Amazon is not easy to value. All we know for sure is that its sceptics get flattened. The shares have more than doubled this year.
The company does not yield much free cash — about $1.30 a share, on a share price of $666 — so it is still priced on what it could be, not what it is.
So what could it be? Something really big and profitable, surely. Its retail unit dominates online, and had about $94bn in sales over the past 12 months. Its web services unit dominates enterprise cloud computing, and has about $7bn in sales. Both are growing fast. How big will they be in, say, 10 years? Very big — but no one would be fool enough to offer a precise forecast.
It is useful, though, to consider an extreme scenario. Assume that both businesses become about as successful as any company has ever been in either industry.
Assume, in other words, that Amazon retail grows to the size of Walmart; and that Amazon Web Services to the size of IBM. This is a bit arbitrary, of course. Amazon targets a different market from Walmart’s, which makes half of its sales from groceries, the hardest product category to deliver profitably. IBM’s services-driven model of corporate computing differs from Amazon’s low-cost one. Both provide a sense, however, of what ubiquity looks like, and how much profit can be extracted from it.
So, let us assume that as of late 2025 Amazon retail has a revenue run rate of $485bn a year, as Walmart does now, and makes a Walmart-like 6 per cent operating margin. Give AWS $107bn a year in sales — IBM’s peak a few years ago — to go with a margin of 30 per cent. Amazon 2025 would then have $61bn in operating profit.
With some benign assumptions about taxes and share count, and excluding stock compensation expense for simplicity, earnings per share would run to $90 or so. Put a price to earnings multiple of 30 on that and the 10-years-hence share price passes $2,600. That, in turn, would amount to annual shareholder returns of nearly 15 per cent a year, compounded, starting from today.
Walmart took 20 years, not 10, to go from $94bn to $485bn in sales; IBM grew at an even slower pace. Even on the assumption that ubiquity takes until 2035 to achieve, however, the projected returns remain above 7 per cent a year, near the long-term average for stocks.
So long as Amazon conquers the world eventually, its investors will be just fine.
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