Understanding the inner workings of multi-faceted industry giants can help investors better understand the thinking behind their business models.
With this in mind, Morgan Stanley’s Brian Nowak thinks an in-depth analysis of Amazon’s (AMZN) engineering workforce provides some revelations.
Excluding AWS, out of a total headcount of a huge ~1.5 million, Amazon employs around 68,000 engineers. For comparison’s sake, this is just about the same as Meta’s total employees and ~4.3x more than the total headcount of SNAP, PINS and TWTR… combined.
Assuming a $275,000 per head cost, Nowak estimates total investment in engineering in 2021 amounted to ~$18.8 billion. While the analyst notes that the majority work on “core, large” Amazon products, the company also has a “significant number of more than 10 long-term and yet-to-emerge ‘other bets’ that they are investing in.” So, even if only 30% of the engineers are working on these projects, it would imply around $6 billion spent on “other bets” investments.
While it is hard to estimate the breakdown of these engineers’ primary tasks, the “sheer size” of this employee base, says Nowak, “speaks to the opex impact.”
Ok, but what does this ultimately mean? Nowak explained: “Given we estimate a significant majority (80%) of these investments are allocated toward the N. America segment, the midpoint of our sensitivity (i.e., the 30%) would imply that core N. America retail margins are already operating at a 4.3% margin…~160bp higher than the expected 2.7%.”
If this is correct, Nowak says, the company has a “disclosure opportunity” which will help investors “better understand the still-strong underlying unit economics of AMZN’s retail business.”
“In addition,” added the 5-star analyst, “Disclosure like this is likely to become even more important as AMZN’s retail unit economics recover in ’22/’23and (presumably) the company’s investment in engineers grows.”
All in all, Nowak rates Amazon shares an Overweight (i.e., Buy) rating along with a $4,200 price target, suggesting shares have room for ~30% growth in the year ahead. (To watch Nowak’s track record, click here)
Turning now to the rest of the Street where there are 30 analyst reviews on file currently, and uniquely, all are positive, providing the stock with a Strong Buy consensus rating. At $4,150.83, the average price target could potentially yield returns of 26% over the one-year timeframe. (See Amazon stock forecast 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.
