(Bloomberg) -- Amazon.com Inc.’s Prime Day may grab headlines, but investors are much more focused on its fast growing cloud-computing and advertising services businesses.
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The two-day shopping event, which starts Tuesday, comes as the tech giant’s retail business faces weaker consumer demand amid a looming recession. Bulls, however, say e-commerce headwinds have obscured the still-vibrant trends at cloud computing business Amazon Web Services (AWS) and the advertising services unit.
“AWS alone could be worth more than Amazon’s entire market cap right now, which means you’re essentially getting the retail business for free,” said Marko Lazarevic, a US investment analyst at Harris Associates. “At this valuation, you’re not taking on much risk buying Amazon for the long-term.”
Shares in the tech giant have slumped 32% this year amid the broader growth-stock selloff and as consumers return to pre-pandemic habits, denting demand for online shopping. Even so, support from non-retail businesses has helped Amazon outperform pure-play e-commerce companies like Etsy Inc., Wayfair Inc., and Shopify Inc., which are all down 60% or more.
Retail still accounts for more than half of Amazon’s total sales, but the other businesses are increasingly important, with AWS revenue growing 37% in constant currency terms in 2021, to $62.2 billion. The cloud unit, which helps power everything from Netflix videos to robot vacuums, is also the company’s most profitable.
Amid a huge opportunity for cloud computing, some analysts see AWS alone being worth more than Amazon’s $1.14 trillion market capitalization. Cowen estimates AWS has an enterprise value of $1.2 trillion, while Bloomberg Intelligence says AWS sits in the $1.5 trillion to $2 trillion range. Redburn analyst Alex Haissl sees a path toward $3 trillion for the unit.
“Amazon is at least 40% cheaper than it should be, relative to the sum of its parts,” said Eric Clark, a portfolio manager at Accuvest Global Advisors. “With expenses falling and AWS and ads continuing to grow, that’s an environment where the stock can really shine. I’m happy to keep buying on dips, because it has a really great catch-up opportunity.”
Ad services sales jumped almost 58% to more than $30 billion last year, and Bloomberg Intelligence projects revenue could reach $100 billion over the next decade.
The non-retail businesses will be closely watched when the company reports second-quarter results later this month. AWS revenue is expected to grow nearly 32% and revenue from ad services is projected to climb 19%. That compares with basically flat year-over-year growth for online sales, according to Bloomberg Consensus estimates.
While Amazon may not be immune from an economic downturn, playing the long game might prove profitable. “If there is a recession or a slowdown, that would hurt retail sales, and that could mean a slowdown at Amazon,” Lazarevic said. “However, recessions come and go, but the overall trends at Amazon -- whether e-commerce or cloud computing -- will pull through.”
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More than 40% of Nasdaq 100 Index components are trading above their 50-day moving average, a positive signal for short-term momentum. While that’s below a peak of nearly 80% in late March, it’s a rapid turnaround from June, when fewer than 6% of stocks were above the level, the fewest since 2020. Improved technicals are a reason why Oppenheimer recently turned positive on growth stocks, singling out tech as a sector “positioned to lead off a bear market low.”
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(Updates to market open.)
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