Amazon (AMZN -5.00%) is not my favorite e-commerce stock (I prefer Shopify‘s mission to put the power of commerce back in the hands of small traders). Nonetheless, I bought Amazon because I think it’s too cheap to ignore, especially considering the company’s main breadwinner, public cloud computing pioneer AWS (Amazon Web Services) .
After another drop in the stock over the past month, I recently went back to buying Amazon stock, as I believe the e-commerce segment is essentially a “free” at this point. Here’s why Amazon is currently one of the best stocks to buy for the long term.
Assessing different business segments can be difficult
As has always been the case with giant, complex corporations, Wall Street is struggling to figure out how to value Amazon. This is a particularly difficult case because of how the company allocates its revenue and operating profit (or in the case of 2022, operating loss – more on that in a minute).
Broadly, sales and operating income are broken down into “North America” and “International” (which are further segmented into online and physical store sales, third party seller services, advertising and subscriptions), as well as in “AWS”.
The problem is that these operating segments couldn’t be more different. North America and International are largely consumer-facing e-commerce businesses, with some lucrative services like digital sidecar ads. As impressive as these companies are, Amazon’s e-commerce empire isn’t really paying the shareholder bills these days. That’s the job of AWS, the ever-booming, ridiculously profitable high-tech cloud titan.
|
Amazon Segment |
Revenue for the last 12 months Q2 2022 |
Revenue for the last 12 months Q2 2021 |
Annual 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% |
|
Total |
$485.9 billion |
$443.3 billion |
9.6% |
Data source: Amazon.
|
Amazon Segment |
Q2 2022 last 12 months operating profit (loss) |
Q2 2021 last 12 months operating profit (loss) |
Annual 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% |
|
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 overall operating profit, even though it only accounted for 12% of total revenue. Things have changed drastically this year with the slowdown in e-commerce and Amazon has started to invest heavily to promote its next phase of growth. Thanks to AWS’ continued rapid growth, the cloud segment now accounts for nearly 15% of revenue and is the only segment generating positive operating income.
Nevertheless, overall operating profit has been cut in half over the past year due to North America and International returning to the red. The market appears to be following that number and has punished Amazon’s stock accordingly, while overlooking AWS’s rapid and steady advance. The shares are down more than 40% from their record high at the time of this writing.
Buy an AWS, get an e-commerce empire for free
After enduring market punishment, Amazon has an enterprise value of $1.14 trillion. But here’s where things get interesting: If AWS was currently a standalone stock and still valued at $1.14 trillion, it would currently be trading at 51 times 12-month operating earnings (based on a AWS operating profit of $22.4 billion). An expensive price? Sure. But that’s not unthinkable considering it’s a massive computer technologist that has still grown its operating profit at a 45% rate over the past year. Quality usually fetches a premium.
What strikes me as odd is that the current valuation seems too focused on operating losses in the North American and international e-commerce segments. Of course, as standalone e-commerce companies, they are not AWS. Even in mid-2021, when e-commerce was still running at full steam during the pandemic, North America and International generated 12-month operating margins of just 4.4% and 1.9%, respectively (compared to an operating margin of 29.4% for AWS). Still, even with these low margins, Amazon’s e-commerce (and related services) juggernaut can generate significant cash given the hundreds of billions in sales it makes each year.
What I’m saying here is that AWS is the workhorse that runs Amazon’s finances, but Wall Street seems hyper-focused on e-commerce segments that have temporarily fallen into loss-making territory. If you think the red ink in the e-commerce segments will be temporary, this stock looks very cheap. This is especially true if AWS continues to grow and generate a high level of profit along the way. Buy 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 board member of The Motley Fool. Nicholas Rossolillo and its customers hold positions at Amazon and Shopify. The Motley Fool holds positions and recommends Amazon and Shopify. The Motley Fool recommends the following options: $1140 January 2023 Long Calls on Shopify and $1160 January 2023 Short Calls on Shopify. The Motley Fool has a disclosure policy.
