Amazon Investors Get Their Ecommerce Business For Free

The second quarter earnings season has not been kind Amazon.com (NASDAQ: AMZN) shareholders, with shares plunging about 7% the next day. After a boom year in 2020 amid the pandemic, it appears investors are less excited about Amazon when it reopens, with the stock only rising 3.7% on the year, compared to a gain of 19. % for the S&P 500.

Although revenue rose 27.2% in the last quarter, this solid growth figure missed analysts’ expectations. Now that the reopening has begun, Amazon is seeing a deceleration in its core e-commerce offerings.

But as e-commerce slows down, Amazon’s smaller but more lucrative segments are booming: Amazon Web Services (AWS) and digital advertising. In fact, if you remove only these two segments, you could argue that they are worth as much as Amazon’s total market cap right now; So even if e-commerce slows down in the short term, investors can get it pretty much for free.

Cloud and digital advertising: strong growth, high margins

In the second quarter, AWS accelerated 37% to $ 14.8 billion, up from 32% growth in the first quarter and the highest growth rate since before the pandemic. AWS is Amazon’s highest margin segment – at least the highest it discloses, with operating margins of 29.4% in the past 12 months.

Meanwhile, Amazon’s “other” category, which is made up primarily of digital advertising, jumped 83% to over $ 7.9 billion. Amazon does not disclose the profit margin it makes on advertising; however, large-scale rivals Alphabet and Facebook recorded advertising service margins of 39.1% and 43% in the last quarter, respectively. Given how close Amazon’s ads are to a buy on its platform, it wouldn’t be unreasonable to assume that Amazon’s digital advertising business is just as profitable as these other platforms.

Looking at the current revenues of these two segments, AWS is on an execution rate of $ 60 billion and reports an execution rate of approximately $ 32 billion. Assuming operating margins of 30% for each (which may be prudent for ads), and these segments would generate roughly $ 18.5 billion and $ 10 billion in operating revenue, respectively; with a 20% tax rate, the net profits would be $ 15 billion and $ 8 billion.

As stand-alone businesses, it wouldn’t be crazy to value AWS at, say, at least 50 times earnings or even more, especially with 10-year T-bills earning around 1.3%. Given the wide divide of AWS, the oligopolistic cloud infrastructure industry, and a decade of strong growth ahead, one could argue for giving AWS the same return on earnings as non-growing US Treasuries. , which would be equivalent to a ratio of 77 PE. (100 / 1.3%). If one valued AWS at 50 times current earnings, that would give it a value of $ 750 billion. At 75 times earnings, that would be a valuation of $ 1.125 billion.

Meanwhile, Amazon’s advertising business would also get a pretty big multiple, especially given its staggering 83% growth rate. In the last quarter, Alphabet and Facebook also saw strong advertising growth of 68% and 56%, respectively. However, the first quarter overlap of COVID lockdowns tends to cloud matters. Interestingly, before the pandemic, Amazon’s advertising business appeared to be on a more solid trajectory, registering 44% growth in the first quarter of 2020, compared to just 10.4% for Google and 17.6% for Facebook during of this quarter.

Google and Facebook tend to trade at a high PE ratio or below 30, so it’s not crazy to think that Amazon’s advertising activity could generate a multiple of 50 or more, given the higher growth path. If so, it could make Amazon’s advertising business worth $ 400 billion to $ 500 billion.

Amazon’s $ 1.7 trillion valuation looks cheap in retrospect

Applying these valuation multiples to AWS and advertising, the total is between $ 1.2 trillion and $ 1.6 trillion. Meanwhile, all of Amazon is valued at just under $ 1.7 trillion today.

The world’s leading e-commerce platform, with its captive and growing Prime subscriber base, leading processing capabilities for third-party sellers, and overnight delivery capabilities, is probably worth well over 100-200 billions of dollars. And let’s not forget a number of other initiatives underway with grocery shopping, cashless checkouts, third party shipping, a growing pharmacy and healthcare business, and new technology we don’t know about. probably not even.

The bottom line is that after a year or so of doing nothing, Amazon’s overdue stock starts looking pretty cheap again.