Re-visting my AWS Thesis and Valuation $AMZN

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I published an AWS piece in March 2019 that is counter to what most people are saying. My note could be boiled down to 3 thoughts: AWS is a good business with great tailwinds, but:

  • It’s becoming highly competitive, with Google, Microsoft, Oracle, IBM and others all gunning for a piece of the pie.
  • Pricing, and therefore margins, will likely go down in the future . In fact, AWS proactively lowers pricing for customers. This is not a sign on a good business, but instead a sign of a commodity. You become the low cost producer by having the highest volume, so you need to incent players to stay and leverage your fixed costs.
  • I didn’t think it was being mis-priced in Amazon’s stock. In other words, it wasn’t a hidden gem. You’ll see from this post that I still think that is true.

I’m reposting my initial projections for the company below and we’ll discuss how they’re performing to those expectations. I came up with a value of $165BN.

Maybe I was being a little harsh on the out years, especially for margins. But guess what? AWS was somewhat in-line with this estimate in 2019, with $35BN in sales, $9.2BN in Op Income and $17.4BN in EBITDA.

2020 is supposedly the golden era for AWS with COVID-19. Tons of start-ups are growing rapidly with everyone shifting to the cloud and AWS is the backbone they are built on. As those companies grow, they scale up the resources needed from AWS so AWS makes more money.

YTD 6/30/2020, AWS did $21BN in sales and $6.4BN in EBIT.  If we annualize that, its $42bn in sales and $12.8BN in Op income for ~30.5% EBIT margin. So they are behind on sales actually, but the margin is holding in there. This is from higher utilization needed during the pandemic (which helps fixed cost leverage), but it looks like the company also changed its depreciation schedule, so I would need to see D&A to get a real sense of what true cash margins are (and they don’t disclose D&A by segment outside of the 10-k). They actually called this out as helping the EBIT margins.

For those that may think AWS can keep up its amazing growth, that’s not so. Its clearly decelerating, but it is on big numbers so that is expected. By contrast, Azure grew 50% in this same quarter (though is about half the size of AWS).

So maybe I’m wrong on the AWS valuation. I do think I am probably too punitive on the out years for margins. If I change my margin assumption to ~22% average EBITDA margins for 2024-2028, the value is ~$275BN. This is solid improvement, but seems well captured in Amazon’s $1.6 Trillion market cap.

What is Twitch worth? A look at what you need to believe…

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A good friend of mine came to me full of excitement about the prospect of Amazon’s “hidden gems.” He had heard Amazon owned Twitch and was very excited for what that could mean for the company given the success of Fortnite and other games, which have driven a new era for e-Sports (that is, watching other people play video games). Twitch could also serve as a platform for other content. I decided to take a moment and explore what Twitch might be worth and put into context what that may mean for Amazon’s share price.

Warning: As with any investment analysis, I make a lot of assumptions in this post given I have very limited disclosure from Amazon.

With that warning out of the way, I hope that you can take these assumptions with you and think about “what do I need to believe?” when it comes to Twitch (and Amazon) and determine whether or not the market is pricing this in (as I wrote recently about here). Let’s get started:

Most internet platforms like Facebook, Twitter and YouTube are analyzed by a popular KPI called, Monthly Active Users (or MAU). MAU is important, and different than valuing a company via “eyeballs” as was common in the tech bubble, because MAU measures engagement with the platform and that helps advertisers determine whether placing an ad on the site has impact or not.

According to a very trustworthy source, Wikipedia, Twitch had 100MM MAUs in 2015. I assume that has likely grown significantly since then, given the dawn of Fortnite and internet celebrities like Ninja. I assume 130MM MAUs for 2017, which compares to Twitter’s 328MM.

As for Average Revenue Per User, or ARPU, I think Twitch is still in its infancy stage. I don’t think it is likely capturing as much money as it can right now because (i) it is owned by Amazon which has a long investment horizon and (ii) they likely want to keep engagement up and growing as much as possible in the near term to drive stickiness with the platform. However, I do have it growing substantially over time. In fact, this may be an aggressive assumption given Twitch has a monopoly on this niche for now, and competitors may move in. In addition, advertisers can move elsewhere, such as Instagram, Facebook, Twitter, Youtube, and so on. There is only 1 advertising pie and all these players are competing for the biggest slice.

On the flip side, Twitch should benefit from a “live TV” aspect of its content, much like ESPN which is able to charge a large premium in the broadcast world compared to its peers. As a result, I expect ARPU to ramp up quickly. Twitter’s total advertising revenue / MAU ramped from $2.20 in 2013 to $5.30 in 2017. I have Twitch scaling much quicker than that given what I’ve noted above.

For now, I don’t think Twitch is a major contributor to EBITDA given investment in R&D, sales staff and general expenses, but with price gains comes scale. For reference on how I derived my assumptions, I looked at Twitter. Twitter in 2015 spent ~36% on R&D, 39% on sales and marketing, and ~12% on G&A (though some of this includes a massive stock based comp expense, at ~30% of sales). This has stepped down to R&D being 22%, Sales being 29%, and G&A being 11.6% (again, these expenses include an 18% of sales expense for stock comp, which is non-cash but is a real expense at the end of the day).

Twitch est

Therefore, you may view my assumptions still as aggressive, but I’m trying to show what you need to believe. Net / net, I have Sales growing at a 127% CAGR from 2017 to 2020 and EBITDA growing at 450% (albeit off of a low base). I’ve also included some multiples so far as a proxy for where the value of Twitch may shake out.

I do not know where Amazon puts Twitch today in its reporting, but I’ll assume it is in the North American Retail business for now, given I don’t have a better idea of where to put it (I know that AWS is distinct from any ad revenues though so I didn’t put it there). here is a snapshot of Amazon today then, including my rough Twitch estimates.

AMZN Today - Segments

Now, for my next assumptions, I am going to go with some street estimates here, but a big assumption on my end is that I do NOT think they are baking in the value of Twitch. That is a big “if”, but given how small Twitch is today relative to the rest of the business, I don’t think it is out of the realm of possibility. Below are the 2020 estimates for AMZN, including my assumptions in value for Twitch.  All in all, it shows pretty strong growth for a company that has already grown massively. AMZN 2020

I took the liberty to assign multiples that you may disagree with, but I have a sensitivity table later that will let you be the judge.

The problem you may be seeing is that the total EV of Amazon of slightly less that $600BN is less than the current ~$890BN. As shown below, my “price target” is well below the current price.


Uh ok… Ok OK I must have done something wrong. My multiples must be WAY off. That’s for you to judge and that is the “art vs. science” part of investing. As we see below, I think I am pretty comfortable given where other Tech titans trade on my multiples, especially when we look out 2.5-3 more years.

AMZN 2020

So what do you need to believe??

Below I show a sensitivity of AMZN’s stock price relative to (a) changes in my EBITDA estimate and (b) estimated changes in the multiple. If you think Amazon is worth 18x EBITDA and will produce $50BN of EBITDA, for example, then today’s price of $1,830 looks OK (if not a little rich given this PT is based on 2020 estimates).

AMZN Sensitivity

Does this seem reasonable to you? It may, or it may not. That’s part of doing the analysis. After all this you may say, “Yes, actually. Amazon is such a dominant force, with a loyal customer base, I think it is worth a high multiple and the street is underestimating it.” On the flip side, you may say to yourself, “Geez, I don’t know. Those are some lofty figures it will need to reach… Maybe I’ll stay on the sidelines for now.”

Both are equally fair.

That’s all for now. Full disclosure: I am long AMZN.

Tax reform’s impact on stocks – the question NOT being asked

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A lot has been written about the Tax Plan passed at the tail end of 2017. I recently wrote a post on, while I think the plan is very beneficial to US equities, some considerations we should have on the rest of our portfolio.

And not to be a debbie downer, but I am here again to discuss some questions that are not being asked here. If you’re buying individual stocks today, I think the main underlying question for investing in that company comes down to one thing: Does this company have a strong competitive advantage?

In highly competitive industries, typically those that compete solely on price or sell commodities and have little differentiation, these tax benefits may soon be competed away.

Consider a distributor, which typically sells many goods and the only value it adds is perhaps customer service. Grainger has been an example of a distributor that has faced headwinds from price competition as customers look to Amazon for cheaper products. Take a look at GWW’s stock chart over 2017 to gain an understanding of this impact (stock was down 3-4% when the S&P was up 20%).

GWW’s stock really started to recover at the end of the year, one from earnings being better than feared on low expectations, but also due to its tax rate which should decline from 38%.

Given GWW’s heightened competition, due you think those savings will be used for buybacks or high return projects, or do you think they’ll be used to compete and maintain market share? Let’s say you think that’s fine if they use it to maintain share, as they’ll be in a better position. Well, do you think Amazon and other competitors won’t also respond?

Also consider the recent hikes in minimum wage from companies and $1,000 bonuses. They are doing that to attract and retain talent, which is simply another form of competition.

Hopefully you can see what I am getting at. Low competitive moat industries likely will compete the savings away. While the tax rate will be low, returns on capital may end up being the same.