Last Thursday, when AMZN stock - currently trading at some ridiculous four or more digit P/E multiple - made its latest spurt higher, we reported that as a result of the move, Jeff Bezos was now richer than Warren Buffett and fast approaching Bill Gates.
As a reminder, just last Wednesday Bezos added $1.5 billion to his net worth, the day after the e-commerce giant announced it will buy Dubai-based online retailer Souq.com, and has added over $7 billion since the global equities rally began following the election of Donald Trump. As of last week, Bezos had a net worth of $75.6 billion based on the Bloomberg Billionaires Index. That’s $700 million more than Berkshire Hathaway Inc.’s Buffett and $1.3 billion above Ortega, the founder of Inditex SA and Europe’s richest person.
That said, as of last Thursday, Bezos remained just over $10 billion behind Microsoft co-founder Bill Gates, the world’s richest person with $86 billion.
But not for long, because fast forward less than a week later, when following a number of more sellside upgrades, Bezos is nearly there.
The latest catalyst: a "research" report from BMO's Daniel Salmon who upgraded the company to BMO's Top Pick, boosting his price target from $900 to $1,200. The alleged catalyst: Amazon is next set to challenge Google on its advertising business, to wit:
In this 46-page report, we examine a significant emerging opportunity for Amazon: advertising. We believe Amazon's ad business is gaining significant momentum, will reach $3.5B in revenue in 2017 (up 65%), and is increasingly being driven by the native, CPC ad product, Sponsored Products. We believe this high margin revenue can buttress our thesis around "investments while growing margins" and could be a greater catalyst for the stock if management shares more data points on it.
We believe Amazon will take share of marketing spend from 1) Google, 2) Facebook, 3) other online direct response budgets, 4) offline direct marketing, and 5) retailers' trade promotion budgets. Amazon is early in its video strategy, including around premium content, so we do not see branding/television budgets at much risk today, though we expect this to ramp in the years ahead. We believe Amazon's advertising business could have adjusted EBITDA margins in the 50%-70% range and is very accretive to total company margins. We believe the advertising business can be used to offset investments in other areas of Amazon's business (price, Prime content, India, etc.) while expanding margins.
Valuation: We are raising our price target from $900 to $1200 owing to higher estimates and a higher target multiple due to the early stage nature of the high margin ad business. Our new $1200 price target implies 27.1x 2017E EV/adjusted EBITDA, versus our prior 20.7x 2017E EV/adjusted EBITDA.
How does Salmon get to a $1,200 price target? Simple: by using a 130x P/E multiple.
While it is easy to dismiss the recent surge in analyst euphoria as nothing more than lemmings chasing momentum to the upside, the outcome for the stock is clear, and as of this morning, AMZN is up another $6, or 0.7%, with the stock trading on top of $900, up $25 in just a few days, and cutting the net worth spread between Bezos and Gates by 20%.
More notable is that should Amazon hit BMO's price target, as explained last week that would make Bezos the world's undisputed richest man. But it doesn't even have to rise that high: in fact, AMZN is now just $100 dollars away from the key $1,000/share level at which point the owner of the Washington Post would surpass $86 billion in value and - assuming MSFT stock does not rise in tandem - would make Bezos the world's richest man.