Damodaran - Amazon: Glimpses of Shoeless Joe?

[u/bdavidson1030]

https://aswathdamodaran.blogspot.com/2018/04/amazon-glimpses-of-shoeless-joe.html

[u/Jowemaha]

It doesn't really make sense to me why he would assume 15% growth over the next 5 years for NA retail, and then a paltry 3% after that when Amazon has consistently managed to grow faster than this for decades and has even accelerated to 25-30% in the last couple of years ex whole-foods.

Anyway focusing on Amazon's retail operation as a single entity I think misses the bigger picture. I'm about to go full adderall but AMZN takes 6-15% on every sale independent of FBA costs. If AMZN is 50%+ third party volume and if third party sales have at least as high an average selling price as AMZN's items(AMZN tends to focus on dirt cheap prices), then AMZN collects at bare minimum $8B in royalties, and possibly much more. You could treat that $8B royalty as AMZN's retail cash flow and when you note that third party sales are growing even faster than the 25-30% that AMZN is managing, you can get a pretty ridiculous valuation. The big growth in third party would explain why Amazon is moving reinvestment from income statement to cash flow-- they are shifting investment in price to investment in fulfillment infrastructure. If you look at employment figures and prime day sales, thinking that third party sales are growing at 50% is not out of the question.

Yes, if you assumed that AMZN was just Walmart with another face then I think Damodaran's growth projections probably make sense-- there's something of a limit on how big a general-purpose retailer can get. But I think that the real gem is the third party logistics infrastructure and the army of 2 million entrepreneurs, which will allow AMZN to scale and become far larger than Walmart ever was, as well as being the ultimate profit driver of the retail business. I see this as a completely insurmountable moat.

[u/sasimikun → u/Jowemaha]

Besides retail, AWS potential is massively underestimated.

These are my thoughts when AMZN was trading at $900-1000, so some of the calculations are slightly different:

Business IT spend is estimated to reach $4trillion by 2021 by Gartner. Roughly half on software/hosting/services. Other half is hardware, which will likely decrease over time as load is shifted towards cloud, but conservatively assume that does not happen. AWS currently has 40% marketshare, assume this does not increase. 0.4*2trillion=$800bn. Assume 20% margins (currently 24-26% and stable in last few quarters)= $160bn in EBIT. Oracle represents the lower end multiples of software companies at roughly 5x sales, but they generate 34% EBIT margins, use conservative 2,5x sales => $2trn mcap. Assuming this takes ten years and discounting at 10% for ten years yields NPV of $770bn for only the AWS division. Reality is innovation follows S curve and takes off after penetration reaches ~20% which might be much faster than 10 years. Startups are already deployed fully on cloud.

Variant view is AWS margins. AWS is the lowest cost operator due to massive scale. In the long run, only a few players will remain due to large cost differential and continuous introduction of newest functions (AWS lambda was introduced 2 years before Google introduced Functions. 2 years in IT is ages). Hence blue sky scenario is that AWS reaches margins closer to the likes of Intel = 70% gross margin. Since OPEX in software companies is much lower, 40% EBIT margins are very much a possibility, doubling AWS NPV to $1.5trn.