Why Amazon Stock Is Undervalued Compared To Walmart

Sam Mendoza

·3 hours ago

shared a media post in group #The Informationvia#The Most Important Thing

Investor enthusiasm for semiconductor stocks and blue-sky vision companies have sucked money out of stocks of long-established tech companies. Some are now trading at bargain-basement prices. We’re thinking specifically of Amazon, whose stock really deserves a bit more love.  #The Most Important Thing 

We know the gripes: Like Alphabet and Meta, Amazon is spending an absolute ton—$220 billion this year alone—on capital expenditures to build out its AI data center capacity. That’s not without risk, for sure: The investment depends on business demand for AI services taking off. Even so, that can’t justify Amazon trading at a discount to Walmart, as it has done for the last 18 months or so. Walmart is expected to grow revenue this year by about 5.6%—about a third of Amazon’s estimated growth rate. And yet Amazon is trading at about 29 times forward earnings, compared with 37 times for Walmart, according to Koyfin data. 

Moreover, while Walmart is a predominantly brick-and-mortar grocery store chain, Amazon has a much more diverse business. It owns the dominant online shopping service, where its retail sales alone grew 13% in the first half. It’s also the biggest cloud provider and a major film and television business. And it’s got a bunch of other bits and pieces, including its nascent Leo satellite service, which is trying to compete with SpaceX in satellite-delivered broadband. It’s not hard to make the case that with a market capitalization of $2.8 trillion, Amazon is a bit undervalued.

Consider this math: AWS should be worth at least $1 trillion, if not much more, given its expected growth in the next couple of years and where small neoclouds like CoreWeave and Nebius are trading. The film and TV studio business should be worth at least as much as Netflix, which has a market capitalization of $300 billion. Then there’s the shopping business, including merchant services, ads and subscriptions. They’re all tied together in various ways, which complicates things. 

Online sales and merchant services, excluding ads and subscriptions, generated revenue of $468 billion in the 12 months to June, growing at about 12%, which means it could hit $500 billion this year.  If you apply Amazon’s forward revenue multiple of 3.3 to that number, the online shopping side is worth about $1.7 trillion. Then there’s the ad business, which is an $80 billion a year business right now, growing at 20% to 25% annually. It’s mostly promotional spending for merchants on Amazon’s platform, which makes it less valuable than ads on Meta or Google, but it should still add hundreds of millions in value to Amazon. 

There’s upside elsewhere. At Goldman Sachs’ recent Communicopia conference, tech analyst Eric Sheridan made the case that Amazon should be among the best-positioned companies to benefit from the rise of robots, helping automate more of the logistics and delivery parts of its shopping business and improving profit margins. Of course, there are lots of variables, even aside from the uncertainty about the return on the AWS capex outlay. We don’t know how the rise of AI agents will change consumer behavior, if at all. If agent traffic largely replaces humans scrolling on Amazon, its ad business could be wiped out. 

To be sure, Amazon’s status as a conglomerate likely dooms its stock to always trade at a discount to its real value. It’s possible that one day the company will break up into two or three pieces, with AWS the most logical business to be carved off. That day is a ways off, however, as AWS needs cash flow flowing from the shopping business to finance its capex right now. But even the possibility of a breakup points up the opportunity for investors with a long term time horizon.

By Martin Peers of #The Information

Sam Mendoza

·3 hours ago

shared a media post in group #The Informationvia#The Most Important Thing

Investor enthusiasm for semiconductor stocks and blue-sky vision companies have sucked money out of stocks of long-established tech companies. Some are now trading at bargain-basement prices. We’re thinking specifically of Amazon, whose stock really deserves a bit more love.  #The Most Important Thing 

We know the gripes: Like Alphabet and Meta, Amazon is spending an absolute ton—$220 billion this year alone—on capital expenditures to build out its AI data center capacity. That’s not without risk, for sure: The investment depends on business demand for AI services taking off. Even so, that can’t justify Amazon trading at a discount to Walmart, as it has done for the last 18 months or so. Walmart is expected to grow revenue this year by about 5.6%—about a third of Amazon’s estimated growth rate. And yet Amazon is trading at about 29 times forward earnings, compared with 37 times for Walmart, according to Koyfin data. 

Moreover, while Walmart is a predominantly brick-and-mortar grocery store chain, Amazon has a much more diverse business. It owns the dominant online shopping service, where its retail sales alone grew 13% in the first half. It’s also the biggest cloud provider and a major film and television business. And it’s got a bunch of other bits and pieces, including its nascent Leo satellite service, which is trying to compete with SpaceX in satellite-delivered broadband. It’s not hard to make the case that with a market capitalization of $2.8 trillion, Amazon is a bit undervalued.

Consider this math: AWS should be worth at least $1 trillion, if not much more, given its expected growth in the next couple of years and where small neoclouds like CoreWeave and Nebius are trading. The film and TV studio business should be worth at least as much as Netflix, which has a market capitalization of $300 billion. Then there’s the shopping business, including merchant services, ads and subscriptions. They’re all tied together in various ways, which complicates things. 

Online sales and merchant services, excluding ads and subscriptions, generated revenue of $468 billion in the 12 months to June, growing at about 12%, which means it could hit $500 billion this year.  If you apply Amazon’s forward revenue multiple of 3.3 to that number, the online shopping side is worth about $1.7 trillion. Then there’s the ad business, which is an $80 billion a year business right now, growing at 20% to 25% annually. It’s mostly promotional spending for merchants on Amazon’s platform, which makes it less valuable than ads on Meta or Google, but it should still add hundreds of millions in value to Amazon. 

There’s upside elsewhere. At Goldman Sachs’ recent Communicopia conference, tech analyst Eric Sheridan made the case that Amazon should be among the best-positioned companies to benefit from the rise of robots, helping automate more of the logistics and delivery parts of its shopping business and improving profit margins. Of course, there are lots of variables, even aside from the uncertainty about the return on the AWS capex outlay. We don’t know how the rise of AI agents will change consumer behavior, if at all. If agent traffic largely replaces humans scrolling on Amazon, its ad business could be wiped out. 

To be sure, Amazon’s status as a conglomerate likely dooms its stock to always trade at a discount to its real value. It’s possible that one day the company will break up into two or three pieces, with AWS the most logical business to be carved off. That day is a ways off, however, as AWS needs cash flow flowing from the shopping business to finance its capex right now. But even the possibility of a breakup points up the opportunity for investors with a long term time horizon.

By Martin Peers of #The Information