Amazon: Huge AWS Growth Potential, Could Be Worth $4,900 By 2024

Summary

• Amazon's share price has cooled off from its all-time high after reporting declining operating income in the first quarter 2020.
• Amazon Web Services (AWS) is still growing really fast, accounting for a big portion of the company's total operating income.
• AWS has a lot of growth potential. Amazon's fair value could reach $4,910 per share by 2024.

Amazon’s (NASDAQ:AMZN) share price has cooled off from its all-time high, after reporting mixed results for the first quarter of 2020. While the revenue beat analysts' estimates, its EPS came in at $5.01, much lower than the previous expectation of $6.25. Although Amazon can experience short-term pressures in the stock price, given its long-term growth potential, we still think Amazon is cheap.

Declining operating income due to COVID-19

In the first quarter of 2020, Amazon delivered $75.45 billion in revenue, a 26.4% year-over-year growth, driven by both product sales and service sales. However, its operating income dropped by nearly 11%, from $4.42 billion to $3.9 billion. The reduction in operating income was caused mainly by the significant rise in the cost of sales and fulfillment expenses. The higher cost of sales and fulfillment expenses resulted from higher shipping costs, content production delays, costs to maintain safe workplaces and employee pay and benefits in the current coronavirus environment. We expect these expenses will be materially higher, which would drive down Amazon’s operating income further in the next two quarters. The company estimated that its operating income might stay in the range of -$1.5 billion to $1.5 billion in the second quarter, after spending roughly $4 billion in employee safety and expanding its COVID-19 testing capabilities.

Amazon Web Services is still growing fast with a lot of upside potential

Amazon Web Services (AWS) has been a cash cow for the company. While it generated only 10-12% of its total revenue, it has brought the most substantial operating profit and cash flow to Amazon. In Q1 2020, it has produced nearly $3.1 billion in operating income, 38% higher than the same period last year. AWS alone has accounted for 77% of the company’s total operating profit in the first quarter. AWS is indeed a global leader in the cloud infrastructure market. In 2019, its global market share reached 32.4%, while the second position belonged to Microsoft (MSFT) Azure, with a 17.6% market share. Google (GOOG) (GOOGL) cloud was in third place, accounting for 6% of the global cloud infrastructure market.

Source: Canalys

The cloud infrastructure spending is expected to grow significantly to $284 billion by 2024. If AWS accounts for 30% of the global market share, it will generate nearly $85.2 billion in revenue in the next four years. If AWS revenue is 12% of the entire company’s net sales, Amazon’s total revenue will come in at around $710 billion in 2024. A 25% operating margin would translate into $21.3 billion in operating profit from Amazon Web Services. If the AWS segment accounts for 70% of the total company’s operating profit, its total operating profit will come in at $30.4 billion by 2024, 109% higher than 2019 operating income.

It could be worth $4,910 per share by 2024

Amazon’s long-term focus is the free cash flow generation. In the first quarter of 2020, Amazon’s free cash flow came in at $24.34 billion, a year-over-year growth of 6.6%. In the past five years, Amazon has been growing its free cash flow at a rapid rate.

Source: YCharts

Since 2010, its free cash flow has grown by more than 10x, from nearly $2 billion to more than $24.34 billion. That translates into a 28.4% annual compounded growth rate in the past ten years. The free cash flow as a percentage of total revenue (FCF/Revenue) has been fluctuating widely in the past decade, staying in the range of 0.65% to 7.7%.

Source: YCharts

The normalized FCF/Revenue is roughly 6-7%. With the assumption of FCF/Revenue at 7%, the company’s 2024 free cash flow would come in at $49.7 billion.

In the past ten years, the market has been valuing Amazon at a very high free cash flow multiple. At the time of writing, Amazon is trading at as much as 55x EV/FCF. If we apply the similar multiple to 2024 FCF, Amazon would be valued at $2.73 trillion.

Amazon’s total shares outstanding have been increasing consistently from 448 million in 2010 to nearly 513 million in Q1 2020, with a 1.36% compounded annual growth rate. If Amazon continues to reward employees with stocks more generously, growing the total number of shares at 2% annually, its total shares outstanding can reach 555.3 million by 2024. A $2.73 trillion valuation with a 555.3 million shares outstanding would translate into $4,910 fair value per share by 2024.

Conclusions

With a dominating global e-commerce and cloud service business, Amazon can keep delivering increasing value to shareholders. A significant growth of the worldwide cloud service market will lead to a tremendous increase in Amazon’s operating performance and its free cash flow. Although its share price might have short-term downward pressures, it still has an excellent long-term outlook. By 2024, we expect Amazon can generate $710 billion in total revenue, with a fair share value of more than $4,910 by 2024.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GOOG, AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[ECLS18]

Interesting read and analysis. I’m a close follower of the company. 

1. AWS is the cash cow supporting the high volume low margin business. While AWS will continue to grow there is a likelihood that AWS could be spun off as Amazon becomes too big to fail. Not to mention the scare that Trump (if re-elected) and the Congress would attempt to break the company down. When that happens the natural split for the company would be to split AWS from its consumer business which will put immense pressure on the retail side which is the bulk of the company. 

2. The other threat which is understated is its treatment of its warehouse workers. While the number of protest aren’t sizeable enough there is growing concern internally and externally around unfair employment practices. In my opinion, that will be a critical factor leading to the demise of the company. Can’t really comment on what that will happen but avrg lifespan of companies on S&P 500 is 20 yrs. Amazon is 23 with no signs of slowing down. So perhaps during 2030-2040. Who knows ..

3. Lastly, Bezos is the poster child of the company. While his personal life is none of my business, his lack of judgment around how he managed the situation definitely raised concerns. Although the stock wasn’t impacted but a repeat mistake wouldn’t necessarily shield the stock from going down. In summary, fair bit rides on him steering the company. While not a single point of failure, his exit/demise/poor judgment could have an amplified impact on the company.

Comments welcome!

[User 49721462]

"3. Lastly, Bezos is the poster child of the company. While his personal life is none of my business, his lack of judgment around how he managed the situation definitely raised concerns. Although the stock wasn’t impacted but a repeat mistake wouldn’t necessarily shield the stock from going down."

Yeah, who knows, with that kind of judgement he could run for and be elected president.

[TechSales]

Amazon drivers get to drive a Nice fleet. I live in a nice neighborhood. I do not recall the last time I saw a greater percentage of UPS/FedEx trucks on my street vs those beautiful Amazon Trucks. love seeing that logo drive down my street when I’m on my front porch swing.

[Anh Hoang]

@TechSales they are taking all the logistics infrastructure now...

[TomM5060]

There are two reasons I own Amazon stock. The first one is books/DVD's and second Jeff Bezos. I read a lot and I can find what I'm looking for on Amazon while the closest book store is miles away. Jeff Bezos started this brainstorm of a business selling books so I bought into his company because I use it. What they do with software is beyond my knowledge I guess it's just a plus. I have all the respect for Bezos to do something new and next in the future that will bring his companies more income. There are few men in this world leading companies that they started and this guy has done a tremendous job. As long as he's living I'll continue in believing and investing in what he makes and starts.

[Anh Hoang]

@TomM5060 Itsn't it fascinating? The reason he creates Amazon was how crazy the high growth of the internet at that time in the 1990s. And digital book was the way to go. I myself now mainly read in the kindle, not the physical book anymore.

[ilikebiscuits]

I would love to buy AWS if it was spun off. As long as Amazon uses it as a piggy bank to fund the rest of its barely profitable businesses I'll pass.

[Gary J is Rich on AMZN]

@ilikebiscuits

"Amazon uses it as a piggy bank to fund the rest of its barely profitable businesses"

That's funny since it is EXACTLY the reason AMZN has been a rocket ship for 21 years and counting.

[ilikebiscuits]

The rocket ship has gotten most of its thrust from AWS. I'm guessing that if AWS was spun off it would go for $2,000-ish, with the "stub" going for $800-ish, so why not ?

I don't think taking a low-cost, high margin business like on-line retailing and turning it into a high-cost, low-margin business by spending massive amounts of AWS' cash flows on a delivery operation has done shareholders any favors.

[Gary J is Rich on AMZN]

@ilikebiscuits

Prime

It's all about Prime.

To understand learn about, wait for it.... Prime.

[baubcar]

I will hold Amzn a least another five years and buy more on any dip

[TechSales]

I’m thinking generational hold. Just don’t tell the kids.

[user225084-jm]

It's simply incredible how delusional these AMZN cheerleaders are. AWS/Cloud is not a difficult business to replicate. Any idiot can slap together some data centers. The management software already exists in many different incarnations, including open-source versions. There is plenty of bandwidth available. Within 5 years, cloud computing will be completely commoditized, just like the "IBM" PC was in the 1990s. All the technology is available, and there is only low barriers to entry.

[User 49721462]

Sorry you missed out :(

Signed
A Delusional 8 Bagger

[Anh Hoang]

@user225084-jm what AWS product are you using now? that you can it is easy to replicate?

[TechSales]

Lol

[kthor]

My Magic eight ball isn't responding right now ..

[Buyandhold 2012]

Amazon is a BUY up to $2,350 and a HOLD over $2,350.

[Anh Hoang]

in a short-term it might also go down a bit.

[User 49721462]

My prediction is it will go up, down and sometimes sideways but ultimately up making new highs along the way.

[HogMoney]

Wow, a soothsayer!

[jcat90]

I doubt it will go 1 cent above $4,909 by 2024.

[Anh Hoang]

haha let see

[Gary J is Rich on AMZN]

Yes growth has been kicked to a new level. AWS growth of 33% has never been achieved for a software company of that size. Never.

e-commerce will probably retain its growth due to an increase in Prime members who are sticky and spend more.

YTD 24% return in this market is quite spectacular and there is still a VERY long runway.

[Anh Hoang]

@Gary J thanks for your comment. sure, the growth has been quite fascinating, and we agree that Amazon's e-commerce is really sticky, so is AWS.

[Esol Esek]

AMZN services, both AWS and seller subscriptions, are not that cheap. Businesses with less money are going to shop around and find other providers. Amazon's services are just too damn expensive. Plus the rest of their business is under enormous labor pressure which is only going to get worse in the coming political environment.

Your price target isn't going to happen.

[Herrington]

The superior platform can charge superior prices. What website are you referring to BTW?

[Esol Esek]

MSFT cloud services.

[Up and Away]

@Esol Esek
Interesting but many do not want to be in their ecosystem and pay for it. With Amazon, you pay for what you use only. Big difference and one of the reasons they are number one.

[Earthybreezyy]

Yeah, but AMZN is going back down to $1,600ish this quarter or so, imo

[V_uniqueacc]

I might just buy a crystal ball as well. On AMZN of course, with Prime delivery

[Anh Hoang]

in a short-term it might go down, the overall market has large divergence on the fundamental economics. and many stocks might have downward pressures. If it goes down to $1,600, we will be quite excited.

[baubcar]

Well I can say Amazon is going up to $2,600 this quarter imo. I think I have a much safer bet

[Sjmuk1]

Thanks for your article and I have no doubt Amazon will perform very well over the time frame. I am an AWS certified architect building cloud services for around 5 years now. I recently started working with azure and whilst still not as good an offering its amazing how far they have caught up. I personally feel MSFT and GOOG will take more market share and out perform AWS in cloud services over the next few years. My money is on MSFT to win the cloud wars because they are the most focussed pure play cloud business with less distraction from other business lines. AWS had a first mover advantage but MSFT has two very important elements (o365 and azure AD) that are the fabric of most organisation IT. Also the Jedi program is highly unlikely to reverse its decision despite the probably justified litigation to oppose the decision. All three are solid bets but I suspect MSFT is the most likely out-performer by 2024.

[Anh Hoang]

Thanks @Sjmuk1 for your comment and opinion. We got the idea that the AWS has breadth and depth of the cloud services they provide, while MSFT is more about C-level executive management, AWS is more for developer. What do you mean by the focused pure play cloud business? Can you elaborate more on this? Thanks

[Sjmuk1]

Hi Anh, My comments are very high level. Amazon is 87% other business i.e. mostly retail, Google is 94% other business i.e. mostly advertising. Microsoft is 66% software and service to the enterprise. All I am suggesting is that Microsoft is the more focussed of the 3 business on the specific segment as a whole business. Unfortunately, Microsoft only publishes growth figures for azure, not actual revenues and they lump O365 in with productivity tools business line not their intelligent cloud business line (which I think includes all server licensing). It's just a very high-level opinion about where the core of each of the overall business revenue models is. In a nut shell what do Amazon care about most? Retail sales. What do Google care about most? Advertising. What do MSFT care about most? Enterprise software and services. Will it make a difference? who knows...

[Anh Hoang]

@Sjmuk1 thanks, good point. True that MSFT is more about enterprise software and productivity services. Their 365 product is very well-known among many companies, and actually it is their best business. We will see about the general market growth and market share for cloud services by the end of this year. it's interesting to see the competition between those three companies and quite unpredictable about what they might come up with.

[joshuac.jackson]

""If AWS accounts for 30% of the global market share, it will generate nearly $85.2 billion in revenue in the next four years. If AWS revenue is 12% of the entire company’s net sales, Amazon’s total revenue will come in at around $710 billion in 2024.""

please tell me you didn't just estimate AWS revenue and simply divide by 10-12% to get $710 Billion by 2024. That would be a HUGE assumption and likely a complete bust in your estimate to assume that the other 88-90% of the business is going to grow just as much as AWS cloud computing will. Complete apples to oranges divided by pears unless you came about that number in a completely different way.

Sorry it just reads like you took a 10% chunk of the business, estimated its growth from 'a source?' and then extrapolated that same growth to the rest of the company.

[FunInvesting]

THE trailing PE RATIO OF 107 already estimated much of the future stock price growth. Author, what is your PE ratio est. in 2024?
What am I missing here?

[Gary J is Rich on AMZN]

@FunInvesting

"What am I missing here?"

Learn when P/E matters and when not so much for high growth companies like AMZN. For 21 years and until further notice.

[Maxander10]

Around 70-80% now think that Microsoft Azure will dominate the future ahead which has really strong experience in the field of software development from last 3 decades.
Earlier only 50% were in favour of Azure & around 40% in favour of AWS.

[Anh Hoang]

Microsoft is more popular with C-level executives and long-time relationships with its vendors. AWS has better breadth and depths of services, better for developer functionality.

[usermichael]

Most enterprises will adopt Azure because of its integration with o365 and windows.

[kellyenfield]

Its still mind boggling how Amazon went from: book & music marketing that was making a profit to a company with few profits & often a PE of 100. - then they invented this subsidiary AWS, with Beezer buying talent by selling shares of stock.

[LiveOnNewGoods]

with a 4900% ROI since 2005, we're on a stock forum, Amazon's returns are incredible.

[Up and Away]

@kellyenfield
Amazon started with books and has grown far more than just music and developed AWS which Microsoft copied since their windows products were declining and added Azure to it which raised their stock price. Ask Alexa!
Jeff Bezos is a far more innovative CEO than almost all of them and has other interests than just this company. His private company Blue Origin is funded by him with some of his personal sale of stock. The Fang stocks and others all give the new employees stock options along with a base salary.

[kellyenfield]

How does AWS hire people, giving them stock? And tie the performance of Amazon stock price to their future?

[Anh Hoang]

stock-based compensation, motivating employees.

[ShankaSwingTrades]

Thanks for the article.
Do you see a split coming?

[Anh Hoang]

We don't know, that might be a possibility, but look at Berkshire Hathaway's A share price.

[dimdada]

I doubt you’ll see any stock splits in the future. Buybacks are what companies focus on nowadays. If Amazon did though, they might do the same type of split Google (new share class) enacted. But I would have to agree with the author, Bezos probably wants a price valuation like Berkshire.

[TopperBrad]

Is there any value added when you trade a dime for two nickels? The real winners with a stock split are the administrators of the split that collects the fees. Besides, stocks with high stock prices are usually less volatile (all other things assumed equal) compared with ones with a lower price.

For the people that talk about the stock price being above $2K and that they can't buy even one share (or a fractional share with some brokerage firms)...if your portfolio/cash position isn't big enough to be able to afford that, you should probably start with a low cost index fund as a core before you even think about buying individual stocks.

[AdamW2]

Please dear hedge fund managers and professional multi million investors
Don’t sell such news to the public without taking in consideration the recovery of the economy
I will give you a simple example
My company monthly aws bill went down form $56k a month to $3k yes that’s 3k
Why ? The drop of advertising results in a huge drop in ad serving.
Also another point : do you think google and Microsoft will stay still watching amazon AWS taking over the world ?
There will he less demand on AWS from all businesses due to the economy crises
New business who will emerge to the digital world won’t make up for this drop.
You need to watch the bonus of AWS manager at the end of the year to be able to see this.

[Anh Hoang]

Thanks for the comment @AdamW2 there will be competition between Google, Amazon, and Microsoft, Google and Microsoft is still have much less market share now. The advantage of Amazon Web Services is the breadth and depth of its hundred of services including storage, database, networking, developer tools, IoT...

[Herrington]

So you are saying that all businesses will will reduce supply to AWS, just because your company reduced theirs? You realize how dumb this sounds?

[mattdlong]

@Herrington : My cloud spend was the first place I went looking to cut costs, I cut it down by 50% (~35k) and we're currently refactoring and optimising across the board to cut it down further. It's low hanging fruit and I would assume that most companies who spend in the cloud would also be looking at optimising and cutting redundant services, in times of growth it's very easy to accumulate redundant expenses in the cloud.

[forrestcoward]

"In the past ten years, the market has been valuing Amazon at a very high free cash flow multiple. At the time of writing, Amazon is trading at as much as 55x EV/FCF. If we apply the similar multiple to 2024 FCF, Amazon would be valued at $2.73 trillion."

This is your thesis, and to me, it seems like an incredibly poor thesis not backed up in your article at all. Why should Amazon continue trading at 55x EV/FCF as it grows even bigger? What is the precedent for this? You need to discuss this in your article. You also need to discuss risks.

You might as well just perform linear interpolation. Pointless.

[Larry Hall]

Sounds about right. I do wonder sometimes, as a shareholder, if the inconsistencies between EPS and revenues is eternal. But I think the inability to achieve a consistent EPS does reflect an investment/reinvestment model that continues to drive the company to unprecedented objective heights. Yeah, might need to add a few..

[Anh Hoang]

Thanks @Larry Hall for the comment. yeah, it has been the large earnings multiples for years. Amazon indeed keep reinvesting back into the business to create more initiatives. (many of which failed though, however, overall results have been quite satisfactory)

[Larry Hall]

Agree, people discount or devalue the stock at the peril of giving up otherwise very promising gains. I got out of AMZN once in early '18, but don't plan on repeating that.

[Carlspackler1]

Why are you using EPS on Amzn?