In a peer group of US tech firms which have in recent years routinely traded at valuations well above 20x forecast earnings, it may seem counterintuitive to ask if a stock is materially undervalued.

On the face of it this may seem doubly true of online retail behemoth Amazon. In addition to a headline 2020 PE multiple of 56x, the company’s sheer size has made it a prime target of the recent tech backlash, as politicians question whether online giants have become dangerously monopolistic.

Even at that multiple, a share price of $1,739 and a market cap of $860 billion (£630 billion) the stock is well off recent highs above $2,000, and a total value above $1 trillion. But many market watchers believe it remains fundamentally misunderstood, with the most bullish analysts offering targets from $2,500 to $3,200.

At issue is the company’s cloud computing arm Amazon Web Services (AWS). While the retail business may be comparatively easy to understand, many fund managers say AWS’s potential is both much more opaque and much more exciting.     

What price Amazon?

 Morningstar analyst RJ Hottovy believes Amazon could be worth as much as $1.2 trillion, attributing $550 billion of that to AWS versus the retail division’s $446 billion (see chart). He views the non-public face of the business as ‘misunderstood and underappreciated’.

‘We see AWS as Amazon’s most important cash flow contributor over the next decade, with advertising beginning to take the mantle roughly a decade out. Both segments offer more significant margin expansion opportunities than the market is giving them credit for.’

The firm racked up revenue of $233 billion in 2018, and Morningstar predicts that this will grow to $490 billion by 2023.  

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