If you listen to Morgan Stanley analysts, Amazon (AMZN) stock is worth a whopping $800 per share.
If so, Amazon stock is a must-buy, having upside of nearly 25% from its current price of $650.
There are, however, several issues with how the firm arrived at that $800 target, issues that suggest AMZN’s true worth is much, much lower.
MS Actually Undervalues AWS
First and foremost, I think MS analyst Brian Nowak is a little conservative with his $63 billion valuation for Amazon Web Services. In April, I made the case that AWS could be worth $85 billion in a free market, and after two exceptional quarters with solid margin and revenue growth, that figure may have risen even more.
Based on Nowak’s model, AWS is worth 5.3 times its FY2016 revenue expectations of $11.8 billion. This 5.3 multiple is far less than the 7.5 price/sales ratio that Salesforce (CRM) trades at relative to next year’s revenue expectations.
With AWS growing faster, and with far more profitability, I would lean more towards an $85 billion valuation than $63 billion.
Nevertheless, AWS is a smaller piece of the Amazon stock puzzle, with the overwhelming majority of Nowak’s model tied to AMZN’s e-commerce business — which he values at $300 billion!
Much like AWS’s worth can be figured from comparison to a cloud competitor, however, the same logic applies to retail.
How MS Overvalues Amazon’s Core Business
Keep in mind, Amazon recognizes retail revenue by product sold, and that’s one reason margins are so low. The company then has other higher margin businesses like advertising and payments that help generate profits.
Regardless, Amazon has created net sales of $71.25 billion in the first nine months of 2015, mostly from retail, with an operating profit of $1.1 billion. This is what Nowak values at $300 billion.
Nowak, however, admits that the majority of his $300 billion valuation is allocated to North American ops, approximately $256 billion in his model. The reason is because Nowak believes AMZN can achieve an operating margin of 8% long-term in North America.
Still, with just $42.2 billion in revenue during the first nine months from North American ops, $256 billion gives AMZN stock a steep multiple to other retailers.
In comparison, Walmart (WMT) created $74 billion in net sales during its last quarter alone. If we add $14.7 billion from Sam’s Club then Walmart’s U.S. sales in just one quarter more than double AMZN’s North American ops over a nine-month span.
While AMZN’s North American net sales soared 28% year-over-year during its last quarter, it saw growth of just 7% internationally. Excluding AWS, AMZN grew net sales less than 20%. That’s very similar to Walmart’s 16% increase in e-commerce sales.
With that said, Amazon’s bread and butter is North America, yet e-commerce sales in the U.S. are expected to grow just 14.2% in 2015, 13% in 2016 and 12.2% in 2017, according to eMarketer.
In contrast, international markets present much better growth opportunities, like China’s e-commerce, which will grow 32% this year followed by 27% and 22% growth in the two years thereafter.
Albeit, Alibaba (BABA) is considered the Walmart/Amazon of China, seeing a mind-boggling $112 billion of gross merchandise volume on its Chinese platforms during its calendar third quarter.
That’s not even comparable to Amazon’s net sales, but because BABA does not realize revenue from the sale of a product, but rather high-margin advertising and marketing products, investors don’t realize just how much larger BABA is vs. AMZN.
Not to mention, BABA is also growing much faster.
Bottom Line for Amazon Stock
So why does BABA and WMT matter when talking about Nowak’s $800 price target? The answer is valuation! Nowak’s model has AMZN stock valuation equivalent to the combined value of Walmart and Alibaba’s market capitalization.
So a company that’s not even half the size of Walmart or Alibaba, and is far less profitable, is worth about twice as much as either company alone? This makes no sense at all, and really illustrates the blind love that Wall Street analysts and investors have shown to Amazon stock.
With all things being equal, CRM illustrates why Nowak’s AWS valuation model is conservative, but WMT and BABA show why Amazon’s core e-commerce business is ridiculously overvalued.
Therefore, Amazon stock isn’t worth $800, it’s not even worth $650, and it sure isn’t worth the same valuation as Walmart or Alibaba.
For investors who have enjoyed this remarkable run in Amazon stock, congratulations, but sooner or later, logic and fair value will trump momentum and irrational exuberance.
I’d sell Amazon stock this very minute.
As of this writing, Brian Nichols was long BABA stock.
