AWS (the Amazon “cloud”), is wildly profitable (20%+ margins), and while only 10% of their revenue currently, is growing much (over 2x) faster than the rest of the business.
He offers these figures for the second quarter:
Amazon Web Services $4.1 billion revenue, $0.9 billion profit, revenue growth rate of 50 percent per year.
Amazon excluding AWS $33.5 billion revenue, $1.5 billion loss, revenue growth rate of 22 percent per year.
So let me play with these numbers a bit, to try to get to $12.5 billion in profit, which I think is needed to justify the current stock valuation. We have four numbers to play with: AWS revenue, AWS margin, ex-AWS revenue, and ex-AWS margin.
1. Start with a combination of AWS margin of 20 percent, ex-AWS margin of 0. Then we need AWS revenue to be at $62.5 billion, compared to $4.1 currently. That might not happen for . . .ever.
2. Start with a combination of AWS margin of 20 percent and ex-AWS margin of 4 percent. At current revenues, that gives them $.9 billion and $1.34 billion, respectively, for $2.24 billion. That means that they have to grow revenue in each sector by a factor of 5 to get to $12.5 billion in profit. Even if AWS maintains a 50 percent growth rate, it would take 4 years to go up by a factor of 5. And it would take ex-AWS a lot longer. All while supposedly goosing their profit margins in retail to 4 percent.
Another commenter notes that Dean Baker thinks the way I do about Amazon.
Other commenters have said that profits are understated, because Amazon has plenty of “free cash flow” that it is currently spending to try to enhance its capabilities. OK, but Amazon’s revenues are not understated. They had $38 billion in quarterly revenue. How much of that could possibly be profit, under the most generous accounting?
I’ve got $100 that says the market cap of Amazon is lower on July 31, 2020 than it is today.
Quoted commenter here.
Again, I’m certainly no Amazon apologist, hold no Amazon stock (outside indexes), and might join your side of the bet if I bet at all. However, the dichotomy between Amazon retail and AWS is contextually super interesting.
Thanks for playing with the numbers further! If I stop being so non-committal and make a projection, I would say that Amazon is more likely to be at > 4% ex-AWS margin than > 20% AWS margin in 2025, given how hard MS and Google are pushing on the diversified cloud services side (not to mention big players without US presence like Alibaba, late comers with reasonable bank accounts and big corporate contracts like Oracle, IBM, etc.).
In 2016, amazon has gross profit margin of 30% and gross income of $47 billion http://www.marketwatch.com/investing/stock/amzn/financials
Walmart had $124 billion, but at the rate Amazon is growing, it will overtake Walmart in 3-5 years.
1. Start with a combination of AWS margin of 20 percent, ex-AWS margin of 0. Then we need AWS revenue to be at $62.5 billion, compared to $4.1 currently. That might not happen for . . .ever.
People said the same thing about Amazon’s other businesses .
The real way to get Amazon to $1 trillion is real options theory – Amazon has so many real options based on their internet platform that we can’t even predict now what businesses Amazon will spin out. Nobody saw AWS coming five years ago and now it’s most of the market cap. Amazon has more optionality than any other stock out there. BOOM. $1 trillion.
Perhaps it’s a flight to quality, or a mini fintech index? Still overpriced, but it may be a safe bet, along the lines of “I’m not sure what happens next, but I’m pretty sure Amazon will be left standing among the rubble.” It’s a hard value to model, but you raised the (potential) issue of a safe assets shortage — Amazon seems to solve that problem, at least in some sense.