Amazon (NASDAQ:AMZN) is not having a great year. The AMZN stock price has stalled out for months now. Now at around $1,744, it’s well short of its earlier highs of $2,000 per share. Even in a lackluster environment for tech stocks, Amazon’s performance has been notably weak.
There are various reasons for that. For one thing, investors are questioning some of the company’s long-term growth initiatives. The foray into brick-and-mortar grocery sales via Whole Foods does not appear to be going particularly well, for example. The bloodbath in streaming stocks such as Netflix (NASDAQ:NFLX) has caused investors to ask how much money Amazon is willing to lose — especially running its not especially popular streaming services for music, movies and more.
Then there’s political issues. President Donald Trump’s administration has made Amazon a whipping boy, going after Jeff Bezos and The Washington Post in particular. Amazon’s political issues won’t necessarily go away if Trump leaves office, however. The company has amassed prominent Democratic critics including Congresswoman Alexandria Ocasio-Cortez and presidential candidate Andrew Yang. With nearly 50% of the U.S. e-commerce market share, it’s hard to see the antitrust cloud lifting anytime soon.
R.J. Hottovy Isn’t Buying the Bearish Story
Not all analysts are concerned about the various arguments against AMZN stock, however. Morningstar’s sector analyst R.J. Hottovy recently reaffirmed his $2,300 price target for AMZN stock, rating it a four-star stock (out of five) and suggesting shares are more than 25% undervalued. He reaches this conclusion by answering the following question: What happens if Amazon breaks up?
The basis of Hottovy’s recent argument is a sum-of-the-parts analysis. This is where you value each piece of a large business and see what it’d be worth if you assigned a price to each operating unit. With the threat of government antitrust action in the air, it’s worth asking what happens if Amazon splits up.
The largest source of value, according to Hottovy, is in Amazon Web Services. This unit alone he suggests, is worth $550 billion, or more than half of Amazon’s current market cap. On a standalone basis, AWS as an independent firm would be worth more than other tech rivals including Alibaba (NYSE:BABA) and Facebook (NASDAQ:FB).
In online retail, Hottovy sees Amazon’s business being worth $300 billion. I can see the case for that valuation being fully justified today. In fact, if Amazon can ever get its retail profit margins up, this figure should probably be significantly higher. Prime membership, for example, which is included in this category, is a great business even if it is getting diluted by expensive battles in content streaming.
For brick-and-mortar retail, he places a price tag of $20 billion now, a decent step up from the $14 billion that Amazon shelled out for Whole Foods. I’m not convinced that Amazon has generated much if any subsequent value there, but it’s a rounding error to the overall stock price, so don’t concentrate on it too much. There’s also advertising, which he values at $120 billion. Add up all the various parts, and you get an AMZN stock price of about $2,300 per share.
Does Hottovy’s Overall Math Check Out?
I see some of Hottovy’s estimates as a touch aggressive. For example, AWS is clearly worth less than Azure would be if Microsoft (NASDAQ:MSFT) spun it out as a separate company. Microsoft’s cloud business is significantly larger than AWS and has a faster growth rate, too. So it would be worth more than AWS as an independent entity. Microsoft is worth $1 trillion as a whole company today. If you split it up, giving Azure $600 billion, the AWS comp at $550 billion looks a little optimistic.
However, the place I’d push back the most is on the advertising business. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook are the clear internet duopoly here, at around 30% and 20% share respectively. No other player has more than 5%, with Twitter (NYSE:TWTR) running in third place.
While Amazon is making a respectable run to gain market share, it’s hard to envision Amazon’s advertising today being worth $120 billion when Twitter is $30 billion. Amazon advertising may one day command a premium, but at this point, I don’t see how you could remotely justify a valuation of 4x Twitter.
AMZN Stock Verdict
I don’t own AMZN stock now. And that’s been an error of omission on my part. I should have bought the dip when shares hit $1,350 last December. At more than $1,700, AMZN stock leaves me feeling ambivalent.
You can certainly make a plausible case for reasonable upside in 2020. While I find Hottovy’s estimates a bit optimistic, they’re not too far off aside from advertising. If Amazon isn’t worth $2,300 per share now, it could easily grow into that valuation in a year or two.
Still, as far as mega-cap tech stock goes, FB stock seems like the much more obvious bargain at this point. The company is rapidly moving past its scandals, and revenue and profit growth has remained much stronger than expected. At 19x forward earnings, Facebook is a fast-growing company trading nearly as cheaply as the overall market. AMZN stock, by contrast, is not cheap. It could be a fine long-term buy at this price, but more needs to go right in the future for things to turn out well.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.