Welcome to the club.
E-commerce and cloud behemoth Amazon (NASDAQ:AMZN) briefly joined Apple (NASDAQ:AAPL) in the trillion dollar club on Tuesday. By crossing over a $2,050 price tag, Amazon stock finally pushed into trillion-dollar territory.
It didn’t last long. Amazon stock quickly retreated off those levels. As of this writing, Amazon’s market cap is $985 billion.
But, the quick retreat off of a trillion dollar valuation is meaningless. In the big picture, a $1 trillion valuation for Amazon stock makes a ton of sense. Indeed, if you consider potential growth in Amazon’s next big markets — pharma, logistics, internet streaming, and offline retail — a $1 trillion valuation for Amazon stock today actually seems like a bargain.
Investment implication? Buy Amazon stock and hold for the long run. Until something trips up this company’s secular growth narrative, Amazon stock will only head higher.
Amazon E-Commerce Is Worth at Least $360 Billion
Amazon’s e-commerce sales last year were about $160 billion. That is a big number. But, it is still a far way off from Walmart (NYSE:WMT), the global retail giant that reported $500 billion in sales last year.
The current trend, however, is that Amazon will get to a $500 billion and larger commerce sales base one day. E-commerce sales penetration continues to rise as a percent of total retail sales, and Amazon is the undisputed king in the e-commerce world. Thus, over the next five to 10 years as e-commerce constitutes 20%, 30%, 40% and more of total retail sales, Amazon’s total commerce sales base should scale towards Walmart levels, and even higher.
Using SEC filings and Deloitte top 250 retailer market share figures, I peg Amazon’s current market share of the global retail market at around 3.5%. That should climb to 10% by 2025 as e-commerce penetration rates globally increase. Assuming about 4% global retail market growth, that implies roughly $630 billion in retail sales for Amazon. At a 5% operating margin, that would equate to $31.5 billion in operating profits by 2025.
Walmart reported $20 billion in trailing-12-month operating profits. Walmart’s market cap is $300 billion, implying a 15X operating profit multiple. But, Walmart’s operating profits are dropping in a multi-year window. Amazon’s operating profits, even in 2025, will be presumably rising in a multi-year window.
Thus, Amazon commerce easily deserves a 20X to 25X operating profit multiple in 2025. A 22.5X multiple on $31.5 billion implies a 2025 valuation of $710 billion. Discounted back by 10% per year, that equates to a 2018 valuation for Amazon commerce of $360 billion.
Amazon Cloud Is Worth at Least $430 Billion
Using SEC filings and Gartner public cloud market data, I peg Amazon’s market share in the entire public cloud market at just about 11% — Amazon Web Services (AWS) revenues of $17 billion last year, versus a global cloud market of $154 billion.
This market is rapidly growing and is projected to grow at a near 20% annualized rate into 2021. Thereafter, growth should remain big as IT spending continues to shift towards the cloud, and growth will likely run around 15% per year.
Under those assumptions, and assuming AWS grows market share to 20%, I think Amazon’s cloud business can do about $110 billion in revenues by 2025. At a 35% operating margin, that would equate to $38.5 billion in operating profits by 2025. Throwing a growth-average 20X forward multiple on that implies a 2024 valuation for Amazon Cloud of $770 billion. Discounted back by 10% per year, that equates to a 2018 valuation of roughly $430 billion.
Amazon Advertising Is Worth at Least $190 Billion
The most underappreciated driver of Amazon stock is the company’s digital advertising arm.
Amazon is one of the most visited websites in the world. Yet its digital advertising business is anemic next to the digital ad businesses supporting the world’s other top-visited sites like Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL).
As such, Amazon has tremendous room to scale this business to new heights over the next several years.
The digital advertising market is growing at a rapid rate. According to eMarketer, worldwide digital advertising spend is expected to hit nearly $430 billion by 2022. That seems reasonable to me, and I see the market growing to $500 billion by 2025.
I also think Amazon can swoop in and take 10% of this market by then, implying $50 billion in revenues. At a 35% operating margin, that would equate to $17.5 billion in operating profits by 2025.
Facebook’s operating profits over the past 12 months are $24 billion. Facebook’s market cap is $500 billion, implying a 21X operating profit multiple. Applying that same multiple to projected Amazon ad operating profits of $17.5 billion in 2025, you arrive at a 2025 Amazon ad valuation of about $370 billion. Discounted back by 10% per year, that equates to a 2018 valuation of about $190 billion.
Amazon’s Other Initiatives Push Valuation Higher
Between Amazon’s three core businesses (e-commerce, cloud, and digital advertising), I think Amazon is worth just under $1 trillion today.
Thus, if Amazon was just e-commerce, cloud, and digital advertising, a $1 trillion valuation for Amazon stock seems largely fair. But, Amazon is much more than just e-commerce cloud, and digital advertising. The company has the potential to disrupt the multi-billion dollar pharmaceuticals, logistics, internet streaming, and offline retail industries over the next several years.
It is tough to say exactly how much share Amazon will gain in those markets. But, if history says anything, it is that Amazon will be a formidable player in whatever market it enters. Thus, one could reasonably say that potential disruption in those markets is worth $50 to $100 billion today.
Adding that on top of the $980 billion from e-commerce, cloud, and digital advertising, you arrive a reasonable valuation for Amazon stock today of over $1 trillion.
Bottom Line on Amazon Stock
Buy and hold for the long-term. Amazon stocks features one of the market’s most attractive multi-year growth narratives, and while the valuation might be ostensibly scary, it simply incorporates what is increasingly looking like an inevitable ramp in the company’s core commerce, cloud, and digital advertising businesses.
As of this writing, Luke Lango was long AMZN, AAPL, FB, and GOOG.