Morgan Stanley Sees AWS Driving ~60% OF Amazon's Forward Profitability

• Amazon.com, Inc. AMZN shares are up 26 percent in the last three months, climbing from a low of $463.37 on August 24 to crossing the $600 mark on November 5.
• Morgan Stanley’s Brian Nowak maintained an Overweight rating on the company, while raising the price target from $750 to $800.
• The AWS opportunity is underappreciated by the market, and could drive the company’s forward profitability, Nowak said.

AWS is benefiting from accelerating public cloud adoption. Analyst Brian Nowak mentioned that AWS could drive nearly 60 percent of Amazon’s forward CSOI [non-GAAP operating income] over the next 2 years.

“Our new price target values AWS at $63bn (5.3X 2016 revenue, a 25% premium to the SaaS comp group) and the core retail business at $300bn,” Nowak wrote. He added that Amazon now seems to be worth $800 per share, even if there is only a ~300bp expansion in the North America retail margins over the next 5 years and International retail margins reach only 2 percent.

Amazon's North American retail business is worth $256 billion, even if the long-term margins are only 8 percent. Amazon's International retail business is worth $44 billion, even if the long-term margins are merely 2 percent, the Morgan Stanley report stated.

Nowak added that Amazon’s shares do not appropriately reflect the company’s eCommerce business, which could be a major driver of profit improvement in the near term.