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Amazon: Set Up to Deliver Strong ‘Multi-Year Profitability,’ Says Analyst

Throughout the pandemic, Amazon (AMZN) invested in its fulfillment and delivery network. The company has also been on a hiring spree and has raised wages. All have resulted in elevated costs. Now, to offset the cost increases, the ecommerce giant has announced its FBA (fulfillment by Amazon) fees are set to rise by an average of 5.2%, beginning on January 18.

While this is bad news for sellers, specifically those who use the FBA service, Morgan Stanley’s Brian Nowak thinks it will be good news for shareholders, as the price increase provides a “potential ~$1bn (3%) cushion to ’22 EBIT.”

Historically, Amazon increases its FBA price by roughly 2%-3% per year so this hike is larger than normal. Nowak estimates Amazon’s FBA revenue haul in 2021 was around $45 billion, with the present 2022 forecast based on a typical ~2-3% annual increase incorporating 18% growth and resulting in revenue of $54 billion. “As such,” the 5-star analyst notes, “~5% pricing increase would add an incremental ~$1.2bn of revenue and (assuming an 80% flow through) ~$1bn of EBIT.”

But there’s a bigger picture to look at here. While Nowak thinks that the 5% pricing increase “may not be material alone,” the analyst believes it is just one example of the “many levers and factors” which set the company up to to “deliver stronger multi-year profitability.”

These include Covid costs declining, Amazon’s scale and “high margin revenue streams,” improving on labor inefficiencies, while Nowak also ponders whether a Prime price increase is in the cards, too.

As such, the analyst believes the current valuation is “under-appreciating the multi-year durability of top-line retail revenue growth and company-wide profitability (from retail and high margin revenue streams) as the company grows into its outsized ’20/’21 build.”

Going by Nowak’s $4,000 price target, the “under-appreciation” means Amazon shares are presently undervalued by 12%. (To watch Nowak’s track record, click here)

Amazon is a unique beast on Wall Street with large and unanimous coverage; all 30 recent reviews are positive, naturally resulting in a Strong Buy consensus rating. The $4,095 average target is a touch higher than Nowak’s objective and set to generate returns of 14% in the year ahead. (See Amazon stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.