In one month, Amazon.com's (NASDAQ: AMZN ) stock has declined more than 15% to triple the Nasdaq's loss; Amazon now trades 22% below its 52-week high. Yet given this loss, Amazon's sum-of-parts might imply the presence of a good investment opportunity. This includes its cloud business, which directly competes with that of salesforce.com (NYSE: CRM ) and its core e-commerce business, which compares favorably to the likes of Wal-Mart (NYSE: WMT ) .
You can't forget AWS!
Amazon is an enormous, $145 billion company. In the first step of determining whether this is a fair price or if the company is overvalued or undervalued, investors must do a sum-of-parts analysis to figure out what creates this valuation.
With that said, Amazon Web Services, or AWS, is a somewhat under-the-radar segment of Amazon that has a massive valuation. It provides services for cloud infrastructure, or laaS, and app platforms, or PaaS. AWS owns 35% and 17% market share, respectively, in each segment.
In comparison, figures show that Salesforce has market shares in laaS and PaaS of 3% and 18%, respectively, in an overall market that's growing at a more than 40% annual rate. Last year, AWS grew 55% to post revenue of $3.8 billion. Research firm Macquarie estimates that this figure will rise to nearly $9 billion by 2015. Hence, it is a fast-growing segment, one that Evercore has valued at $50 billion.
Yet for those who think this valuation appears excessive in regard to Amazon's overall market capitalization, keep in mind that Salesforce carries a $33 billion market cap despite its less impressive growth and market share. With that said, investors can remove the $50 billion valuation of this segment from Amazon's $145 billion market capitalization to arrive at a $95 billion valuation for its existing core e-commerce business.
How does Amazon compare?
Amazon operates an enormous e-commerce platform with nearly $75 billion in revenue that has seen 29.6% annualized growth over the last three years.
Comparisons between eBay and Amazon appear most often. Unfortunately these comparisons aren't suitable, as nearly half of eBay's revenue comes from PayPal and so does the majority of its profit. Hence, Wal-Mart actually makes for a better comparison due to the manner in which it earns revenue and its retail focus.
Wal-Mart has grown at a three-year annualized rate of 4.1%, and analysts expect its sales to grow 3% this year. Hence, Amazon has been growing at a rate six times faster than that of Wal-Mart and analysts expect this to continue, yet without including AWS, Amazon trades at just 1.27 times its 12-month sales. In comparison, Wal-Mart trades at 0.52 times sales, which is likely fair value, but gives Amazon a premium of less than 150%, and despite its growth premium.
With that said, investors always give premium valuation multiples to companies with faster growth than their peers, as investors are betting on the future rather than the present. Hence, Amazon looks attractively priced relative to Wal-Mart due to its growth.
Ultimately, it is impossible to determine or predict the price of a stock or the trend it will follow. A stock's price is always connected to the broader market, and Amazon in particular is widely held among index funds and institutions, and it is also weighted heavily in the Nasdaq. Thus, if these funds sell and the indexes trade lower, this will always affect Amazon.
However, these stock price losses can create opportunities. Regardless of what happens during the next month or what future trends will affect Amazon, it does appear that the stock is attractively priced. AWS makes up a significant part of the Amazon equation and now it has entered into the video streaming business as well, a market where Netflix carries a market cap north of $20 billion as the industry leader.
With that said, Amazon is not just an e-commerce retail giant, it's also a disruptive growth company that's showing no signs of slowing down. Hence, Amazon's 22% loss looks to be a good opportunity for shareholders, one where the long-term upside trumps the short-term downside.
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