Despite its gargantuan size, shares of Amazon.com (NASDAQ: AMZN) have gained an incredible 66% over the past year alone, largely thanks to strong performance within the company’s Amazon Web Services (AWS) division combined with continued growth in Prime members.
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Investors still don’t have a specific figure for Prime members, but it’s clear that Prime members are soaring after Amazon added "tens of millions" of new paid members in 2016. Most third-party estimates peg total Prime members somewhere in the range of 65 million to 75 million. Meanwhile, the AWS business is so profitable that it effectively subsidizes Amazon’s international e-commerce business, which still operates at a loss as Amazon continues to invest in it.
In fact, AWS is such a strong business that it could help propel shares close to the $1,000 threshold.
Word on the Street
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Oppenheimer analyst Jason Helfstein is out with a research note today (via Tech Trader Daily) reiterating an outperform rating while boosting his price target from $900 to $970, which would flirt with the four-digit threshold. After perusing Amazon’s 10-K for some light reading, Helfstein came away impressed with how capital-efficient AWS is becoming.
Image source: Getty Images.
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The analyst is reducing his expectations for capital expenditures in 2017 by $1 billion, and expects capital spending to come in at $6 billion this year. Even after factoring in estimates for price cuts, which is common throughout the cloud infrastructure market over time, Helfstein is modeling for $0.82 of incremental revenue per $1 of capital expenditures. Looking farther out, this ratio should trend toward $0.70 per $1 of capital expenditures, which would translate into about $11.1 billion in unlevered free cash flow in 2020.
Capital spending should accelerate in 2018, but by then higher-value services combined with continued hardware efficiencies should take the driver’s seat in terms of returns. Helfstein has meaningfully increased his overall estimate for the value of AWS, moving it from $212 billion to $258 billion. That revised estimate is nearly two-thirds of Amazon’s current market cap of $400 billion.
Thanks, AWS
For context, here’s Amazon’s cash capital expenditures over the past three years.
Year
Cash Capital Expenditures
2014
$4.9 billion
2015
$4.6 billion
2016
$6.7 billion
Data source: Amazon 10-K.
Amazon does not provide guidance for 2017 capital expenditures, but in general the bulk of its spending relates to ongoing expansion of fulfillment infrastructure as well as AWS infrastructure. A chunk of spending related to internal-use software is expensed (instead of capitalized and depreciated), which was $417 million of last year’s total.
AWS is becoming increasingly important to Amazon as its most profitable operating segment — by far — which in turn allows AWS to become a major driver in Amazon’s total value and investment thesis.
Segment
Net Sales (2016)
Operating Margin (2016)
North America e-commerce
$79.8 billion
2.9%
International e-commerce
$44 billion
(2.9%)
AWS
$12.2 billion
25.4%
Data source: Amazon 10-K.
AWS will be absolutely instrumental for Amazon shares to potentially hit $1,000 one of these days.
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