Andrew Willis: Amazon (AMZN) is worth a trillion U.S. dollars, and not only because of its online retail business. You see, while Amazon was rewriting the way we shop, it was ALSO taking over server farms and a third of the world’s could computing services.
It’s growing power and influence caught the attention of U.S. regulators, who have their eye on breaking up big tech companies, potentially changing their long-term financial positions. We don’t think a breakup is imminent, but it did have us wondering – what’s Amazon’s sum of parts?
Alexa, what’s Amazon’s sum of parts?
Almost 70% of the valuation is likely to come from Amazon Web Services and Amazon Advertising. Amazon Web Services remains the most significant contributor to their cash flow over the next five years, at the centre of a growing ecosystem of advertising, streaming, and online retail services. And of, course, Alexa.
Alexa, show me Amazon’s stock chart
We believe that operating margins at Amazon Web Services and Amazon Advertising could hit the mid-30s and mid-20s, respectively, over the next decade. That’s part of why we believe the stock is undervalued and is trading at a 24% discount to our fair value estimates. Plus, that kind of cash flow will serve as a strong insulator if we’re hit with a recession.
Amazon’s other businesses would take a hit in a recession, but we see this offset by growing margins and unmatched prices, along with its retail subscription services locking in consumer loyalty.
For Morningstar, I’m Andrew Willis.