A gold mine is buried 'under the weeds' at Amazon — here's why it could take the company beyond the $1 trillion mark (AMZN)

August 31, 2018

A gold mine is buried 'under the weeds' at Amazon — here's why it could take the company beyond the $1 trillion mark (AMZN)

Jeff Bezos

Amazon looks set to become the second US company to reach a market capitalization of $1 trillion.
But it could grow to be much bigger than that, says Daniel Morgan, a portfolio manager at Synovus Trust.
Amazon's cloud business is growing rapidly in a fast-growing industry, he noted.
Meanwhile, it has an advertising business that few are paying attention to that has the potential to rival Google and Facebook, he said.

Amazon is close to becoming the second US public company ever to hit a market capitalization of $1 trillion, but if you ask Daniel Morgan, it's got plenty of headroom after that.

The e-commerce giant's cloud business, Amazon Web Services, is growing rapidly and that growth looks set to continue, said Morgan, a senior portfolio manager at Synovus Trust, an investment firm that owns shares in Amazon. Meanwhile, he said, Amazon has a kind of under-the-radar business that's already making lots of money, is on track to more than double in size this year, and has plenty of potential — advertising.

"They're positioned so well right now," Morgan said.

Amazon's shares closed regular trading Thursday at $2,002.38, giving it a market capitalization of $977 billion. Its stock will have to get to a little higher than $2,050 a share for the company to reach a valuation of $1 trillion, given its current share count. Morgan doesn't think it will hit that level this week, but thinks it won't take much for it to get there.

Regardless, he's in it for the long haul, in part because of AWS. Amazon's cloud business holds about 30% of the market of the core cloud computing market, putting it far ahead of its rivals, including Microsoft and IBM.

The cloud and advertising are driving Amazon's growth

AWS continues to grow rapidly; in the second quarter, its sales grew by 49% over the same period a year earlier. And it could continue to do so for years to come; Morgan estimates that the cloud computing market as a whole will grow at a 33% compounded annual growth rate through 2020.

"This cloud phenomenon to me is huge," he said.

But many Amazon investors are focused on AWS. What they don't seem to be paying much attention to is Amazon's ad business, Morgan said.

The company's "other" revenue, which largely comes from advertising, hit $2.2 billion in the second quarter, which was up a whopping 132% from the same period last year. This fiscal year, Amazon's other revenue should reach $10.3 billion, accounting for some 8% to 10% of its total sales, he projects.

And that could be only the start of its rapid growth. To Morgan, Amazon has the potential to be the third major player in digital advertising, alongside Google and Facebook. To him, here's what Amazon has going for it:

It has data that's valuable to advertisers. Google knows what you're searching for, and Facebook knows your friends and interests, but Amazon knows what you shop for and buy, Morgan noted.
It's got the resources to compete. Amazon has the money and reach to compete toe-to-toe with digital advertising's Big Two, he said.
It has its own streaming video network. Amazon's Prime video service has million of users who tune in regularly to watch shows such as "The Man in the High Castle" and "The Marvelous Mrs. Maisel." The company knows what people are watching, who they are, and what they like to buy — data that could potentially fuel a profitable ad business, if Amazon can figure out how to do it without alienating users that have gotten used to commercial-free viewing, Morgan said.
Its the leader in the smart speaker market. Amazon's Echo speakers are now in millions of homes and its Alexa assistant, which underlies them, could eventually be in many more, now that other companies are using it in their own devices. That ability to reach so many consumers along with the data that Amazon has on their shopping habits could make audio ads distributed through Alexa another big opportunity for the company, he said.

"This is something a lot of people don't talk about," he said, referring to Amazon's advertising business. "It's under the weeds."

But, he continued, the ad business, could be "another gold mine."

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