Amazon could surge 90% to $5,000 in long-term bullish scenario, analyst says
- Amazon could surge 90% to $5,000 in a long-term bullish scenario, driven by a "hidden value multiplier thesis," according to a note published by Needham on Tuesday.
- The firm set a 12-month price target of $3,200, but thinks that target can swell in the long run due to Amazon's track record of total addressable market expanding decisions.
- Needham said that those decisions have a tendency to "elongate its growth runway, drive higher profitability, and lower shareholder risk via revenue-stream diversification."
- Needham assumes that the COVID-19 pandemic has accelerated consumer adoption of Amazon's products and services for the long term, which should result in strong free cash flow growth over the next three years.
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Amazon could continue to trade at all-time highs for years to come and eventually hit $5,000 a share, representing 90% upside from current levels, if Needham's long-term bullish scenario play out.
In a note published on Tuesday, the firm said that Amazon has several "hidden value multipliers that suggest it is worth between $4,500 and $5,000 per share. Those four multipliers include:
1. Total addressable market expansion multiplier. Amazon has a history of continuing to expand its growth runway by adding adjacent market offerings with sizable total addressable markets "that weren't visible 3-5 years prior to the investments," Needham said. One product line highlighted is Amazon's Alexa devices. The firm said these market expansion decisions have a strong track record of driving higher profitability, elongating its growth runway, and lowering shareholder risk via revenue-stream diversification.
2. Services company (not product) multiplier. Amazon has transformed into a services company over the past decade, evidenced by the astronomical growth of Amazon Web Services, which represents 43% of the company's revenue, and has operating margins of 19%, according to Needham. The firm said it thinks that AWS is worth $560 billion as a standalone company.
3. $500 billion of media asset value (largely hidden) multiplier. Needham thinks Amazon's addition of media assets like video, Twitch, and music to the Amazon Prime bundle "lowers churn, keeps users in the Amazon ecosystem for an extra 3 years, and increases the lifetime value by $3,437 per user." The firm said that Twitch is the most undervalued asset inside Amazon's business, because it "extends Amazon's reach into the next generation of purchasers."
4. Ecosystem value multiplier. Needham said Amazon's scale economics, data superiority, and brand franchises "generate additional revenue for any business owned by Amazon compared to what the business could generate as a stand-alone entity. Amazon's ecosystem essentially draws customers in and leads them to spending more money in other areas of the business."
Needham continued: "We estimate that any business appended to Amazon's core e-commerce business is worth 1.5x more than that company would be worth outside the Amazon umbrella. By implication, sum-of-the-parts calculations based on public company comps meaningfully understate Amazon's value."
Needham assumes that the COVID-19 pandemic has accelerated consumer adoption of Amazon's products and services for the long term, which should result in strong free-cash-flow growth over the next three years.
Needham initiated Amazon with a buy rating and a 12-month price target of $3,200 per share, representing potential upside of 21% from current levels.
Amazon traded up as much as 1.5% to $2,655 in Wednesday trading, and is up more than 40% year-to-date.
