Sometimes, the best stock is right underneath your nose. Take Amazon (AMZN -0.40%), for instance. Sure, everyone knows about this tech giant and how it has performed over the past two decades-plus. But investing is more about selecting companies based on future performance rather than on what the company has done in the past.
I don't think enough investors know about Amazon's potential and why it could explode higher in 2024.
Amazon has multiple business segments
Amazon's largest business segment may be its online stores, but it's the other, more exciting segments within the company that should have investors' attention right now.
| Segment | 2023's Q3 Revenue | Growth (YOY) |
|---|---|---|
| Online stores | $57.3 billion | 7% |
| Third-party seller services | $34.3 billion | 20% |
| Amazon Web Services (AWS) | $23.1 billion | 12% |
| Advertising services | $12.1 billion | 26% |
| Subscription services | $10.2 billion | 14% |
| Physical stores | $5.0 billion | 6% |
| Other | $1.3 billion | (3%) |
Data source: Amazon. YOY = Year over year.
One of the biggest eye-catchers is its growing third-party seller services segment. It turns out Amazon is increasingly becoming more of a selling service rather than doing the selling itself. That's a noteworthy shift because it means Amazon isn't responsible for stagnant inventory or finding the latest trend. As many software companies have proven, selling a service rather than a product can be far more profitable.
Another noteworthy segment is its advertising services. This is Amazon's fastest-growing segment and, while its still developing, it already generates more revenue in a single quarter than a tech giant like Netflix (Netflix's Q3 revenue was $8.5 billion). A lot of Amazon's profitability improvement this year has come from the rise of this business segment.
Among the minor disappointments in a strong 2023 for Amazon was its cloud computing business, Amazon Web Services (AWS). AWS saw its growth slow this year as many clients looked to improve the efficiency of their workloads running on AWS servers. Amazon took a long-term view and helped its clients reduce their usage, slowing down its revenue growth. AWS is hoping that kind of customer service will result in retaining many clients that might have otherwise jumped ship, making it a smart move. Moving into 2024, management noted that this trend is starting to level out and growth is returning to AWS as new workloads come online.
Amazon's business can be valued by parts
With Amazon's business looking strong heading into 2024, it got me thinking, "What is Amazon's stock truly worth?"
Valuing a company as wide-reaching as Amazon by its parts can be a worthwhile exercise, as a can reveal a part of the company that may be grossly undervalued. Value investors like Warren Buffett deploy this strategy and it's useful for all types of stocks.
Because Amazon doesn't break out how profitable each segment is, I'll divide the business into four segments, then I'll value each segment based on its trailing-12-month (TTM) revenue:
- Online and physical stores and other
- Third-party seller services
- Amazon Web Services
- Advertising and subscription services
For online and physical stores, a retailer like Walmart provides a good comparison. Walmart trades at 0.64 times sales. Third-party seller services are a bit trickier. For comparison, a similar business is Shopify. But that stock has a significant premium attached to it (it trades at 14 times sales), making for a troublesome comparison. However, a significant part of this business is payment processing and fulfillment, making it a cross between businesses like PayPal and UPS. As a result, I'll assign a 2 times sales ratio to this segment.
AWS would trade like a software stock, so assigning a 10 times sales multiple here seems reasonable. Finally, advertising and subscription services would demand a premium similar to Meta Platforms or Alphabet, which would value that segment around 6.5 times sales.
If you multiply the trailing-12-month revenue by these valuations, then you'd get a value for each segment that looks like this:
| Segment | TTM Revenue | P/S Ratio | Value |
|---|---|---|---|
| Online and physical stores and other | $250.6 billion | 0.64 | $160.4 billion |
| Third-party seller services | $132.7 billion | 2 | $265.4 billion |
| Amazon Web Services | $88 billion | 10 | $880 billion |
| Advertising and subscription services | $82.9 billion | 6.5 | $539 billion |
Data source: Amazon.
If you add up the valuations for each segment, you'll get $1.84 trillion, a 20% jump from its current $1.53 trillion market cap.
This exercise suggests that Amazon is a stock undervalued based on its segments and primed for upside. Note too that this is a conservative estimate because my third-party seller services and online store valuations were on the conservative side.
Going into 2024, the market is going to catch on to Amazon's undervaluation and I'm confident that this monster stock will have a great year.
