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Nov. 28, 2017, 9:12 a.m. EST

Here’s how Amazon may be a $1 trillion company in a year

Amazon Web Services is larger than all but 11 of the S&P 500’s components by itself

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By Ryan Vlastelica

Amazon.com is one of the most valuable companies in the world, but according to one analysis, its diverse business units, when evaluated on a sum-of-the-parts basis, are worth a lot more than Wall Street currently seems to appreciate.

The online retail giant—which also has a major presence in cloud computing and media, among other divisions—currently has a market capitalization of about $548 billion, thanks to a 51% gain in the stock over the course of 2017. According to Morgan Stanley, however, there’s a case to be made that Amazon /zigman2/quotes/210331248/composite AMZN -0.89%  is a trillion-dollar company, or worth nearly twice its current size.

The investment bank evaluated Amazon’s five major business segments: Amazon Web Services (or AWS, its cloud-computing unit), subscriptions, advertising, and 1P and 3P retail (1P, or first-party, retail, is when Amazon sells products on a wholesale basis with a vendor. In 3P, or third-party, consumers sell products on Amazon’s marketplace.). It then applied a multiple to them, based on appropriate peer groups, as well as their margins and growth rates.

Extending this analysis to the end of 2018, the investment bank came up with a bull-case price target of $2,000 a share, which would take the company to a roughly $1 trillion valuation.

Amazon shares last traded at $1,135.00, slightly lower on the day.

Morgan Stanley estimated that the 1P business was worth $191 billion “by assuming the market would be willing to pay 12X earnings before interest, tax, depreciation and amortization (Ebitda) for this ~$200 billion revenue business still growing 13%,” a growth rate it said was “arguably conservative.” The third-party retail business was valued at $401 billion.

The other three business units—AWS, subscriptions, and advertising—were described as “emerging high-margin revenue streams.” The subscriptions unit was valued at $69 billion while advertising was valued at $55 billion. AWS was valued at $273 billion, itself larger than all but 11 of the components of the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.20%  . Despite that, Morgan Stanley also suggested that this valuation was conservative, given that it has higher margins than its cloud-computing peers, as well as better growth.

“These businesses appear set to grow gross profit at a 32% 16-20 compound annual growth rate (essentially becoming the same size as Amazon’s core retail gross profit), which gives Amazon a growing ‘pool’ of gross profit dollars to invest harder than ever (in core retail, logistics, B2B, Prime, Echo, health care, India, and Brazil to name a few) and still deliver better than expected profitability,” wrote equity analyst Brian Nowak.

In late October, Amazon reported record sales and forecast revenue growth for the big holiday quarter from 28% to 38% on a year-over-year basis.

Apple /zigman2/quotes/202934861/composite AAPL +1.77%    is currently the largest company on the U.S. stock market, with a market capitalization of $876.53 billion. It recently cracked $900 billion, and some analysts say it could eventually be worth a staggering $2 trillion.

A handful of other companies are currently worth more than Amazon: Alphabet /zigman2/quotes/202490156/composite GOOGL -0.08%   , the parent company of Google, has a market cap of $718 billion while Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -0.12%   is valued at $635.9 billion.

/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 89.55
-0.80 -0.89%
Volume: 31.69M
Dec. 9, 2022 12:08p
P/E Ratio
82.39
Dividend Yield
N/A
Market Cap
$921.72 billion
Rev. per Employee
$312,308
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/zigman2/quotes/210599714/realtime
US : S&P US
3,971.47
+7.96 +0.20%
Volume: 0.00
Dec. 9, 2022 12:08p
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 145.17
+2.52 +1.77%
Volume: 30.71M
Dec. 9, 2022 12:08p
P/E Ratio
23.78
Dividend Yield
0.63%
Market Cap
$2269.29 billion
Rev. per Employee
$2.40M
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/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 93.64
-0.08 -0.08%
Volume: 11.13M
Dec. 9, 2022 12:08p
P/E Ratio
18.93
Dividend Yield
N/A
Market Cap
$1214.35 billion
Rev. per Employee
$1.79M
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 247.11
-0.29 -0.12%
Volume: 8.18M
Dec. 9, 2022 12:08p
P/E Ratio
26.69
Dividend Yield
1.10%
Market Cap
$1844.24 billion
Rev. per Employee
$918,891
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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.

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