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I believe Amazon (NASDAQ:AMZN) is one of the most well covered stocks that is completely misunderstood and undervalued by investors.
Buried on the second to last page of every financial document I’ve recently seen from Amazon is the most important piece of financial information the company produces.
In some ways, I think the company might even intentionally bury the segment growth at the bottom of the financial reports so competitors, and possibly regulators, don’t realize what Amazon is brewing up outside the core retail business.
Either way, parts of Wall Street and certainly the bear case against owning Amazon stock focuses almost solely on the core retail business and AWS. However, Amazon has 5 different business units growing double-digits revenue wise.
Today I’m going to walk you through each business unit and illustrate that based on the revenue and growth rate – each of these business units have peers that are imputing a value that needs to be viewed on its own to fully understand the value of Amazon’s business and ultimately stock price.
Online Stores
Worth around: $172B
Q4 Revenue: $64.531B (-2% Y/Y) +2% Excluding F/X
TTM Revenue: $219.8B
Let’s compare the sales multiple of popular low-margin retailers to Amazon to derive a valuation for Amazon’s online store business.
| TTM P/S | Amazon Value | |
| Walmart (WMT) | 0.66x | $145B |
| Costco (COST) | 0.96x | $211B |
| Target (TGT) | 0.73x | $160.5B |
| Average | 0.78x | $172B |
Amazon’s online business is actually the least exciting from an investment perspective. Low-growth/low-margin retail is rarely going to achieve a high sales multiple from Wall Street, however the online stores business drives the more exciting areas of the business like Advertising, Prime Subscription, 3rd Party Sellers, and of course AWS.
Physical Stores
Worth around: $14.8B
Q4 Revenue: $4.957B (+6% Y/Y)
TTM Revenue: $19B
Physical stores is primarily Whole Foods for Amazon. Amazon strips out buy-online pickup in store orders and counts those as online orders, so the total revenue in this segment is skewed a bit.
I apply the same multiple to this business as the online store model above, however I wouldn’t blame an investor who wants to knock it down a bit more due to the fact it’s primarily grocery. The best comparison is Kroger (KR) which trades at just 0.22x TTM sales.
Amazon Advertising
Worth at least: $169B
Q4 Revenue: $11.557B (+19% Y/Y) +22% Excluding F/X
TTM Revenue: $37.739B
Let’s compare the sales multiple of popular online advertising companies to derive a valuation for Amazon’s ad business.
| Q4. Growth Rate | TTM P/S | Amazon Ad Value | |
| Google (GOOG) | +1% | 4.37x | $165B |
| Meta (META) | -4.5% | 4.01x | $151B |
| Snap (SNAP) | Flat | 3.72x | $140B |
| Pinterest (PINS) | +3.6% | 5.9x | $222B |
| Average | 4.5x | $169.8B |
Amazon’s advertising business is growing exponentially faster than all other online advertising stocks. Conservatively the ad business should be worth an average sales multiple of 4.5x – however considering the growth rate is over 5 times higher than the closest comparable in Pinterest – the value could easily be much higher.
3rd Party Sellers
Worth at least: $500B
Q4 Revenue: $36.339B (+20% Y/Y) +24% Excluding F/X
TTM Revenue: $117.7B
There are a few 3rd party marketplace companies to compare Amazon to. You certainly could include some of the travel websites, as it’s essentially the same business, but I decided to keep the focus to retail.
| Q3 Growth Rate | TTM P/S | Amazon Value | |
| eBay (EBAY) | -4% | 2.79x | $328.4B |
| Etsy (ETSY) | +11.7% | 6.8x | $800.4B |
| Average | 4.8x | $564B |
What’s sneaky about the 3rd party seller category for Amazon is it actually disguises the total amount of gross merchandise value or GMV that flows through Amazon. The company only reports its online and physical store GMV – hidden is the GMV the 3rd party sellers generate as Amazon only reports the commissions it receives – not the gross sales totals.
It’s estimated the GMV generated by 3rd party sellers is about 2x that of what Amazon generates from its own online stores – or roughly $400B+. So before you race down to the comments and argue the valuation of 3rd party sellers, realize its growth rate is exponentially higher than virtually any retailer or comparable reseller marketplace. Additionally the GMV 3rd party sellers generate is approaching Walmart like levels and is more than Target and Costco combined.
Subscription Services
Worth around $27.5B
Q4 Revenue: $9.189B (+13% Y/Y) +17% Excluding F/X
TTM Revenue: $35.2B
This business unit is essentially Amazon Prime, along with digital book, video and music sales.
Tough business, in my opinion, to put a clear value on. That’s because unlike many of these other businesses, this business unit doesn’t really stand on its own. I really can’t imagine an “Amazon Prime” spin-off IPO like I can with AWS, 3rd party sellers or the ad business.
That being said, this is incremental margin to the online store business since the two are so closely related. Therefore I’m going to extract the 0.78x TTM P/S multiple we applied to the Online Stores business above and apply that here.
Other
Worth around: $9B
Q4 Revenue: $1.253B (+77% Y/Y) +80% Excluding F/X
Amazon labels “other” revenue as:
Sales related to various other offerings, such as certain licensing and distribution of video content and shipping services, and our co-branded credit card agreements.
Up until Q2 2022, the business unit wasn’t generating over $1B in revenue and was growing in the 15% – 28% range. However, once Amazon closed on the MGM Studio acquisition, revenue accelerated over 100% and the past two quarters have been around $1.25B.
We don’t have 4 complete quarters that included MGM Studios in the other revenue category, however Amazon just acquired this business for $8.45B. I’m assuming the premium hasn’t grown much for that business in the past twelve months, so conservatively I’m valuing that business around what Amazon paid.
Let’s Recap
- Online Stores = $172B
- Physical Stores = $14.8B
- Advertising = $169B
- 3rd Party Sellers = $500B
- Subscription = $27.5B
- Other = $9B
Total = $892.3B
But wait … what about Amazon AWS?
I’m glad you asked. Before we get to that, let’s not gloss over that Amazon’s core retail business is not far from the total enterprise value of Amazon at $1.1T. Additionally, the growth rate of the advertising and 3rd party seller portion of the business is considerably higher than peers – meaning these valuations could be viewed as conservative.
AWS Business
Worth around: $500B+
Q4 Revenue: $21.378B (+20% Y/Y)
TTM Revenue: $80.1B
TTM Operating Profit: $22.841B (+23% Y/Y)
While not identical business models, conservatively we can look at Oracle (ORCL) and IBM (IBM) to compare the AWS segment to.
| Growth Rate | P/S | AWS Value | |
| Oracle | 18% | 5.07x | $406.1B |
| IBM | Flat | 2.02x | $161.8B |
With positive earnings, we can look at AWS from an earnings perspective as well.
| FWD EPS Growth | P/E | AWS Value | |
| Oracle | 0.12% | 17.76x | $405.7B |
| IBM | 3.92% | 14.29x | $326.39 |
Even with the AWS business unit showing some signs of slowing, the emergence of artificial-intelligence applications should help Amazon maintain a solid growth rate for the foreseeable future. Additionally, cloud competitors like Microsoft (MSFT) and Google are launching what could be seen as in-house “chatbot” AI products – so it’s possible Amazon wins more chatbot startups if Amazon is viewed more of a neutral 3rd party cloud service.
In totality, the AWS business is growing faster than its peers and should achieve a higher than average multiple.
Add It All Up
Amazon has a ~ $900B retail, advertising and entertainment business. A stone’s throw from Amazon’s current $1T market cap. The cloud business is conservatively worth $500B on its own. Essentially you buy Amazon’s core business and get whatever value you place on the AWS business for free.
The bear case would need to argue that these businesses are worth significantly less than peers, despite higher growth rates. Yes, I understand many will point to earnings – but Amazon only breaks out segment operating profits for AWS. It’s hard to imagine Amazon isn’t operating largely profitable advertising and 3rd party seller businesses – which I estimate as the most valuable aside from AWS and the core retail.
That ultimately makes Amazon’s challenge fairly simple.
Start to drive operating efficiency in the core retail business. I realize this has been the challenge for 2+ decades, but also realize the core retail business has allowed Amazon to grow AWS, advertising and 3rd party seller businesses into some of the most valuable parts of the company.
Conclusions
The bear case against Amazon is often lazy. It points to Finance 101 metrics like P/E that if they worked 100% of the time, there would be no need for a website like Seeking Alpha – or any financial education material for that matter.
The fact is Amazon has built up a dominant advertising, subscription, streaming video, 3rd party selling and cloud server business at the expense of making money on low-margin retail. It’s actually a brilliant strategy, that has been executed to near perfection.
Yes, the company needs to become more efficient on the core retail side – but investors aren’t paying a huge premium for the company to figure it out. Amazon shares should be worth at least 40 – 50% more based on the total value the company’s business units provide.
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