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For Amazon.com (NASDAQ: AMZN ) investors, trading at $400 per share is a major accomplishment and a level that many thought could never be seen. The constant debate regarding the worth of Amazon races on, but as $400 fast approaches, investors must also wonder if the stock is still a buy.
Not an ordinary company
In a previous article, I explained how Amazon might be the most disruptive company in history. Amazon has evolved from a bookstore to a retail powerhouse and is now a cloud services and grocery provider as well. There is seemingly not much that this company can't accomplish. With that said, part of what dictates how to value Amazon is determining what exactly it is.
For one thing, Amazon is not a retail company per se. The bulk of its business is in retail, but to truly get an accurate reading of this company and its valuation you must dissect its parts.
What's the value assigned to AWS?
AWS stands for Amazon Web Services, and is the company's cloud infrastructure and cloud app platform business. These are businesses made popular by the likes of salesforce.com (NYSE: CRM ) and Workday (NYSE: WDAY ) .
The research firm Evercore estimates that Amazon will produce $3.5 billion in 2013 from AWS and is growing at a rate of more than 55% annually. With this growth and revenue in mind, Evercore also assigns a $50 billion market worth to AWS, a whopping 14.2 times sales.
While 14.2 times sales might sound outrageous, consider the fact that Salesforce trades at 8.4 times sales and Workday is even more expensive with a price-to-sales ratio of 40.4. This is a great illustration of value, as Amazon is accurately right in the middle of these two companies.
Salesforce is a major player in the cloud app platform business with an 18% market share. AWS is growing significantly faster than Salesforce in this business, however, and could soon be the new leader in the cloud app platform segment. Salesforce is also spending at a rate that is faster than its growth, suggesting that AWS is worth a heftier premium than Salesforce.
Workday develops infrastructure or sells software-as-a-service. In the company's most recent quarter, it showed accelerated growth and improved its operating margins. With 71% growth, Workday deserves a higher multiple than AWS. At the same time, the large range between Workday and Salesforce likely validates the multiple and valuation awarded to AWS at $50 billion.
What's the retail worth?
After we remove AWS, we are left with Amazon's core retail business. This gives us $66.5 billion in annual revenue remaining and a market cap of $130 billion. This applies a much more attractive price-to-sales ratio of 1.95 for its retail segment versus the 2.5 times sales that is given for the entire company.
If we look throughout retail, Amazon still looks pricey. Wal-Mart (NYSE: WMT ) ,for instance, trades at 0.56 times sales. Wal-Mart is the largest retail company in the world, and if we're trying to determine if Amazon is expensive relative to its retail business, then we have to compare it to the best.
There is another element to the story, however, and that is growth. If we use Thanksgiving and Black Friday as a comparison, ShopperTrak estimates that brick-and-mortar stores rose just 2.3% year over- ear while e-commerce grew a whopping 17.3%. Therefore, Wal-Mart and Amazon are on two completely different levels of growth. As seen with AWS, higher premiums are normally awarded for growth.
In fact, Amazon is not just the largest e-commerce company in the U.S., but is also one of the strongest. ChannelAdvisor estimates that Amazon saw same-store sales rise 20.3%, far better than the overall industry.
With that said, Amazon is growing 10 times faster than Wal-Mart but is only 3.5 times more expensive. This fact is a good indication of investment value.
What about earnings?
Right now, bears are probably screaming that price times sales is not a fair metric. After all, Wal-Mart trades at just 14.4 times next year's earnings versus a forward P/E ratio of 146 for Amazon.
The problem with this argument is that net income or earnings is not a good valuation metric for companies at different stages in their growth cycle. Amazon is investing heavily in growth -- including new segments such as grocery -- while expanding its infrastructure. Wal-Mart, on the other hand, is large and well-established.
It is worth noting that in both Amazon's and Wal-Mart's most recent quarter, Amazon actually had a higher gross profit margin. Amazon's gross profit margin was 27.6% versus 25% for Wal-Mart. This suggests that Amazon might one day achieve profit margins greater than Wal-Mart's 3.6% once its aggressive spending subsides.
There's a lot to like about Amazon, even as the stock closes in on $400. When you break it down into both retail and AWS and then consider its growth, you can see that Amazon might still have a significant amount of room to run higher.
Is Amazon a good investment right now? Unfortunately, no one can accurately predict the short-term performance of a stock or the broader market. Amazon has seen stock gains of 60% this year alone, and more than 800% during the last five years. Amazon might see a pullback after hitting $400, but for long-term investors the valuation still suggests further upside ahead.
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