Amazon.com, Inc. (NASDAQ:AMZN) shares have gained more than 34% over the past 12 months. While many argue that the stock is overvalued, Bernstein Research analysts Carlos Kirjner, Peter Pashkaver and Garrett Marks believe that the stock is still trading cheap. Bernstein has an Outperform rating on Amazon with a $420 price target. The analysts used multiple methods including price to sales, price to gross profit, price to retail gross profit, sum-of-the-parts, and DCF. The results of all these methods show why the research firm is bullish on the stock.
Using the price to next-twelve-month (NTM) sales multiple give a valuation of $440 per share. But the price to sales ratio may not be an appropriate metric for a company like Amazon.com, Inc. (NASDAQ:AMZN). The online retailer has experienced a dramatic mix shift over the past few years, and this trend is likely to continue over the next few years. It has three revenue streams, first-party business, third-party business, and Amazon Web Services. Each Business is growing at a very different rate, and each have different capital intensities and margin structures.
Using the price to NTM gross profit model gives a valuation of $484 per share, using the gross profit estimate of $33.6 billion. The analysts value Amazon.com, Inc. (NASDAQ:AMZN) at $465 a share using price to NTM retail gross profits (which doesn’t include gross profits from Other Revenues). The Jeff Bezos-led company doesn’t book cost of good sold (COGS) associated with Amazon Web Services. So, it makes sense to consider price to NTM retail gross profits
EV/EBITDA method values Amazon at $548
Meanwhile, the EV/EBITDA yields a much higher valuation of $548 a share. Amazon.com, Inc. (NASDAQ:AMZN) is trading at about 24 times the consensus EV/EBITDA estimate. Bernstein analysts estimate 2015 non-GAAP EBITDA of $10.4 billion. The analysts believe that Amazon’s EBITDA margins are artificially compressed, and should rise rapidly going forward.
Sum-of-the-parts appears to be a better way to value Amazon.com, Inc. (NASDAQ:AMZN) because its businesses have different growth rates, margin profiles, operating costs and capital requirements. The analysts calculate Amazon’s retail and cloud (AWS) businesses separately using price to sales and DCF models. On the price to sales basis, its retail business is valued at $335. Of that, $142 a share is assigned to the third-party business and $193 per share for first-party business. On the other hand, the price to sales ratio gives AWS a valuation of $90.
Even Amazon’s low case scenario represents significant upside
The DCF model values the retail segment at $442 and Amazon Web Services at $102. Combining the two scenarios, the lower end of the valuation comes at $451 and the higher end comes at $571. That’s a wide range. Though the range is wide, even the low case scenario suggests significant upside from the current level.
Amazon.com, Inc. (NASDAQ:AMZN) shares rose 0.15% to $369.38 at 12:37 PM EDT.