Amazon (AMZN -5.00%) isn’t my favorite ecommerce stock (I prefer Shopify‘s mission to put the power of commerce back in the hands of smaller traders). Still, I bought Amazon because I think it’s too cheap to ignore — especially considering the company’s main earner, public cloud computing pioneer AWS (Amazon Web Services).
After another tumble in the stock over the past month or so, I’ve recently bought back shares of Amazon because I think the e-commerce segment is essentially a “giveaway” at this point. That’s why Amazon is a top stock to buy for the long term right now.
Evaluating different business areas can be difficult
As has always been the case with huge and complex companies, Wall Street is struggling to get a grip on Amazon’s valuation. It’s a particularly difficult case, as the company allocates its earnings and operating income (or, in the case of 2022, operating losses — more on that in a moment).
Broadly speaking, revenue and operating income are broken down into “North America” and “International” (which are further broken down into online and brick-and-mortar sales, third-party seller services, advertising, and subscriptions) and also “AWS.”
The problem is that these business segments couldn’t be more different. North America and International are mostly consumer-centric e-commerce businesses, with some lucrative services like digital ads as a sidecar. As impressive as these companies are, Amazon’s e-commerce empire doesn’t really foot the bills for shareholders these days. That’s the job of AWS, the high-tech cloud titan that’s still booming and incredibly profitable.
|
Amazon segment |
Trailing 12-month sales Q2 2022 |
Trailing 12-month sales Q2 2021 |
year-on-year change |
|---|---|---|---|
|
North America |
$291.6 billion |
$266.6 billion |
9.4% |
|
International |
$122.2 billion |
$124.0 billion |
(1.4%) |
|
AWS |
$72.1 billion |
$52.7 billion |
36.9% |
|
In total |
$485.9 billion |
$443.3 billion |
9.6% |
Data source: Amazon.
|
Amazon segment |
Running 12-month operating profit (loss) Q2 2022 |
Running 12 Months Operating Profit (Loss) Q2 2021 |
year-on-year change |
|---|---|---|---|
|
North America |
($1.5 billion) |
$11.8 billion |
N / A |
|
International |
($5.6 billion) |
$2.4 billion |
N / A |
|
AWS |
$22.4 billion |
$15.5 billion |
45.0% |
|
In total |
$15.3 billion |
$29.6 billion |
(48.4%) |
Data source: Amazon.
In the first half of 2021, AWS generated more than half of Amazon’s total operating profit, despite accounting for just 12% of total sales. Things have changed dramatically this year as e-commerce has slowed and Amazon has started investing heavily to fuel its next growth spurt. Thanks to AWS’s continued rapid growth, the cloud segment now accounts for almost 15% of revenue and is the only segment that is generating positive operating income.
Still, overall operating income has halved over the past year as North America and International slipped back into the red. The market appears to be following the headline and has punished Amazon stock accordingly while overlooking AWS’s rapid and steady rise. Shares are down over 40% from their all-time high as of this writing.
Buy an AWS, get a free e-commerce empire
After punishing the market, Amazon has an enterprise value of $1.14 trillion. But this is where it gets interesting: If AWS were a stock in its own right now and still valued at $1.14 trillion, it would currently be trading at 51 times trailing 12-month operating earnings (based on an AWS operating income of $22.4 billion). An expensive price? Secure. But not unthinkable considering it’s a massive computer technologist that’s still growing its operating income by 45% over the past year. Quality generally gets a premium.
What I don’t like is that the current valuation appears to be biased too heavily towards operating losses in the North America and International E-Commerce segments. Sure, as standalone ecommerce companies, they’re not AWS. Even in mid-2021, when e-commerce was still in full swing during the pandemic, North America and International had trailing 12-month operating profit margins of just 4.4% and 1.9%, respectively (compared to an operating margin of 29.4% for AWS). Still, even at those slim margins, Amazon’s e-commerce juggernaut (and related services) can still generate significant revenue given the hundreds of billions in sales it generates each year.
What I’m trying to say here is that AWS is the workhorse powering Amazon’s finances, but Wall Street seems heavily focused on the e-commerce segments that have temporarily slipped into loss-making territory. If you think the e-commerce segments’ red ink will be temporary, this stock looks mighty cheap. That’s especially true as AWS continues to grow while generating high profits. Buy the stock now for the cloud computing business and get Amazon’s e-commerce ecosystem as a “free” bonus.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and its customers Have positions on Amazon and Shopify. The Motley Fool has positions in and recommends Amazon and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
