Is Amazon’s Trillion Dollar Market Cap Justified?

Tech behemoth Amazon (NASDAQ:AMZN) became the second publicly listed U.S. company  after Apple (NASDAQ:AAPL) to cross a $1 trillion market cap on Tuesday. Amazon has reported consecutive quarters of high double-digit annual revenue growth in recent years, despite the fact that its high base leads to tough year-on-year comparisons. What’s especially impressive is that the revenue growth has accelerated during this period, leading to substantial optimism among shareholders. Amazon’s stock has surged from around $800 in January 2017 to over $2,000 currently (market cap rose from $360 billion to nearly $1 trillion). The stock’s performance this year has been even better, with a 66% year-to-date rise from under $1,200 at the beginning of the year.

With that said, the Trefis price estimate for Amazon’s stock stands at $1,650, implying a valuation of $830 billion, about 15% below the current market price. We have created an interactive valuation dashboard for Amazon where you can modify individual segment revenue and margin forecasts for the current year to gauge how any changes will impact the company’s valuation based on expected 2018 results. 

Valuation Breakdown On Expected 2018 Results

Amazon’s core e-commerce and complementing grocery, in-house products (Echo, Kindle) and subscription (Prime) revenues have all contributed meaningfully to revenue growth this year. While these sub-segments continue to individually gain traction in their respective markets, the integrated Amazon ecosystem with add-on services offered to Prime subscribers is key to further growth. Adding more Prime subscribers globally should not only help drive subscription revenues, but also improve the stickiness of customers. Based on recent trends and sustained strong performance of the company across geographies, we expect Amazon’s combined North America revenues to increase 36% for the year to $144 billion. Similarly, Amazon’s International revenues this year are forecast to increase by 27% to $69 billion. In addition, we forecast Amazon Web Services (AWS) revenues to continue to increase at over 40% to $25 billion through 2018. Given the strong set of results through the first half of the year, Amazon appears to be on course to cross $235 billion in revenues for the full year.

In terms of profits, Amazon has successfully managed to improve its profitability in recent years. Amazon was operating at razor-thin margins in 2014 (6.6% EBITDA margin), which improved to 9% in 2015 and subsequently to around 10% in 2016 and 2017. As shown in the charts below, Amazon’s North America operations and AWS have helped drive profits higher, while the International segment has required massive investments in order to expand the company’s footprint in certain geographies. This trend has continued this year, and we expect it to continue through the end of the year. We forecast the company’s adjusted EBITDA margin to expand 120 basis points to 11.2% for the year.

Based on individual segment revenues and margins, we arrive at a $27 billion figure for adjusted operating through the year. This is nearly 50% higher than $18 billion reported last year. It should be noted that we adjust reported operating profit figures for depreciation, amortization and operating lease expenses. We use these figures with an EBITDA multiple of just under 31 to arrive at our $830 billion valuation. Amazon’s EV/EBITDA multiple has trended higher in recent years from just under 25 in 2016 to 31.7 in 2017. It should be noted that we have used EBITDA instead of earnings multiples since Amazon’s trailing P/E ratio has fluctuated between 130 and 250 in the last couple of years.

Based on our forecast for the company’s near-term results, Amazon’s EV multiple for 2018 would be even higher at over 37 in order to justify a $1 trillion valuation. With that said, at least a portion of the stock rally in recent months is attributable to positive investor sentiment around some of Amazon’s newer ventures that have yet to bring in material revenue, but hold great potential to add more paid subscribers to its ecosystem over the long run. For instance, the company is planning to launch an ad-supported streaming app for Fire TV users to compete with Roku Channel, and launched its app in Hindi for customers in India recently. While these developments aren’t likely to contribute directly to the company’s top line in the near term, they present further avenues to potentially onboard millions of new Prime subscribers. These longer-term bets are not captured in our near-term forecasts, and are at least partially excluded from our valuation estimate due to long-term uncertainties surrounding execution and their ultimate impact on the company’s financials. You can modify assumptions on our dashboard to come up with a near-term valuation based on expected 2018 and 2019 results, or use our DCF model to analyze how longer-term trends can impact Amazon’s valuation.

See our complete analysis for Amazon

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