Today, one Wall Street analyst is seeing significant potential in Amazon. Rob Sanderson of Loop Capital Markets recently reiterated a “buy” rating for AMZN stock. While he did reduce his price target short-term — from $3,750 t0 $2,825 — Sander emphasized that shares could still double in price if unit economics recover as expected by 2025.
Investors should examine this analysis in context. AMZN stock has been rallying this week after a recent market selloff pushed the tech sector down. As of this writing, it is up about 2% for the day.
June 3 will mark the historic Amazon stock split and a strong trading frenzy is to be expected. Anticipation is high as the split nears, keeping shares elevated. For that reason, Sanderson’s price target reduction isn’t likely to effect AMZN.
AMZN Stock: Two Key Predictions
Given Sanderson’s new price target, it’s tempting to assume he’s bearish on AMZN stock. It is important to note, though, that the new target is a reflection of “lower multiple for the retail sector” and should not be seen as a damning prediction about Amazon alone. “We misjudged the magnitude of inflationary pressure and excess capacity in the near-term but continue to think that unit economics will return to historic levels over time,” Sanderson said in a client note.
If unit economics do return to normal, this analyst thinks AMZN stock will ride the wave to historic highs. As he sees it, the stock could double in two years, reaching a new high of around $4,000 per share. Sanderson laid out the logic behind this predication:
“With what we consider reasonably conservative assumptions for improvement on unit economics, our framework points to retail operating margin of +7.5% by 2025 with about $40B in segment net profit. In this scenario, a 20x forward P/E on retail profits with 30x for AWS and Amazon could be a +$4,000 stock on recovery.”
Even if unit economics do not reach levels that high, they should still climb. AMZN stock will rise as they do.
The Bottom Line on Amazon
The future may be uncertain, but investors shouldn’t ignore Sanderson’s argument. If the analyst’s longer-term predictions are even close to being correct, the future of AMZN stock is very bright. Plus, with the stock split nearing, investors are about to hold even more shares. Their value will be temporarily diluted. But as long as unit economics recover — as Sanderson thinks they will — shares will regain plenty.
Amazon has no intentions of slowing down either. The e-commerce giant is potentially considering an acquisition of video-game giant Electronic Arts (NASDAQ:EA), for example. That kind of deal would be an excellent catalyst to boost shares after the split.
Looking forward, investors should be excited about AMZN stock — even if its price dips in the short term.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
