Amazon's current market capitalization is 941 bln. USD. Amazon's main driver of future growth in both revenue and market capitalization as assumed by Wall Street research analysts and almost everybody else is its cloud business Amazon Web Services(AWS). AWS is the Cloud Application Services or Software As A Service(SAAS) platform of Amazon.
According to Gartner the global SAAS market reached 80 billion USD in 2018 and is expected to expand to 94.8 and 143.7 billion USD in 2019 and 2022 respectively. Amazon.com Inc. clocked in almost 25.7 billion USD from AWS in 2018 which gives it roughly a 32% of the cloud SAAS market. Amazon made 7.3 billion USD in profit on 25.7 billion in net sales in AWS which makes for a 28.4% net profit margin. Given that Gartner forecasts that SAAS business will grow at around 15% on average for the next four years it is reasonable to assume a Price/Earnings multiple of 30 on AWS, which gives Amazon's AWS business valuation of about 220 billion USD currently. Amazon's main business of online products sales made 207 billion USD in revenue in 2018 growing by roughly 25% in 2018 compared with 2017. Amazon online selling business, however, is notoriously not very profitable. The North America business made around 7.2 billion USD, while its international online merchandising business incurred a loss of 2.1 bln. USD. So, all in all, Amazon's main business of online selling makes about 5 billion USD a year in profit. Given that is growing by 25%, we could place a multiple of Price/Earnings of 50, so Amazon's main business is worth about 250 billion USD. So sum of the parts analysis of Amazon's two main businesses of online sales valued at 250 bln. USD and AWS valued at 220 billion USD gives probable value of Amazon.com Inc. of 470 billion USD.
So why does the market price Amazon at 941 bln. USD, roughly twice my simple valuation of 470 bln. USD? One reason is that Gartner estimates the whole cloud market at 182.4 billion in 2018 as you can see from the table below.
2018
|
2019
|
2020
|
2021
|
2022
|
|
Cloud Business Process Services (BPaaS)
|
45.8
|
49.3
|
53.1
|
57.0
|
61.1
|
Cloud Application Infrastructure Services (PaaS)
|
15.6
|
19.0
|
23.0
|
27.5
|
31.8
|
Cloud Application Services (SaaS)
|
80.0
|
94.8
|
110.5
|
126.7
|
143.7
|
Cloud Management and Security Services
|
10.5
|
12.2
|
14.1
|
16.0
|
17.9
|
Cloud System Infrastructure Services (IaaS)
|
30.5
|
38.9
|
49.1
|
61.9
|
76.6
|
Total Market
|
182.4
|
214.3
|
249.8
|
289.1
|
331.2
|
Apparently the market thinks that Amazon.com Inc. could win a larger market share of the other types of cloud services or alternatively win an even larger market share of its current domain SAAS.
Another reason for Amazon's high market capitalization is that market participants seem to believe that Amazon could develop other verticals. Amazon recently has had success doing online advertising which brought in around 10 billion USD in 2018. Emarketer puts the size of the global advertising market at 283 bln. and 517.5 bln. USD in 2018 and 2023 respectively as evidenced by the following link:
https://www.emarketer.com/content/global-digital-ad-spending-2019
Amazon.com Inc. nearly doubled its Q4 2018 online advertising revenue to 3.4 bln. USD compared to Q4 2017. Online advertising could turn out to be the new main driver of Amazon's stock.
I think the intrinsic worth of Amazon.com Inc. is 640 billion USD or around 32% discount to its current 941 billion market capitalization.
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Petar
Vladimirov Posledovich is not liable for any investment losses incurred
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Kind regards,
Petar Posledovich
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