Amazon (AMZN) will have as much profit from new lines of business — cloud computing, subscriptions, and advertising — in five years’ time as it does today in retail sales, according to Morgan Stanley’s Brian Nowak, who reiterates an Overweight rating the stock, and a $1,250 price target. That could boost Amazon’s valuation, as a “sum of the parts,” to $2,000 per share, writes Nowak, or $1 trillion in market capitalization, as soon as one year from now. (Amazon had 494 million shares issued and outstanding as of the end of last quarter, according to its Q3 report back on October 26th.)
In short, the main retail business, consisting of both “first-party” sales, including Whole Foods and all the stuff Amazon already sells itself, and the higher-margin third-party sales, or “3P,” in Street argot, will be worth $600 billion by then, based on a multiple of twelve times the Ebitda he thinks it can earn by 2020.
He surmises the AWS cloud computing operation will be worth $270 billion, and will trade for a higher 18 times Ebitda. The subscription business, known as “Amazon Prime,” will be a $70 billion business, and the advertising business will be worth $55 billion.
All that assumes differing rates of growth in profit. For example, AWS profit is likely to grow by 38% per annum, compounded annually, through 2020, in comparison to the 32% combined growth rate of first-party and 3P sales. The subscription business will grow profit even faster, at 40%, and advertising even faster than that, at 45% per annum.
The estimate for AWS alone assumes it grows its revenue to $38.54 billion by 2020, from a projected $17.295 billion this year, and that it has an operating profit margin of 31.4% by then, up from 29.7% this year.
By discounting AWS and the other parts back to 2018, he arrives at his target.
Perhaps the bigger point is that the higher-margin businesses give the company “a growing ‘pool’ of gross profit dollars to invest harder than ever (in core retail, logistics, B2B, Prime, Echo, healthcare, India, and Brazil to name a few) and still deliver better than expected profitability.”
Speaking of investing, Amazon said this afternoon, just before market close, that it has acquired the rights for multiple seasons to an original television series of JRR Tolkien’s “The Lord of the Rings.”
Amazon shares today closed up $3.82 at $1,129.17, and is currently trading down 79 cents in late trading.