The narrative around Amazon (AMZN -1.43%) is slowing sales growth in its retail business, in which online stores reported a 1% decline in revenue last quarter. This explains why the stock plunged after the company released its first-quarter earnings report.
But investors are forgetting that Amazon is more than retail these days. It has fast-growing revenue coming from advertising, third-party seller services, Prime subscriptions, and cloud services. These businesses are growing much faster and contribute more value to Amazon's business than retail alone.
A quick glance at what these businesses are worth helps illustrate why Amazon is a solid investment at these low share prices.
How to value Amazon
A simple way to value a business is to think like a home buyer. When buying a house, you consider what other comparable houses in the same area have recently sold for to inform your offer. We can use the same technique to estimate Amazon's intrinsic value.
Amazon Web Services (AWS) is the company's fast-growing cloud services business. AWS generated $67 billion in trailing-12-month revenue through the first quarter. Other leading cloud stocks trade at a price-to-sales ratio ranging from 9 for DigitalOcean Holdings to as high as 42 for shares of Snowflake. Let's keep it conservative and apply a multiple of 10 to AWS' trailing-12-month revenue. That values AWS at $670 billion.
Amazon's advertising revenue has been growing like gangbusters lately. Companies are desperate to market their goods in front of more than 200 million Prime shoppers. That demand pushed Amazon's ad revenue up 25% year over year in the first quarter to reach $32 billion on a trailing-12-month basis. Two leaders in online advertising are Alphabet's Google and Meta Platforms' Facebook. Those stocks command a price-to-sales multiple of about five right now. Applying that number to Amazon's ad services revenue gives a value of $163 billion.
We are already at an estimated value of $833 billion for Amazon, which is two-thirds of its $1.23 trillion market cap (total shares outstanding times the stock price). We haven't even valued its retail business, third-party seller services, and subscription services (e.g. Prime membership fees). Those remaining revenue streams add up to $375 billion on a trailing-12-month basis. Even if we lumped those businesses together and applied a conservative price-to-sales ratio of one, we would come to a figure that approximates Amazon's current market cap.
However, that would be understating Amazon's value, since the fees from Prime memberships and third-party seller services generate higher margins than the retail business. Comparable businesses that generate revenue from seller fees, like eBay and Etsy, trade at price-to-sales multiples between 3.2 and 5.9. Amazon's subscription and third-party seller services should be valued at a similar multiple. All said, it's easy to make the case that Amazon's current stock price is below its intrinsic value.
What slowing retail sales don't say about Amazon's business
Amazon's slowing retail sales growth doesn't spell doom for the future. One thing the market got wrong is the growth in Prime memberships last quarter. In fact, management said the company added "millions more new Prime members" during the first quarter.
Management also noted stronger usage of Prime benefits over the last two years, such as higher usage of entertainment perks (Prime Video) and greater shopping reliance on Amazon. More Prime shoppers mean more growth for advertising revenue since companies look at Amazon's wide customer base as a gold mine for their brands. This will only push the value of Amazon's advertising business up even further over time.
Breaking down Amazon's business and understanding where it derives value should help investors see through the noise caused by the stock market volatility. The most important thing is that stocks are not lottery tickets. If you buy shares of great companies when they are on sale, you're going to make money over a lifetime of buying stocks. Amazon's sell-off is giving investors that opportunity.