To evaluate Amazon.com, Inc, I would choose the residual income
valuation approach, also known as the residual income model or
residual income method. It “is an equity valuation method that is based
on the idea that the value of a company’s stock equals the present value
of future residual incomes discounted at the appropriate cost of equity”
(Corporate Finance Institute, 2019, May 6). Residual income valuation
assumes that the true “cost of capital” accounts for earnings generated
by a company. This method of valuation uses the data that is readily
available on the financial statements and looks at economic
profitability rather than accounting profitability.
This fits Amazon because in general, residual income valuation is for
mature companies that don’t give dividends. Using the projected
income statement, the growth will be estimated using the past years,
however, we may need to go further back than the pandemic to get a
more accurate valuation. Pushing aside the outliers of the spike in
growth due to the pandemic, I will be able to calculate the average
growth and apply it to the equation. Residual income equals net income
less equity capital multiplied by cost of equity.
References
Corporate Finance Institute. (2019, May 6). Residual income valuation.
Retrieved August 2, 2022, from
https://corporatefinanceinstitute.com/resources/knowledge/valuati
on/residual-income-valuation/
