On the day that Pivotal Research Group expressed optimism for Amazon.com ’s new businesses, the company supplanted Microsoft as the world’s most valuable public company by the close.
Pivotal analyst Brian Wieser initiated coverage on the Internet giant on Monday with a Buy rating, citing its cloud computing and advertising businesses.
“Despite its current massive size, we see Amazon’s opportunities as mostly unconstrained based on a successful track record of capitalizing on consumer and IT department spending,” he wrote on Monday.
Amazon stock rose 3.4% on Monday to close at $1,629.51. Wieser set a year-end price target of $1,920, representing about 18% upside to current levels. The company now has a market cap of almost $800 billion, good enough to top Microsoft’s $785 billion, according to The Wall Street Journal.
Wieser estimates Amazon’s ad business reached nearly $9 billion in sales in 2018, growing 70% year over year. He forecasts the segment will rise to $38 billion in revenue by 2023.
Unlike Google and Facebook, Amazon’s advertising revenue comes primarily from network partners, not owned and operated media, so it can dial up ads based on how it prioritizes profit and sales volume. For instance, if Amazon suddenly decided to give a higher percent of each transaction to ad partners, its ad network and overall sales could light up while profitability remained unchanged.
Advertising is the lifeblood of Google or Facebook, but for Amazon, advertising is just one of many lines of business, so Amazon has the luxury of getting its profits from other areas if it chooses to. Consequently, Amazon defies standard investment modeling.
“Because of Amazon’s scale and the desirability of its data and ad inventory, advertising should be able to provide an opportunity for incremental growth that is independent of consumer-spending trends,” he wrote.
Wieser is also bullish on Amazon Web Services, noting that its $25 billion in sales last year would rank it almost as high as the world’s fourth-largest software company, SAP.
“With significant revenue streams from storage, computing, networking, and other software, Amazon has firmly established itself as capable of deploying new products and servicing IT departments of companies large and small around the world,” he wrote.
Pivotal isn’t the only investment firm that has recently re-thought how to evaluate Amazon.
A year ago BMO Capital Markets changed its valuation methodology for Amazon to what it called “Stacked DCFs,” cumulatively valuing Amazon’s three primary businesses (the marketplace, AWS and advertising) instead of averaging them, thus giving Amazon higher multiples on revenue. “While it is unconventional, we believe this is an appropriate way to value the company,” wrote Dan Salmon, BMO Capital’s media and internet analyst, in the firm’s Amazon update.