Written by Maggie McGrath
With a combined $116 billion in net worth, Amazon founder and CEO Jeff Bezos and Facebook FB -0.14% founder and CEO Mark Zuckerberg sit at the top of both Silicon Valley and the FORBES 400. Much of their wealth stems from their stakes in their respective companies; as Amazon and Facebook have surged in size and scope, so too have Bezos's and Zuckerberg's coffers. And according to a new report from Morgan Stanley, underlying the growth of these companies and the lining of their founders' pockets is more than mere FANG stock exuberance; rather, what has driven their success are business models that are among the very best in the world.
On Thursday, Morgan Stanley released a list of the 37 companies with the best business models in the world. The ranking was the result of quantitative testing on 5,600 stocks from across the globe; stocks were probed for deep value, current value, use of capital, profitability, growth, momentum, revisions and risks. Then, after an analysis for sustainability and corporate governance, the remaining stocks were assessed for their potential for out-performance in 2017.
The 37 names left standing have been crowned by Morgan Stanley as the "global best business models." The list spans 33 industries and 14 countries; companies that made the cut include Accenture ACN +1.52%, J.P. Morgan and Nestle . And, of course, Amazon and Facebook.
Among the metrics helping Amazon land on the list was its 12% return on net operating assets, 21.1 price-to-book ratio and 20.5% cash-to-market cap ratio. On a more qualitative basis, Morgan Stanley believes that Amazon has a solid market position on its side.
"We believe Amazon's industry-leading scale, growing Prime member base, and long-term investment focus will allow it to continue to take a growing share of consumer wallets," wrote Morgan Stanley analyst Brian Nowak, citing the company's 310 million-plus global active users and Amazon Prime's roughly 60 million global active users.
In Nowak's view, the current price of Amazon shares ($766 as of midday trading) do not price in the company's e-commerce business, which he sees as a "major driver of profit improvement" in the near-term. By Nowak's calculation, Amazon Web Services is underappreciated, and going forward will drive 50% of Amazon's overall profitability.
"As consumer purchase behavior increasingly shifts online, we see Amazon as best positioned in e-commerce owing to best-in-class customer service, exceptional user experience (across mobile app, mobile browser, and desktop), broad item selection, and highly competitive pricing," Nowak said.
As for Facebook, the social media behemoth cracked the best-business-model list thanks in part to its corporate governance score (it nabbed a 10 out of 10 possible points), its 22% return on net operating assets and a 32.2 enterprise value to EBITDA ratio.
Nowak praised the company's unmatched scale and engagement -- by his count, Facebook's 1 billion-plus daily users spend more than 50 minutes per day on the social network -- and said that this is what will allow the company to continue to take online ad dollars.
"We believe Facebook's large and logged-in user base also provides it with inherent advantages that are difficult to replicate. Traditional ad serving, measurement and attribution are based on tracking "cookies" (messages that web servers pass to browsers). Cookies do not work as well on mobile and cannot track cross-device or offline conversion," Nowak explained, noting that Facebook is trying to solve these issues by targeting specific users across its platform, rather than using cookies.
"We believe this will ultimately improve Facebook's advertiser return on investment, measurement ability, and overall attribution, leading to growing share of advertiser wallets," Nowak said.
Nowak has given Amazon a hefty $950 price target (and, in his most bullish scenario, a $1,100 per-share target); for Facebook, which as of midday trading Thursday was hovering around $120 per share, he has provided a $155 price target.
In other words: if he's right, expect to see Bezos's and Zuckerberg's fortunes grow even bigger.
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