There is still a one- or two-week lull before the storm of the financial reporting season arrives. As we wait for the third-quarter financial reports, there is a phenomenon worth pondering: investors are frantically chasing semiconductor stocks and companies like SpaceX that are filled with grand visions, while funds continue to flow out of the stocks of established tech giants. The stock prices of some of these established tech companies have now dropped to highly affordable ranges, and Amazon in particular deserves more attention from the market.

We all know the many criticisms directed at Amazon: just like with the alphabet and Meta, Amazon is making substantial capital expenditures, spending as much as 220 billion dollars this year alone on building the computing power of AI data centers. This investment undoubtedly comes with risks, and the returns are highly dependent on whether there will be a surge in commercial demand for AI services.

Even so, Amazon's valuation has been lower than Walmart's for about 18 consecutive months, which is not reasonable. Koyfin Data shows that Walmart's expected revenue growth this year is about 5.6%, which is only one-third of Amazon's expected growth rate; however, Walmart's forward price-earnings ratio reaches 37 times, while Amazon's is only about 29 times.

In addition, Walmart's main business remains physical supermarkets, while Amazon's business scope is much more diversified: its online retail business, which holds a leading position in the industry, achieved a 13% growth in retail revenue in the first half of the year; at the same time, it is also the world's largest cloud service provider and owns a considerable film and television business; in addition to this, there is also the Leo satellite project, which is still in its initial stages and aims to compete with SpaceX in the satellite broadband market. Overall, considering Amazon's market value of $2.8 trillion, there is a suspicion that its valuation may be underestimated.

Let's do some math: Referring to the valuation levels of emerging cloud providers such as CoreWeave and Nebius, and considering the growth expectations for the next few years, the value of AWS's cloud business alone could reach at least one trillion dollars, or even more. The valuation of its film and television studio business could be comparable to that of Netflix, which has a market value of 300 billion dollars. Adding the online retail segment, which includes merchant services, advertising, and membership subscription businesses, makes the valuation calculations even more complex due to the deep integration of these various business units.

In the past 12 months up to June of this year, online retail and merchant services revenue, excluding advertising and subscription business, reached $468 billion, with a growth rate of about 12%. This year, it is expected to exceed $500 billion. Based on Amazon's forward P/E ratio of 3.3, the valuation of its online retail segment is approximately $1.7 trillion. The advertising business currently has an annual revenue scale of $80 billion, with an annual growth rate of 20%-25%. Although most of the revenue comes from platform merchants' promotional investments, its valuation is not on par with that of Meta or Google's advertising business, it still contributes significantly to Amazon's value.

Other businesses also have room for growth. At the recently held Commun Token Issuance pia industry conference organized by Goldman Sachs, technology analyst Eric Sheridan suggested that Amazon is likely to become a key beneficiary of the robotics wave. Robotics technology can achieve greater automation in the logistics and delivery process, thereby increasing profit margins.

Of course, in addition to the uncertainty of returns on such substantial capital expenditures represented by AWS, there are also numerous other variables at play. We are still unclear to what extent AI intelligent entities will alter consumer behavior. If a large number of users switch to using AI intelligent entities and no longer browse Amazon's web pages manually, then its advertising business could suffer a devastating blow.

It is undeniable that, as a large conglomerate, Amazon’s stock valuation has long been discounted, with its market value always being lower than the theoretical value of its individual businesses if they were to be split apart. Perhaps one day in the future, the company will be split into two or three independent entities, and AWS is the division most likely to be separated. However, that day is still very far off. At present, AWS still requires a continuous stream of cash flow from its retail business to support massive capital investments. Nevertheless, the possibility of such a split itself presents opportunities for long-term investors.

Responsible Editor: Guo Mingyu