Amazon has a bevy of growth businesses rolling at once---Prime, with its new price increase, consumer product goods efforts such as Amazon Pantry and e-commerce to name a few---but Amazon Web Services may be valued at a discount relative to other cloud companies.
That argument was floated by Oppenheimer analyst Jason Helfstein, who raised his price target for Amazon shares based on a few moving parts.
- Amazon's recent Prime price increase by $20 will add $453 million in earnings before interest and taxes, or 62 cents a share. Helfstein assumes Amazon will have 25 million Prime members by the end of 2015 and a 16 percent churn rate. Other analysts have also assumed that Amazon customers will absorb the Prime price increase, but shipping costs still hurt the e-commerce giant.
- Amazon will step up its focus on consumer product goods and better compete with Wal-mart and ultimately generate another $46 billion in revenue.
- Amazon Web Services trades at a discount relative to other cloud companies despite higher sales growth.
That latter point is worth a few brain cycles. After all, AWS could be the crown jewel of Amazon---especially on the profit margin front---but little is known about the financials given that unit is still categorized as "other" in the earnings statements.
Looking at a basket of software as a service companies, Helfstein noted that the group, which includes Workday, ServiceNow and Salesforce among others, trades at 10.6 times estimated 2015 revenue. Amazon Web Services is valued at 6 times 2015 revenue estimates.
One thing worth noting here is that AWS is an infrastructure as a service play. Applications as a service is stickier with customers because it's harder to swap. With infrastructure it doesn't take a rocket scientist to see that algorithms will squeeze infrastructure players and find combinations to maximize value per computing instance.
In that regard, AWS is going to be a strong commodity computing player with thin margins (but not nearly as thin as e-commerce).
Here's a look at Helfstein's AWS revenue estimates.
The big takeaway here is that AWS will become a larger part of Amazon's overall value. But the harder argument to make is that AWS should be valued similar to applications players. Software is---and always will be---more valuable than infrastructure.