Bank Of America Offers A 'Deep Dive' Into Amazon, Says AWS Worth $84 Per Share

In a report published Tuesday, Bank of America Justin Post published a "Deep Dive" report on Amazon.com, Inc. AMZN ahead of the company's upcoming AWS segment disclosures.

"Amazon has made a major investment in AWS (pricing, opex, and capex), and the potential disclosure of AWS CSOI losses could imply that Amazon's core U.S. retail business is healthier and more profitable than investors realize," Post wrote. "If we assume AWS CSOI margins were negative 10-20 percent in 2014, N.A. non-AWS CSOI margins would be 4.9-5.6 percent; higher than the 3.8 percent reported."

AWS Only 6-7 Percent Of Revenue

Post noted that AWS is expected to grow its revenue base by 56 percent in 2015 to $6.2 billion (versus 2015 expected revenue of $100.98 billion) as price cuts will be less severe than it has been over the past 12 months.

In addition, the analyst estimated that "Other" revenue (AWS and advertising) could add 160 basis points of year-over-year growth to 2015 margins. However, that gross margin benefit is "a bit misleading" as AWS infrastructure costs are booked in the Tech & Content opex line while at the same time, AWS is "driving significant" capex and capitalized lease spending.

$39 Billion In Value Today

Applying a 4.5x 2015 average SaaS revenue multiple to Post's 2016 AWS estimate of $8.6 billion derives a valuation of $84 per share or $39 billion in value. Assuming this $84 per share valuation, the remainder of Amazon's retail and ad business would trade at 0.74x 2016 P/GMV versus retail at 0.84x.

Bottom Line

Analysts at Bank of America previously estimated the Infrastructure as a Service (IaaS) and Platform as a service (Paas) segment has a total addressable market of $70.8 billion and $33.0 billion, respectively.

Post estimated that Amazon controls "only" four percent of the market, implying there is "ample runway" for AWS growth. Amazon is "laser focused" on moving up the enterprise value chain and its likely Amazon will target additional application sub-segments within the Cloud market.

Shares are Buy rated with a $400 price target.