Amazon (NASDAQ:AMZN) has been a performance machine for investors. AMZN stock is up 420% over the past five years, and nearly 20% so far in 2019. However, there’s some ground to make up before AMZN hits the trillion dollar market cap level again, a rarified club the company was in last September and then briefly again this July.
To hit $1 trillion again, Amazon stock would need to surpass the $2,000 level. Most analysts have a price target on AMZN well above $2,000. But an RBC analyst is making headlines for his call that the rollout of one-day Prime shipping is going to cause AMZN stock to hit $2,600 over the next year.
How realistic is this assessment? Could the move to next-day free Prime shipping really propel Amazon stock to 45% growth over the next 12 months?
RBC’s Bull Case for AMZN Stock
Over the weekend, RBC Capital Markets’ Mark Mahaney released a note to investors in which he extolled the boost that the move to next-day Prime shipping is expected to have on Amazon’s bottom line (via CNBC):
“We believe AMZN may well generate accelerating revenue & unit growth for some time as One-Day goes nationwide & worldwide.”
According to his model, the move to improve the current two-day free Prime shipping to one-day (announced in April) will drive increased membership in Amazon Prime. In addition, the prospect of getting most of their purchases the next day will increase the amount of spending per household. Mahaney predicts the combined effect could boost Amazon’s revenue 7% to 15%, and as a result he’s raised his estimates for AMZN revenue in 2020 to $337 billion.
Based on that math, RBC raised its 12-month price target on Amazon stock from $2,250 a share (the current median AMZN stock price target) to $2,600 a share. With Amazon currently trading around $1,800 that would represent 12-month growth for AMZN stock of 45%.
There Are a Few Hurdles to Overcome…
Amazon has proven itself capable of implementing big changes on a massive scale and in minimal time. The company has invested $800 million this year in infrastructure upgrades to support next day Prime delivery. But there are a few hurdles that Amazon will have to overcome if it’s going to hit the kind of numbers RBC is looking for.
Naturally, Amazon’s competitors aren’t sitting still. Shortly after AMZN announced the planned upgrade for Prime shipping, Walmart (NYSE:WMT) said it would offer free one-day delivery on 220,000 items to 75% of the country by the end of this year.
The U.S. Department of Justice is currently investigating FANG stocks — which includes AMZN — for signs of practices that may have stifled competition and hurt consumers. This is unlikely to result in a breakup of Amazon, but the investigations could be a drag on AMZN stock.
The ongoing trade war with China could prove more troublesome. The latest round of tariffs on Chinese goods will see prices rise on many items Amazon carries. If the situation continues to escalate, consumers could begin cutting back on spending — despite being able to receive their online purchases faster than ever.
Finally, there’s a possibility the one-day delivery plan itself could come under attack. A recent article accusing Amazon of hooking Americans on fast delivery while using third party delivery drivers to avoid responsibility for deadly crashes has been raising tough questions.
Can AMZN Do It?
The phenomenal growth of Amazon, and the resulting performance of Amazon stock, leaves no doubt that the company is capable of implementing change rapidly and at a massive scale. It also leaves no doubt that consumers respond to AMZN’s big moves.
Along with Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), Amazon is one of very few companies that has achieved a trillion dollar market cap, even if it was briefly. If there’s anything that seems likely to push AMZN back into that club — and keep it there — it’s the move to one-day Prime shipping.
But we’ll have to wait another year to see if RBC made the right call in predicting AMZN stock will rocket past that lofty level, and hit $2,600.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
