Wall Street Fails to Recognize Amazon’s Untapped Potential
As the most bullish analyst on Wall Street, Loop Capital’s Rob Sanderson believes that there is a crucial aspect of Amazon.com Inc.’s story that is being severely undervalued. In fact, Sanderson recently raised his price target on Amazon shares from $180 to $200, a view shared by an analyst from Itau Securities. Currently valued at $134.25, the stock presents an opportunity for growth.
One of the primary reasons for this undervaluation, according to Sanderson, is that investors are not fully appreciating the potential of Amazon’s AWS cloud-computing business. In Sanderson’s opinion, the consensus fails to accurately estimate the revenue potential of AWS, overlooking the rebound effect that occurs as attrition headwinds cycle through.
Sanderson’s own estimates for AWS revenue are considerably higher than the consensus. While the consensus predicts a certain revenue for 2024 and 2025, Sanderson proposes numbers that are $3.9 billion and $4.3 billion higher, respectively. It is important to note that these estimates do not even account for the potential growth generated by artificial-intelligence demand. Furthermore, his forecasts assume a decrease in new workload demand from current levels. Sanderson views these assumptions as highly conservative and believes they leave significant room for upside potential.
Sanderson emphasizes the influential role of AWS in shaping investor sentiment regarding Amazon. As the company’s largest lever, AWS can have a considerable impact on overall stock performance. This fact, coupled with Sanderson’s optimistic outlook on trends in the retail business, paints a positive picture for Amazon’s stock.
In conclusion, Wall Street may be overlooking Amazon’s true potential, failing to recognize the significance of its AWS cloud-computing business. With Sanderson’s bullish stance on Amazon shares and his belief in the positive trajectory of AWS revenue, the stock presents an appealing opportunity for investors. Additionally, Sanderson highlights the favorable trends in the retail sector, indicating potential for increased margins.
In light of the COVID-19 pandemic, the retail industry has undergone a remarkable transformation. According to Sanderson, a renowned expert in the field, the structural changes have significantly increased profit margins, particularly in terms of advertising and commission revenue. Surprisingly, Wall Street appears to be underestimating the potential of this aspect of the business. The prevailing consensus overlooks the margin implications of Amazon’s restoration of operational efficiency in fulfillment, coupled with the ongoing shift towards high-margin advertising and commissions.
Evaluating the Stock’s Valuation
Sanderson finds the valuation of this stock highly appealing. He emphasizes that it currently trades at a forward multiple of 14 times earnings before interest, taxes, depreciation, and amortization (Ebitda). This stands in stark contrast to the historical average of over 20 times. Although the market multiple has contracted from levels seen in 2020-21, it still remains higher than the 10-year trailing range. Sanderson asserts that this suggests the potential for multiple expansion as the retail margin story continues to unfold and investors increasingly recognize the growth recovery of Amazon Web Services (AWS). Furthermore, he believes that the advent of gen-AI solutions will prove instrumental in driving incremental cloud demand.
Looking Ahead
It is evident that the landscape of the retail business has evolved significantly in the wake of COVID-19. Sanderson’s expert analysis not only highlights the positive impact on profit margins but also points out the undervaluation of this particular stock. With a forward multiple that is currently lower than the historical average, there is ample opportunity for investors to capitalize on potential future growth. Experts anticipate an expansion of multiples as improvements in retail margins persist, AWS regains momentum, and advancements in gen-AI technology drive increased demand for cloud services.