Stock Analysis & Ideas

Amazon Stock Looks Primed for Takeoff

Shares of e-commerce and cloud-computing behemoth Amazon (AMZN) have been volatile as of late, following news that the stock is getting a 20-for-1 split.

That’s a huge deal that will open the door to a new world of small retail investors. Indeed, splits for big tech has been some sort of trend lately, and Amazon is jumping aboard the bandwagon.

Amazon’s Split and Share Repurchase Ignite a Bounce

Although splits are ultimately good for retail investors, they don’t add value for existing shareholders. In essence, it’s essentially cutting the same pie into 20 slices. You’re not technically getting any extra pie for free.

The most exciting announcement was not the split. It was the intention of buying back $10 billion worth of shares. Share repurchases are only a good thing if a stock is undervalued. After two years of consolidation and a brutal 20%+ plunge, I view AMZN as one of the cheapest FAANG stocks today. As such, I applaud the move. I remain as bullish as ever on AMZN stock.

Investors Quick to Forget the Incredible Quarter

The company blew away its last quarter, yet most have forgotten, and the stock is right back to where it was before the remarkable reveal. Essentially, investors get the quarter for free, with the stock now moving based on events weighing down broader markets.

Fourth-quarter revenues rose a modest 9% year-over-year, a decent, albeit muted gain against some pretty tough comparisons and ongoing headwinds, including supply chain woes, labor issues, and the inflationary impact that propelled shipping costs.

Although the growth wasn’t anything to write home about, it was remarkable that the firm was able to do as well as it did, given the perfect storm of headwinds for the quarter.

With one of the stickiest subscription services out there, Prime is unlikely to see too many cancellations with price increases factored in. Indeed, the company offers a nearly unmatched value proposition. This should allow Amazon to raise Prime prices with ease and help the firm move past pandemic-fuelled inflation that continues to persist.

With recent lackluster performance in the stock, I think the stage could be set for a massive earnings smash at some point down the road. Once price increases, better headwind management, and margin enhancements work their way in the numbers, Amazon stock could be in for another one of its big breakouts, perhaps before the bleak year concludes.

A Margin Push Could Be on the Way

Amazon has taken a hit to the chin, likely because of its 45.5 times trailing earnings multiple. It doesn’t tell the whole story, though. Robust growth and margin metrics suggest the company is on the cusp of a sizeable push towards greater profitability, thanks to AWS and advertising.

In the latest quarter, Amazon shined a bright light on its ad business. It comprises a tiny slice of the overall revenue pie, but it’s growing fast (up 32% in Q4) and could have a more influential (and positive) impact on the company’s profits moving forward.

Could it be that Amazon, the priciest FAANG stock based on price-to-earnings, is actually the most undervalued? I think that’s the case. Investors seem to be discounting the road ahead, which appears brighter than the one behind it.

Wall Street’s Take

Turning to Wall Street, AMZN stock comes in as a Strong Buy. Out of 33 analyst ratings, there are 33 Buy recommendations. The average Amazon price target is $4192.55, implying an upside potential of ~38%. Analyst price targets range from a low of $3,600 per share to a high of $5,000 per share.

The Bottom Line on Amazon Stock

Amazon looks primed (forgive the pun) for take-off. Share buybacks confirm my view that the stock is severely undervalued.

As the company moves past headwinds, I wouldn’t at all be surprised if a move towards the analyst consensus price target of ~$4,200 is in the cards once this brutal stock market sell-off concludes.

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