It’s not too hard to be bullish on Amazon.com Inc. (AMZN), but one Wall Street analyst sees the AMZN stock price hitting $1,000 in the not-too-distant future.
And he may very well be right.
Carlos Kirjner of Sanford Bernstein Co. told clients that AMZN stock has implied upside of 47% in the next 12 months or so from last night’s close of $680, Bloomberg reports.
That’s the highest price target on the Street by some distance. The second-highest PT comes from analysts at JPMorgan Chase, who see AMZN stock rising to “just” $915 in the next year. Meanwhile, on average, analysts’ target price is $802, according to a poll by Thomson Reuters.
And even that more modest estimate makes for implied upside of nearly 20%.
These are all “strong buy” price targets in any investor’s book, so it doesn’t really matter if Kirjner’s view seems like a stretch.
The thing is, it may not be at all. The runaway success of the company’s cloud offerings known as Amazon Web Services (AWS) and growth in Prime subscriptions, among other factors, are set to turbocharge profitability.
From the analysts’ report to clients:
“We think Amazon’s businesses are now so large, fast-growing, and profitable that it is harder and harder for the company to find new areas of investment to keep up with the growth in gross profits. It will be even harder in a year, as AWS adds $5-$6 billion in revenues with well over 50% variable (operating income) margin yet again, content expenses growth slows as it probably will have approached or exceeded $3 billion, and 8th generation fulfillment centers become a more significant portion of the installed base. All of this as Prime continues to grow users worldwide and support GMV and revenue growth. In other words, time is on the side of margin expansion.”
AMZN Is Just Getting Started
AWS enjoyed year-over-year revenue growth of 64% in the first quarter and yet bears no cost of goods sold, the analyst notes. That’s a margin-leverage machine.
But that’s not all. Kirjner sees other areas of accelerating cost leverage. More profitable higher margin product categories appear to be growing faster than lower margin ones on AMZN’s online marketplace. Furthermore, the says costs of goods sold by Amazon’s first-party vendors are trending downwards.
Lastly, costs at the company’s Amazon Prime Video unit will decelerate significantly as its content library grows. (By the way, we’re not even talking about the potential contribution of Amazon’s just-launched competitor to YouTube.)
The analysts’ bottom line is that the market is totally underestimating Amazon’s cost-leverage story and is therefore greatly undervaluing shares.
Here’s Kirjner again:
“[W]e are bullish in the short, medium, and long term and think we may see margins expand much faster than they have in the next two years than they have in the last two. … We think consensus estimates are shockingly low in the next 2-3 quarters and even lower 4-6 quarters out.”
Even if you don’t completely buy all the details of the analyst’s model, the broader argument remains convincing. Amazon has multiple fast-growth businesses that are all posted to benefit from accelerating economies of scale.
Quibble if you want, but AMZN stock is a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.