Amazon.com (AMZN (opens in new tab)) stock has had a terrible 2022, but Wall Street says the e-commerce and cloud-computing (opens in new tab) giant is positioned for outsized returns next year.
J.P. Morgan analyst Doug Anmuth reminded clients of that fact on Monday, calling Amazon stock one of the research firm’s best ideas for 2023. The analyst reiterated his Overweight (the equivalent of Buy) recommendation on AMZN stock, as well as his price target of $145.
And Anmuth, whose price target gives Amazon stock implied upside of more than 50% in the next 12 months or so, is hardly alone in his ardor for the name.
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Of the 52 analysts issuing opinions on AMZN stock tracked by S&P Global Market Intelligence, 34 call it a Strong Buy, 15 say Buy, two have it at Hold and one calls it a Sell. That works out to a consensus recommendation of Strong Buy, which is a fairly rare honor on the Street. Only 24 stocks in the S&P 500 receive a consensus recommendation of Strong Buy (opens in new tab), per S&P Global Market Intelligence.
Meanwhile, the Street’s average target price of $142.70 likewise gives Amazon stock implied upside of more than 50% in 2023.
Amazon is benefiting from the “continued secular shift toward e-commerce and cloud growth,” Anmuth notes, and is finally poised to leverage years of capital investment in its fulfillment capacity. Those capital expenditures (opens in new tab) should pay off by allowing the company to expand its operating profit margin to 4.2% in 2023 from 2.4% this year, the analyst estimates.
Profitability will further be enhanced by the fast-growing Amazon Web Services (AWS) cloud-computing business and increased revenue from advertising, Anmuth says.
In addition to Amazon’s fundamental drivers, AMZN stock bulls say shares are cheap (opens in new tab) after losing more than 40% of their value so far in 2022.
For one thing, Amazon’s cloud-computing business alone is worth more than the value the market is assigning to the entire company.
Just look at Amazon’s enterprise value, or its theoretical takeout price that accounts for both cash and debt. It stands at $953.2 million. Meanwhile, AWS has an estimated enterprise value by itself of $1.2 trillion to $2 trillion, analysts say.
In other words, if you buy Amazon stock at current levels, you’re getting the retail business essentially for free. True, AWS and Amazon’s advertising services business are the company’s shining stars, generating outsized growth rates. But retail still accounts for more than half of the company’s total sales.
More basic valuation metrics tell much the same story with Amazon stock. Shares change hands at 54 times analysts’ 2023 earnings per share (EPS) estimate, according to data from S&P Global Market Intelligence. And yet AMZN stock has traded at an average forward P/E of 75 over the past five years.
That’s a compelling relative valuation. But even more compelling is that Amazon stock trades at just 30 times analysts’ 2024 EPS estimate.
Paying 30-times expected earnings might not sound like a bargain on the face of it. But then few companies are forecast to generate average annual EPS growth of more than 30% over the next three to five years. Amazon is. Combine those two estimates, and Amazon stock offers far better value than the broader market.
Lastly, let’s not forget that Amazon is in the midst of a massive cost-cutting campaign (opens in new tab) that will further boost operating earnings going forward.
Amazon management forecast a disappointing holiday shopping season (opens in new tab) and continues to worry about how inflation and a possible economic slowdown will impact consumer spending (opens in new tab).
No, the company’s problems won’t fade away overnight. But the selloff in Amazon stock does give patient investors (opens in new tab) a chance to buy a top-rated name at a deeply discounted price, bulls contend.
“Amazon likely faces a few challenging quarters, but continues to have a strong portfolio of assets,” writes Argus Research analyst Jim Kelleher, who rates shares at Buy. “We believe that the lagging performance provides an opportunity to establish or dollar-cost-average into positions in AMZN stock, which remains the undisputed category leader.”