Is Amazon Worth $1 Trillion? Morgan Stanley Does The Math

Apple Inc. AAPL could very well be worth $1 trillion within months, and Amazon.com, Inc. AMZN may not be far behind in joining the prestigious group.

The Analyst

Morgan Stanley's Brian Nowak maintains an Overweight rating on Amazon's stock with an unchanged $1,250 price target.

The Thesis

Amazon boasts three high-margin revenue streams that happen to be growing faster than the core retail business, Nowak said in a Sunday note. (See Nowak's track record here.)

The AWS cloud segment is projected to grow at a compounded growth rate of 33 percent through 2020, followed by Other (advertising and other initiatives) at 32 percent and Subscriptions at 28 percent, the analyst said. These three units are likely to grow as large as Amazon's core retail business and contribute approximately 50 percent of Amazon's total gross profit dollars, he said. 

Nowak conducted a sum-of-the-parts valuation of the pieces of Amazon's business that would drive a $1 trillion valuation:

• Core retail business ($600 billion or $815 per share): assumes the $200 billion business will grow at a 13 percent rate while the third party business reaches a 25 percent EBITDA margin in 2022. Amazon's 1P business would be worth $388 per share and the 3P business would be valued at $401 per share.
• AWS ($270 billion or $555 per share): Amazon's AWS segment would be valued at 13x 2022 EV/EBITDA, which implies a slight discount to other cloud-based companies, even though AWS boasts a superior top-line growth rate of 18 percent from 2020 to 2022 versus 8 percent today.
• Subscription ($69 billion or $141 per share): Amazon's subscription business will see a 17 percent compounded annual growth rate through 2022 and reach $21 billion as Amazon grows its Prime membership base to 146 million across the world.
• Other/ Advertising ($55 billion or $112 per share): Amazon can grow its advertising business at 17 percent from 2020 through 2022. But this outlook may even be conservative as it implies Amazon accounts for just 4 percent of the total US 2022 online ad market.

Price Action

Shares of Amazon gained 0.7 percent Monday morning and are higher by 50 percent since the start of 2017.

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