E-commerce kingpin Amazon (NASDAQ:AMZN) kind of lost its crown last year, as the stock shrank 47% over the course of 2022 in the midst of an investor revolt against overvalued tech stocks. Amazon has started to come back in 2023, however, with the stock gaining 19% since the start of the year.
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Now… where will Amazon go from here?
Morgan Stanley analyst Brian Nowak has some thoughts on that score, and he laid out his bull case for buying Amazon stock.
There are, says Nowak, five “key debates” that investors are having about Amazon right now. The first of these concerns the company’s profitability. Specifically, looking past a potential recession in 2023, “how profitable could North America retail” be for Amazon in 2024? And the answer is: Pretty profitable.
Focusing on Amazon’s 7% year over year improvement in the cost of shipping items to its customers in Q4 2022, Nowak predicts that if this trend continues, Amazon could achieve 4% margins in its retail business by the end of this year, then average 3.6% operating profit margins in 2024. Year over year, he sees margins of 4.5% in the final quarter of 2024 — so a 50 basis point improvement over this year.
To put all of that in context, the operating profit margin for all of Amazon, including its incredibly profitable AWS division, was only 2.4% in 2022 — so we’re talking a big improvement even just this year, and even bigger in 2024.
Speaking of AWS — that’s the second thing Nowak wanted to talk about. Noting that growth has slowed in AWS already, he predicts that AWS’s growth rate will trough around mid-year in the “mid single digit y/y growth range.” Then it will reaccelerate. By 2024, he sees AWS growing at a respectable 19% rate again. At the same time, the division will still be uber-profitable for Amazon, with operating profit margins of about 22% this year, and 24% in 2024.
Capital spending is the third Amazon topic Nowak chooses to tackle. The good news here is that he sees Amazon ratcheting back on capital spending in both retail and AWS. After spending $64 billion on capex in 2022, Nowak sees that number falling to $56 billion in 2023 before rising back up towards $63 billion again in 2024. As cash from operations bounces back, this should result in positive free cash flow for Amazon again in both years.
This is good news for Amazon investors because Nowak’s fourth topic — international retail sales — is “less optimistic,” featuring continued losses for Amazon, caused primarily by “macro weakness” across the United Kingdom, Germany, and Japan.
Taken as a whole, however, the forecast looks pretty good for Amazon stock, at least according to Nowak. If he’s right in his assumptions, Wall Street estimates for 2023 operating earnings could be as much as 21% below what Amazon will actually earn, and 2024 assumptions could be off by as much as 15%. All of which adds up to a bullish prognosis for Amazon stock.
To this end, Nowak rates Amazon shares an Overweight (i.e. Bu), with a $150 price target that implies almost precisely 50% upside for the stock this year. (To watch Nowak’s track record, click here)
Does the rest of the Street think AMZN can outperform in the long run? As it turns out, other analysts say yes. 36 Buy ratings compared to just 3 Holds add up to a Strong Buy consensus rating. At $137.05, the average price target puts the upside potential at 37%. (See AMZN stock forecast)
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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.
