Consumer discretionary, Inc. (AMZN) Cloud Services Platform Worth $200 Billion

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Credit Suisse increases price target from $920 to $1,050 on Amazon stock due to potential upside to its already bullish AWS expectation

As, Inc. (NASDAQ:AMZN) continues to expand its offerings for the core e-commerce and cloud services businesses, the analysts at the Street keep hiking its price target ahead of its third quarter results. Credit Suisse joins the list of investment firms, which believe that Amazon stock is valued more than $1,000 mainly due to the young division, Amazon Web Services (AWS).

Stephen Ju, analyst at Credit Suisse, maintained Outperform rating on Amazon stock and increased the price target from $920 to $1,050 in a research note published on Monday. The price target was hiked after reviewing the latest quarterly performance, as the analyst rolls forward valuation parameter to include end of 2017.

Conducting its discounted cash flow (DCF) valuation, the research firm found that AWS is valued around $200 billion. The analyst thinks that the potential for margin expansion of AWS over the long term remains a “controversial topic” for the company.

Credit Suisse said that it models aggressive growth in selling, general, and administrative cash expensive of an additional $1.4 – $1.5 billion over the next five years, up from historical growth of $0.60-1 billion. Excluding any such dramatic and sustained decline in price, it thinks that the combination of moderating capital expenditure and growth in depreciation and amortization expense because of declining usage should eventually result in operating margin of 40% in the long term.

“This means that within five years, AWS will account for roughly 40% of our consolidated FCF estimate,” the sell-side firm noted. Taking the total addressable market for AWS of worth $1 trillion into account, Mr. Ju thinks that his decelerating estimates could eventually prove to be conservative, leading to an upside potential to his free cash flow forecast. “As we roll forward our valuation parameters for AMZN to contemplate 2017, our DCF for AWS now suggests that this asset is now worth $200b,” he wrote in the report.

Amazon has already received several price target hikes since the beginning of September and its stock trades at record-high levels. The investors weren’t too excited about the latest recommendation from Credit Suisse, as the stock edged down 0.82% to $816.20 as of 9:49 AM EDT.

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