At a current market capitalization of $1.6 trillion and trailing 12-month net revenue of $554 billion, Amazon (AMZN +1.02%) is a gargantuan business that hardly flies under the radar. And the fact that its shares have skyrocketed more than 6,200% in the past 20 years attracts even more investor attention.
Everyone is familiar with this tech juggernaut's sprawling e-commerce operations. In fact, Amazon accounts for nearly 40% of all online spending in the U.S. But there's another booming segment that cannot be ignored. It could be worth $550 billion just on its own. I'm talking about Amazon Web Services (AWS).
Stuck in the clouds
Amazon launched AWS to the public in 2006. Founder and former CEO Jeff Bezos realized that as the world became increasingly digitized, other companies would need access to cloud-based tech infrastructure. And boy, was he right.
Today, AWS serves some of the best-known enterprises on the face of the planet, including Walt Disney, Verizon, and Autodesk, with off-premises cloud services. Its offerings include computing power, data analytics and storage, and security services.
From the customer's perspective, moving IT infrastructure to the cloud can save money, maintenance, and capital expenditures, and it can add flexibility to meet changing needs. This benefits executives by not forcing them to plan large-scale investments, instead letting them add capabilities from a cloud provider as they see fit.
According to Grand View Research, the global market for cloud services will create a nearly $1.6 trillion revenue opportunity by 2030. As the first mover in the industry, AWS has a commanding lead, controlling 32% of the market. Microsoft Azure and Alphabet's Google Cloud are the second- and third-place contenders, respectively.
To be fair, AWS has seen its growth slow in recent quarters, causing some shareholders to worry that market share is being given up to rival firms. But CEO Andy Jassy struck an optimistic tone. "We're seeing the pace and volume of closed deals pick up, and we're encouraged by the strong last couple of months of new deals signed," he said on the Q3 2023 earnings call.
NASDAQ: AMZN
Key Data Points
AWS as a stand-alone entity
With these massive tech companies, notably the FAANG stocks, it's always fun to try to figure out what the individual segments could be worth if they were stand-alone entities on the public markets. For example, what valuation would YouTube fetch on its own? Or what about Meta Platforms' Instagram or Apple's services division?
For AWS, this figure is certainly enormous. The segment generated annualized revenue of $92.4 billion in the most recent quarter, with a superb operating margin of 30%. If we apply a price-to-sales (P/S) multiple of six, AWS is a roughly $550 billion business. I think this multiple is reasonable.
For comparison's sake, the P/S ratio for Amazon as a whole is 2.9 right now. But AWS has much greater growth potential than the company's e-commerce operations, and it's much more profitable. Plus, AWS is shaping up to be a leader in artificial intelligence (AI). Customers can already use Bedrock to develop their own generative AI applications by leaning on AWS' tremendous computational resources, which will bolster Amazon's data advantage.
Moreover, Alphabet and Microsoft trade at P/S multiples of 6 and 12.8, respectively. This means that a valuation of $550 billion for AWS might be conservative. Indeed, about a year and a half ago, one analyst was estimating the division to be worth up to $2 trillion.
All this is to say that signs point to Amazon likely being undervalued as a business, even after shares have soared 83% this year. This still looks like a wonderful stock to buy and hold for long-term investors.
