Amazon (NASDAQ:AMZN) stock is down 14% from its July high but still up 9.4% for the year. AMZN’s stock market value is about $853 billion and now may be the right entry point for investors who like its growth prospects.
One thing to consider is whether the market really values AMZN stock enough for its “secret sauce” — an obsessive customer focus. This article explores that thesis.
Valuation of AMZN Stock
Here is a very simple analysis of the Amazon stock: Amazon Web Services (AWS), its cloud business, is worth at least $550 billion according to analysts. But the market is not valuing Amazon’s retail customer businesses sufficiently.
The implied value of the non-AWS divisions at the AMZN stock market value is only $300 billion ($853 billion total market value less AWS at $550 billion ≈ $300 billion). But these retail businesses generate 88% of Amazon’s total sales.
In the last twelve months from Q2, the non-AWS sales were $221.9 billion. This means their value is only 1.35 times last 12 months’ sales. That seems too low.
For example, Microsoft (NASDAQ:MSFT) has both a cloud business like Amazon’s and a retail customer-facing business. The market values it at over 8 times its sales. Apple (NASDAQ:AAPL) is valued at 3.8 times sales. However, Walmart (NYSE:WMT) is valued at only 0.65 times sales.
Amazon Stock Comparison to Walmart
Let’s look at Walmart vs. Amazon more closely. Three years ago WMT paid $3 billion for Jet.com to spur its online sales. Analysts at Recode.com believe Walmart’s e-commerce division is now losing $1 billion on $21 billion in sales. WMT’s e-commerce sales, which include onmi-channel sales, represents just 5.4% of Walmart’s total sales, according to page 17 of its recent SEC quarterly filing.
By contrast, Amazon’s non-AWS businesses are all online and generate $12.9 billion of its total $15 billion in operating income for the last 12 months. Moreover, according to eMarketer, Amazon now accounts for 38% of all U.S. online retail sales, up from 32%. Walmart accounts for only 4.7%, up from 2.6% three years ago.
Amazon’s retail businesses are worth well more than Walmart — closer to MSFT and AAPL. At three time’s sales, the non-AWS divisions would be worth $660 billion.
That brings AMZN stock total value to $1.21 trillion ($550 billion for AWS and $660 billion for non-AWS). With 495 million shares outstanding the Amazon stock price should be at $2,444 per share, not the $1,725 it is today. AMZN stock’s upside is 41.6% using this analysis.
AMZN’s Focus Anomaly
Last year Jeff Bezos said that his company’s “secret sauce” for its success is its “obsessive customer focus on the customer as opposed to obsession over the competitor.”
Harvard Business School agrees. Amazon was used in a recent business case study at Harvard Business Review, where Harvard Business School professor Sunil Gupta wrote an article and podcast titled, “If the Key to Business Success Is Focus, Why Does Amazon Work?”
On the one hand, Gupta argues that Amazon seems to be spread too thin with its many disparate businesses. AMZN has online sales, cloud computing, a real grocery store chain (Whole Foods), video streaming, and even physical book stores. This seems too unfocused. HBS postulates that focus is the key to business success. So the anomaly is why does this apparent lack of focus work for Amazon?
“Are they an online retailer? Are they video producers? Are they now making movies? In strategy, we learn, everybody should focus. Obviously Jeff Bezos missed that class,” says Professor Gupta, referring to Amazon’s founder and CEO.
On the other hand, has Jeff Bezos really make a mistake? The article points out that Bezos’ obsessive focus on the customer worked very well. Here is what professor Gupta concluded:
“… Based on the research that I’ve done, he certainly is very customer-obsessed. He’s focused on customer. He always says, ‘You start with the customer and work backwards.’ He still takes evidently calls on the call center. The culture is very entrepreneurial, but also very heart driven. I mean, the idea for example of Amazon Prime evidently didn’t come from Jeff Bezos, it came from a low person in the organization. He’s quick to adapt the ideas if he sees some merit in it. It’s almost a 25-year-old company that still works like a startup.”
Bottom Line on Amazon Stock
This secret sauce, its obsessive customer focus, is an intangible asset that Amazon stock’s valuation seems to be ignoring.
The patient investor should be willing to ride Amazon stock for its real true value. That value, both from a sum-of-the-parts basis and also including its intangible value (obsessive customer focus), is significantly higher than today’s price. That focus led to constant innovation and higher cash flow. Look for good things to happen to Amazon stock because of its customer focus.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake writes the Total Yield Value Guide which analyzes stocks that are significantly undervalued. Subscribers receive a 2-week free trial period. Subscribe here.
