The valuation debate for Amazon has been around for a long time. What’s the right multiple for it? We’d argue it depends on the rate of change of revenue and profit growth, though even then it's tough to narrow in a specific number vs direction. A different framework for thinking about Amazon’s value is a sum of the various businesses that Amazon has. If nothing else, it gives some granularity to better assess valuation on the direction of the different businesses, especially in a market moment like we have now, where Amazon Retail is clearly slowing, while high margin growth business like AWS and Advertising are accelerating.
Here's our take. At the moment there are 7 businesses we can segment out based on relevance, comparables, and reasonable visibility of reporting. Those are 1P Retail, 3P Retail Platform Services, AWS, Advertising, Whole Foods/Stores, Streaming Video, and Streaming Music.
- A quality growing 1P Retail ecommerce business easily trades at 2x sales and the company gives this number with Online Stores.
- 3P Retail platforms generally trade between from 5x-10x. Amazon likely has less growth than others, but we’d say still deserves at least 6x.
- AWS EBIT is provided so we can use profits for valuation there. We’d say that should probably trade at at least 25x, some may argue much more.
- Advertising is growing rapidly, with scale and a captive customer base. Given where other ad models trade, 8x revenue seems reasonable.
- Whole Foods is probably like any other grocery store. There are some other stores in the Physical Stores segment, but it’s mainly WholeFoods today. We’ll say 0.5x sales.
- The digital content offerings are where it gets a bit harder, since usage on offerings are tied into Prime. The company recently disclosed 175mm subs watched Prime Video over a year as of 1Q21. It also stated it had 55mm Amazon Music users. If we discount the video subs slightly (it was a peak covid usage number) and then compare the subscriber to valuation ratio to NFLX for video and SIRI/SPOT for music, we see the values in the table below.
In total that would be almost $2.3T in value with the current EV at $1.75T. The math isn’t perfect, and there are certainly some user ‘synergies’ created by Prime. Though there are also business/product offerings in Prime or otherwise that we are ignoring (gaming, photos, data storage, and many more).
The outlook for the quarter and the trend fundamentals remain mixed. From a fundamental perspective the time to own AMZN is when revenue and profits are accelerating. At the moment revenue is clearly slowing and with the 4Q effect (an underlying slowdown in 4Q from law of large numbers and competitive intensity pretty much every AMZN 4Q outside of covid aided 2020) likely to rear its head again, the revenue rate of change into 4Q is likely to remain weak. Though at the same time trend street expectations are relatively low, about as low as we have seen for AMZN, and higher margin business are accelerating and/or outgrowing retail, while the company is lapping excessive Covid costs. So the bull narrative would remain around margin upside. Historically AMZN likes Macro Quad 2 (below) as it’s the Quad it has its best absolute average performance. So were mixed on the trend, but would lean long if we had to pick a side, we remian bullish on the TAIL here with several high value business that continue to grow and the company continues to search for share of wallet opportunities.
