Amazon will soar by 65% if its retail business is valued like Alibaba instead of Walmart, analyst says

Swole BezosDrew Angerer/Getty Images

  • Amazon shares will rise by 65% to $3,000 over the next two years if growth continues, says a Piper Jaffray analyst.
  • The valuation is also driven by valuing Amazon's retail segment as an e-commerce company instead of a brick and mortar one.
  • Amazon spinning out its cloud-services business would highlight the value of the remaining businesses, the analyst says.
  • Watch Amazon trade live.

A Wall Street firm says Amazon shares could soar by 65% to $3,000 apiece within two years if the market stops valuing its retail segment as a brick-and-mortar business and instead looks at it as an e-commerce one.

Currently, the market is valuing Amazon's enormous retail segment with a "brick & mortar" multiple of 0.8 times sales, comparing it Walmart, Costco, and Home Depot, according to Michael Olson, a senior analyst at Piper Jaffray.

If the market starts applying an e-commerce multiple, 2.1 times, the business will more than double in value to $760 billion. Doing this would compare Amazon's retail segment to Alibaba, eBay, and Expedia, according to the note.

Olson also notes that spinning off its cloud business, Amazon Web Services, could be an option to highlight the valuation gap. If AWS is spun off, a transaction that could be worth more than $500 billion, the market may more closely focus on the valuation of the retail business, he says.

Recent initial public offerings of tech companies such as Lyft and Pinterest have revealed that each signed multi-year contracts with AWS, guaranteeing hundreds of millions in revenue to the business.

"We have a high degree of confidence that AMZN shares can reach this level with no major acquisitions or other significant changes to the business," Olson wrote. "A potential AWS spin-off, however, would, no doubt, help to highlight the relatively low valuation of the other segments."

Surprisingly, Olson thinks Amazon is undervalued even when a brick and mortar multiple is applied. On this basis, the company is worth $2,031 per share, a 10% premium to where shares are currently trading.

Amazon stock has been volatile amid the trade tensions despite largely exiting the Chinese market, which is dominated by local players such as Alibaba.

In addition, the company's business appears to be unaffected by the drama surrounding CEO Jeff Bezos' personal life. Under the terms of his divorce, Bezos will maintain voting control of the couple's $144 billion stake. Jeff will retain ownership of 75% of the shares, worth over $100 billion.

Amazon is up 22% year to date.

AMZN stock chart

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