Large technology companies are often hard for analysts and traders to value, with many moving parts. Sometimes this leads to the “sum of the parts” trading at a discount to the value of the businesses if they were to be spun off as independent companies.
What Happened: Well-known tech investor Gene Munster, who is a managing partner of Loup Ventures, argues that Amazon.com Inc AMZN is trading at a discount with investors getting the company’s retail business for free.
Amazon shares have fallen 35% over the last six months, compared to a 23% drop for the Nasdaq.
“Underlying this gap is the reality that Amazon’s retail business is now facing gale-force headwinds related to slowing demand and rising costs. There’s a case that those headwinds have pushed the valuation of Amazon’s retail business to zero,” Munster said.
Munster, who is an investor in Amazon via Loup, said Amazon was a key beneficiary over the last two years with demand for products online during the pandemic.
“Since then, comps have gotten tough and the retail growth has slowed dramatically from 44% unit growth in March 2021 to flat growth in March 2022.”
Despite the potential trading discount, Munster said it could get worse for Amazon before it gets better, citing rising logistics costs and labor costs.
“Before framing in the case that Amazon’s retail business is trading for free today, investors should be bracing for things to deteriorate in 2022.”
Amazon Web Services could be the key to Amazon’s valuation, Munster argues. The estimates from Munster are AWS accounting for $700 billion in value and the company’s advertising segment accounting for $500 billion in value.
These two items together represent $1.2 trillion, or around the entirety of Amazon’s current market capitalization.
Why It’s Important: Munster says we could be entering a recession, with a warning for investors to brace for what’s ahead in 2022.
“I believe that the most difficult period for retailers will be the June and September quarters,” Munster said.
Amazon’s retail segment accounts for 85% of the company’s revenue and could grow 5% annually, according to Munster.
“When 85% of your business is declining and losing money, it’s understandable that investors would not give value to Amazon’s retail business.”
Going forward, Munster sees the retail business turning positive in 2023 and beyond. Globally, online sales are less than 25% of retail sales, a figure that could grow to 50% over the next 20 years, Munster said.
The comments from Munster echo those made by Truist Securities analyst Youssef Squali on CNBC’s “Squawk On The Street” Tuesday.
“Now (Amazon) is trading literally at 10 times cash flow, which we haven’t seen literally since the IPO 20 years ago,” Squali said.
The analyst argues that the stock has fallen too far, with concerns overly priced in.
Price Action: Amazon shares were up 4% to $2,404.19 on Tuesday, according to Benzinga Pro.
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