With a base case valuation of $2,300 a share, the highest among Wall Street sell-side analysts, Jefferies' analyst Brent Thill wrote in a note out Wednesday morning that "we continue to see 27% near-term upside from current levels but longer-term we see a road map to $3,000+." Thill added, "We think the stock is deeply undervalued at current levels," even with a forward price-to-earnings ratio of 45.
Amazon's stock is already up 17% year-to-date, beating the S&P 500, which is up 14.7% on the year.
Thill's thesis rests on growth across Amazon's three main business segments: e-commerce, media and advertising, and Amazon Web Services. Advertising and AWS are both seeing faster growth than Amazon's core retail business, Thill noted, and both are also higher margin businesses than e-commerce. Thill thinks Amazon's advertising business will see a compound annual growth rate (CAGR) of 38% between 2018 and 2022, while AWS could see a CAGR of 30% in that period, versus the core e-commerce's rate of 13%.
While Thill thinks Amazon's Advertising, AWS and third-party seller retail businesses will comprise 44% of the company's total revenue by 2022, the fatter profit margins in those segments will cause them to contribute 66% of Amazon's overall valuation. "We have high confidence these high recurring revenue/high-margin businesses warrant higher multiples than the core business and expect investors to recognize their embedded value," Thill said.
Amazon faces growing competition in e-commerce, and some analysts have recently tabbed Netflix as a better pick than Amazon for exposure to big tech, as Amazon faces greater anti-trust scrutiny than Netflix (NFLX) - Get Netflix, Inc. (NFLX) Report . The regulatory issue is "increasingly clouding the fundamental thesis for Amazon," BMO Capital Markets analyst Dan Salmon said in a March note. "Netflix, on the other hand, faces little to no regulatory risk, in our view."
But Amazon is diversified and "has just scratched the surface in many of its existing markets," Thill said.
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