Amazon shares popped today after analysts at Bernstein said they’ve been undervaluing the company’s AWS segment. They believe Wall Street is also underestimating how much revenue and profit Amazon will make in the current quarter, the current year and next year.
Shares of Amazon climbed as much as 1.83% to $434.68 per share during regular trading hours today after Bernstein’s report.
Amazon price target raised
In a report dated May 7, Bernstein analysts Carlos Kirjner, Andrea Rosso and Ben Betcher raised their price target from $450 up to $600 per share, making their target one of the most bullish ones for Amazon on Wall Street. The analysts have an Outperform rating on the company and now estimate that Amazon Web Services is worth $120 billion or possibly even more, which would make it worth about $260 per share for Amazon.
The Bernstein team said after closely analyzing Amazon’s first quarter earnings report that they think AWS is going to be bigger and more profitable than they had previously thought it would be.
Amazon Web Services in hyper-growth mode
They note that Amazon hasn’t had to invest as heavily in its cloud hosting platform as they had previously thought it would have to. The analysts add that this fact indicates how strong demand for the service is.
The Bernstein team is expecting to see revenues from AWS reaccelerate this year as the company has now surpassed the one-year mark since Google cut the price of its cloud platform, triggering a pricing war with Amazon. In the second quarter of last year, revenues from AWS increased 43% year over year, and in the first quarter of this year, they increased 49%, indicating that they are still accelerating.
The analysts are expecting to see revenues from the cloud platform grow by an incredible 70% to 80% in the current quarter and keep accelerating over the next few quarters. They don’t think this acceleration is reflected in Wall Street’s consensus estimates. Further, they expect that by the time AWS matures, the EBIT margin will be around 30%.
AWS benefits from pricing power
The Bernstein analysts also point out that AWS continues to do well even though Amazon has slowed down its price cuts over the last year even though the competition continues to offer discounts on comparable services. They say that the strong pricing power, combined with falling computing and storage costs, partially explain how Amazon Web Services has been able to expand its margins so quickly.
One of the big problems investors have had with Amazon over the last year is its continued spending on capital expenditures. Indeed, the online retail giant recorded gross PP&E additions last year that were greater than 90% of the segments revenues. However, the Bernstein team notes that there are signs that the high spending “is a transient phenomenon driven by growth and deployment of datacenter capacity ahead of demand.” They now expect AWS’ capital intensity to start falling toward depreciation as a percentage of the segment’s revenues.
What about Amazon’s retail business?
The core part of Amazon’s business has always been retail, with Amazon Web Services playing a supporting (and apparently underappreciated) role. The online retailer has been spending money right and left on distribution centers, and investors have gradually tired of all that spending. However, the Bernstein team notes that Amazon’s retail business is showing signs of changing trajectory as well.
They point out that AWS’ better than expected past profitability suggested that last year Amazon’s retail business was less profitable than previously thought. In the first quarter of this year though, they say the trajectory of Amazon’s retail business in terms of revenue and profitability was “significantly” better than they thought it would be.
Acceleration to continue in retail
They were particularly pleased by the surprise in the acceleration of Amazon’s International Electronics and General Merchandise business on a currency-neutral basis compared to a difficult comparison with the first quarter of last year. In the next couple of quarters, the comparisons are easier, and the Bernstein team expects to see continued acceleration in Amazon’s retail business.
They believe the business is accelerating because of growth in Prime subscriptions and FBA in international markets like the U.K. and Germany. Also revenues from North America were better than expected. They don’t think the retail acceleration is being fully factored into consensus estimates either.
Other good news for Amazon
When looking at broader numbers across the online retail industry as a whole, things also look good for Amazon. Nomura analyst Robert Drbul and his team explained what the latest data from ChannelAdvisor means for the online retailer.
They report that Amazon and also Google Shopping continued growing more quickly than the roughly 15% growth rate for e-commerce estimated by comScore. Amazon’s comparable sales rose 22.6% last month, which was a slight deceleration from March’s 24.6%. When looking at Amazon on a two-year basis, ChannelAdvisor found a “very healthy” growth rate of 49.6% last month, according to the Nomura team. The firm also noted that 37% of Amazon’s gross merchandise volume in April was FBA, compared to 27% in April of last year.
The Nomura team maintained its Buy rating and $490 per share price target on Amazon, also offering positive commentary on AWS in agreement with the Bernstein team.
