Amazon Could Be Worth US$3 Trillion in Three Years, Analyst Says
Amazon is going to get bigger—maybe a lot bigger.
2 min
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In a research note on Tuesday, Jefferies analyst Brent Thill lays out a case that Amazon (Ticker: AMZN) can reach US$5,700 a share over the next three years, a potential 70% gain that would boost the company’s valuation to nearly US$3 trillion.
Thill, who maintains a Buy rating on Amazon shares with a current price target of $4,000, notes that the stock has been stuck in neutral since last August, but thinks the stock will outperform again when the market gets clarity on the direction of the core retail business. He cautions that overall revenue growth will be a key driver of stock performance and that the shares could be range-bound until moving past what he warns will be a tough June quarter comparison. But for the long haul, he’s all in.
The analyst asserts that Amazon Web Services is the company’s most valuable business, and one that is well-positioned for further strong growth. He thinks AWS could be worth $1.2 trillion in three years, as more corporate computing workloads shift to the cloud. (Barron’s notes there are only four companies with market caps higher than that: Amazon itself, Apple, Microsoft and Alphabet.)
In a finding that could surprise some investors, Thill thinks the company’s advertising business could be worth more than $600 billion in three years. “As Amazon becomes an increasingly important channel for [consumer-packaged goods] companies, we believe a portion of their spending will shift toward search and product placement,” he writes. “In addition, we think Amazon has the opportunity to expand advertising further in international and new channels like Prime Video.”
As for the core retail business, the analyst estimates the value three years out at US$1 trillion, about US$700 billion of that for the third-party seller business. “[Amazon] Prime adoption and a broader shift to e-commerce have driven an acceleration in growth,” he writes. “We believe the length of the pandemic has served to engrain consumers’ increased reliance on e-commerce.”
Thill is careful to say that his sum-of-the-parts analysis is simply illustrative and doesn’t reflect his official price target. But he adds that viewing Amazon over a longer time period “helps provide perspective in the face of near-term disruptions/volatility from the pandemic.” He also thinks Amazon’s discount to its underlying asset value can narrow over time. And Thill points out that he is not including any value for its new healthcare business, which he notes is addressing a $350 billion U.S. market.
Amazon closed Tuesday at US$3,399.92, up 0.6%.
Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: April 13, 2021.
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The latest hike is unlikely to be the last as inflation remains stubbornly high
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In a decision that will surprise few economists – or borrowers – the RBA announced a further 0.25 percent rise in interest rates when it met earlier this afternoon. This brings the current interest rate up to 3.35 percent, a 3.25 percent increase since May last year.
Prior to today’s announcement, when the interest rate was still 3.1 percent, research by Roy Morgan released at the end of last month revealed that 23.9 percent of Australian mortgage holders were ‘at risk’ of mortgage stress in the three months to December 2022. Mortgage stress is where one third or more of weekly household income is going towards mortgage repayments.
In a tight rental market, mortgage pressure has also lead more landlords to pass rate rises onto tenants.
Research director at CoreLogic, Tim Lawless, says the latest rate rise moves beyond the ‘serviceability assessments’ some borrowers passed when applying for their loans.
“Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate,” he said. “The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.
“Considering most lenders were showing mortgage arrears to be around record lows last year, it’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates.”
Today’s decision signals the RBA’s continued efforts to use the cash rate to manage inflation, which sits at 7.8 percent annually. Time will tell whether it has been successful in curbing spending or whether, as many predict, there are more rate rises on the way. Mr Lawless said overseas economies could offer some hope to borrowers.
“Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending,” he said. “Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022, albeit from the highest level since the mid-1990s (outside of the impact from the introduction of GST in 2000).
“Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35 percent, through to another 75 basis points of hikes. However, a recent survey from Bloomberg puts the median forecast at 3.6 percent, implying one more hike of 25 basis points in the wings.”
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