pursue the merger. However, it might be as well to take these all important factors into consideration, especially if you are an Amazon stockholder wondering what the future might hold, or if you are hoping to become an Amazon stockholder in light of the recent developments. What might the next three years hold in store for the newly merged entity? What assumptions and projections have been made for both companies and how are they liable to impact on matters that will be of all-encompassing importance in how the company performs?
It will perhaps first be wise for us to set some terms against we can measure our own projections for the future; we can agree on the published figures for both concerns to give us the all-important figures for revenue, gross margin, other income, interest expense and operating costs. At the end of 2016 Amazon had a revenue of US$18.3 billion. With that established we can go on to study the assumptions which Amazon have made for the next few years and see how the merger with Whole Foods will impact not only on the overall performance of the company but also on the Amazon stockholders who are the most important factor, in so far as we are concerned. The first thing for Amazon stockholders to note is that the company has always been one that has exhibited high rates of growth. The natural follow-on from this is that even comparatively small changes in the company’s margins can have a very large overall effect on the company’s bottom line performance. With this born in mind it might be reasonable to suppose, considering that Amazon grew by 20% in 2015 and 27% in 2016 to estimate a 20% growth on average over the next few years. Amazon stockholders will be interested to learn that gross margins are expected to increase by 2% from 35% to 37% while operating expenses fall slightly, the margin in operating increases from 3% to 7%, the tax rate drops by 2.5% while other income remains at the same levels. The result of these changes would be that the share count increases by 1.5% per year for the next three years.
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