Morgan Stanley Lifts Amazon's Price Target To $2,500, Bullish On Waymo's Prospects For Alphabet

Morgan Stanley turned incrementally bullish on two of the four "FANG" stocks Wednesday: Amazon.com, Inc. AMZN and Google's parent company Alphabet Inc GOOG GOOGL.

The Analyst

Morgan Stanley's Brian Nowak maintains an Overweight rating on Amazon with a price target lifted from $1,850 to a Street-high $2,500. The analyst also maintains an Overweight rating on Alphabet with a price target lifted from $1,325 to $1,515.

Amazon: Higher Margin Business In Focus

Amazon's momentum has been evident over the past year and is highlighted by a beat on its EBIT guide by an average of 60 percent over the past three quarters, Nowak said in a note. Over the same time period, the company showed impressive growth in high-margin business lines like advertising, Amazon Web Services and subscriptions.

Amazon's momentum is showing no signs of slowing down and should help the company's long-term profit to grow from $25 billion in 2018 GAAP EBIT to $45 billion by 2020, the analyst said. As such, the continued growth in the margin-rich business lines prompted Morgan Stanley to change its sum-of-the-parts price target higher as follows:

• 3P business: $950/share.
• AWS: $750/share.
• 1P business: $300/share.
• Advertising/Other: $250/share.
• Subscription: $200/share.
• Total Valuation: Approximately $2,500/share, or $1.2 trillion.

Alphabet: Bullish On New And Old Businesses

The bullish case for Alphabet is based on the continued belief Google's monetization of its more than one billion users across its multiple platforms is still in the early stages, Nowak said in the note. In fact, management is showing its dedication towards improving monetization by investing in new initiatives across Maps, hardware and YouTube subscriptions, among others.

Alphabet's new business lines are in much earlier innings are undervalued in the stock's current valuation, Nowak said. Specifically, Alphabet's core business should be valued at $1,290 per share based on a 12 times multiple on 2020 EBITDA. As such, the stock assigns minimal value to other business lines, the most notable of which is Waymo which should be valued at $60 per share today.

Even at a $45 billion valuation, Nowak said, Waymo is still undervalued based on the future prospects in the self-driving business (ride-sharing, logistics, licensing). Based on a 20-year discounted cash flow model, the Waymo business would warrant a $175 billion valuation over time. Over the medium-term, investors will better appreciate Waymo's prospects and be more comfortable with assigning higher valuations.

Price Action

Shares of Amazon were trading higher by 1.2 percent early Wednesday morning while Alphabet's stock was higher by 0.7 percent.

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