Amazon Stock (AMZN) Stuck in a Range – Scotiabank Says There May Be a Way Out

Amazon (NASDAQ:AMZN) investors have been frustrated by the stock’s performance over the past year. The shares have been trading mostly within a $200–230 range even as the underlying business continues to perform well.

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However, Scotiabank analyst Nat Schindler thinks there might be a remedy for the lack of movement.

“We believe a separation of AWS from retail/advertising would unlock at least $400-600B of value or ~$37-55 per share, driven by a re-rating of AWS to standalone cloud multiples,” the analyst explained.

Within Amazon today, AWS is implicitly valued at around 6–7x forward revenue, despite delivering its fastest growth in roughly 13 quarters and achieving a “Rule of 40” score that surpasses most public cloud peers. If AWS traded independently at about 10x revenue – similar to Azure – it would be worth roughly $1.9 trillion on its own, compared with the roughly $2.2 trillion valuation the market currently assigns to Amazon as a whole.

Schindler’s sum-of-the-parts framework suggests that all of Amazon’s segments are undervalued. Breaking down returns on invested capital (ROIC) by segment reveals unusually large differences between the businesses. At one end is Amazon’s advertising business, an asset-light unit that generates returns far above its cost of capital. At the other is the international retail division, which would likely struggle to stand on its own as a separate company.

When these businesses are combined, the company’s overall ROIC looks reasonable, but that average hides the big gap between highly profitable segments and weaker ones, making it harder to properly assess the company’s value. At the same time, Schindler points out that not every unit could realistically be separated. Amazon’s advertising business – mostly sponsored listings – is “inextricably linked” to the retail side and depends on its scale to generate those strong returns. AWS is different. It started as infrastructure Amazon built to run its own website, but has since developed into a largely independent cloud business that no longer directly relies on the company’s other operations.

The main complication here – the counterargument, if you will – is the “flywheel effect.” AWS’s operating profits help support pricing in the retail business. If the two were separated, retail would have to rely on its own economics, which could squeeze margins and potentially allow Walmart to gain market share. Schindler estimates these frictions at roughly $19 billion in pre-tax costs annually but believes the re-rating “more than compensates.”

“Ultimately,” Schindler summed up, “while there is no definitive answer as to whether Amazon should spin out either way, the risk-reward at current levels is asymmetric that favors the patient investor whether a breakup materializes or not. If a spin were to happen, the expected valuation re-rating from standalone multiples should make up for the incremental standalone costs, but staying together will continue to allow AWS operating profits to subsidize retail.”

All told, Schindler assigns an Outperform (i.e., Buy) rating on Amazon shares, backed by a $275 price target. Should the figure be met, investors will be pocketing returns of ~32% a year from now. (To watch Schindler’s track record, click here)

On the broader Street, sentiment leans strongly in the same direction. While three analysts are staying on the sidelines for now, another 40 recommend buying the stock, giving Amazon a Strong Buy consensus rating. At $280, the average target points toward one-year gains of ~34%. (See Amazon stock forecast)

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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