Amazon’s worth a trillion dollars

And it’s not because of its online retail business

Andrew Willis 4 October, 2019 | 1:54AM
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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. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating Inc184.06 USD0.22Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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