There’s an opportunity brewing for Amazon (NASDAQ:AMZN) in 2024. That at least is the opinion of Morgan Stanley analyst Brian Nowak, who thinks that by “scaling retail FCF and re-accelerating AWS,” the bulls should be out in full force for the e-commerce giant.
“In our view better execution, cost discipline and revisions leave AMZN primed for outsized beats,” Nowak explained. “In effect, we believe AMZN is set to deliver substantial FCF revisions from improving N. America profitability, a surging digital ad business, and profitable, mid-teens AWS annual top-line growth.”
So, that’s the expectation for 2024, but what about further down the line? Nowak thinks that for investors to get fully confident with the longer-term AMZN story, the company has to improve on 3 different fronts.
One of those is by presenting a “stronger grocery strategy.” Nowak reckons around ~50% ($1.6 trillion) of the remaining offline personal consumer expenses in the U.S. are attributed to purchases in the categories of groceries, household items, and personal care. Although there is potential for growth in areas beyond groceries in the coming years, the significance of grocery and consumer packaged goods (CPG) is expected to rise. According to Nowak’s projection, grocery will contribute to approximately 30% of the overall e-commerce dollar growth in the U.S. between 2023 to 2027. “AMZN needs to drive and enable this online shift, as the multiple the market is willing to pay for AMZN will be impacted by growth durability,” Nowak elaborated on the issue.
Secondly, AWS needs to reclaim top dog status in the Cloud game. Nowak expects 2023 will be the first year in which AWS revenue will see fewer revenue dollars added compared to Microsoft’s Azure and that has tainted investors’ perception of AWS. “Execution and go to market need to fix this,” says Nowak, “because AWS’s multi-year growth durability is going to matter to driving revisions and AMZN’s multiple over the next 3-5 years.”
Lastly, given Nowak’s expectation of Amazon generating substantial amounts of FCF (~$59/$82 billion in 2024/2025), he thinks the company should offer improved capital returns via a larger buyback program. “We have seen AAPL, MSFT, META, and GOOGL all start more aggressive capital and share repurchase programs over the past 3 years,” says the analyst. “We would argue… its time for AMZN to join this club.”
All in all, Nowak reiterated an Overweight (i.e., Buy) rating on AMZN shares backed by a $185 price target. Should the figure be met, investors will be pocketing returns of 16% a year from now. (To watch Nowak’s track record, click here)
Support on Wall Street for AMZN is unanimous. Based on Buys only – 37, in total – the stock claims a Strong Buy consensus rating. The forecast calls for one-year returns of 18%, considering the average target clocks in at $187.4. (See Amazon stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
