Amazon.co.uk (AMZN (opens in a new tab)) the stock had a terrible 2022, but Wall Street says e-commerce and cloud computing (opens in a new tab) giant is positioned for outsized returns next year.
JP 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 recommendation (l purchase equivalent) on AMZN stock, along with its price target of $145. .
And Anmuth, whose price target gives Amazon stock an implied upside of more than 50% over the next 12 months or so, isn’t the only one keen on the name.
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Of the 52 analysts issuing opinions on AMZN stocks tracked by S&P Global Market Intelligence, 34 call it a strong buy, 15 say it buy, two have it on hold and one calls it a sell. That equates to a Strong Buy Consensus Recommendation, which is a pretty rare honor on the high street. Only 24 S&P 500 stocks receive a consensus recommendation of strong purchase (opens in a new tab)according to S&P Global Market Intelligence.
Meanwhile, the average street price target of $142.70 also gives Amazon stock an implied upside of over 50% in 2023.
Amazon is taking advantage of “the continuing secular shift toward e-commerce and cloud growth,” notes Anmuth, and is finally poised to leverage years of capital investment in its ability to execute. Those capital expenditures (opens in a new tab) should pay off by allowing the company to increase its operating profit margin to 4.2% in 2023 from 2.4% this year, the analyst estimates.
Profitability will be further boosted by Amazon Web Services’ (AWS) fast-growing cloud computing business and rising advertising revenue, Anmuth said.
In addition to Amazon fundamental drivers, AMZN bulls say stocks are cheap (opens in a 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 places on the company as a whole.
Just look at Amazon’s enterprise value, or its theoretical selling price which factors in both cash and debt. It amounts to 953.2 million dollars. Meanwhile, AWS alone has an estimated enterprise value of $1.2 trillion to $2 trillion, analysts say.
In other words, if you buy Amazon stock at current levels, you’re getting retail trading essentially for free. Certainly, the advertising services businesses of AWS and Amazon are the shining stars of the company, 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 stocks. Shares are changing 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 P/E of 75 over the past five years.
That’s a compelling relative valuation. But what’s even more compelling is that Amazon shares are trading at just 30 times analysts’ 2024 EPS estimate.
Paying 30 times the expected profit may not seem like a good deal at first glance. But few companies are expected to generate average annual EPS growth of more than 30% over the next three to five years. Amazon is. Combine these two estimates and Amazon shares offer much better value than the broader market.
Finally, let’s not forget that Amazon is in the midst of a crisis cost reduction campaign (opens in a new tab) this will further increase the operating profit in the future.
Amazon management expects disappointing result holiday shopping season (opens in a new tab) and continues to worry about the impact of inflation and a possible economic slowdown consumer spending (opens in a new tab).
No, business problems will not disappear overnight. But the liquidation of Amazon shares gives patient investors (opens in a new tab) a chance to buy a blue chip name at a deep discount, the bulls claim.
“Amazon is likely facing a few tough quarters, but continues to have a strong portfolio of assets,” writes Jim Kelleher, an analyst at Argus Research, which rates stocks at Buy. “We believe the lagging performance provides an opportunity to establish or average dollar cost positions in AMZN stock, which remains the undisputed category leader.”