Amazon shares are up 1.8% in recent trading.
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Amazon.com shares have been under pressure lately, down about 11% since the e-commerce and cloud-computing giant reported June-quarter results on July 29, underperforming the 3% decline on the S&P 500 over the same period.
The company has been beset by myriad worries about its core online retailing business—and therein lies an opportunity for intrepid investors.
In a research note Tuesday, J.P. Morgan analyst Doug Anmuth examines the issues that have been weighing on Amazon shares (ticker: AMZN) and concludes that the logic for owning the stock remains intact. He repeats his Overweight rating and $4,100 price target, a potential 30% return from recent levels.
Amazon shares are up 1.8%, at $3,248, in recent trading. The S&P 500 is up 1.3%.
Anmuth finds there are four key issues for Amazon investors.
For starters, there are concerns about second-half revenue deceleration, given tough year-ago period comparisons and a broader slowdown in U.S. e-commerce spending growth. He notes that credit-card spending data from Chase confirms recent deceleration, but adds that the numbers look more stable on a two-year basis. He sees Amazon reporting gross merchandise value growth of 12% in the third quarter and 8% in the fourth quarter, with companywide revenue of $111 billion, up 15%, in the third quarter, and $138 billion, up 10%, in the fourth quarter, driven by strong growth in both cloud computing and advertising revenue.
Amazon has projected September-quarter revenue of $106 billion to $112 billion.
Another concern, Anmuth says, is the potential impact on Amazon’s ability to deliver products given supply-chain disruptions, “with more than 60 ships off the coast of Los Angeles and freight rates spiking.” But he thinks some disruptions are already reflected in both third-quarter guidance and the Street’s fourth-quarter estimates. And he adds that Amazon has pulled forward the timing of taking inventory ahead of the holiday season to help ease disruptions.
Meanwhile, Amazon continues to invest heavily in its logistics business. Anmuth thinks the company will add 30% to 40% to its warehouse network in 2021, while also expanding its transportation buildout. He adds that the investment “suggests Amazon remains bullish on long-term demand and future growth.”
The other question investors face, Anmuth writes, is what will get the stock going again. He thinks “current caution” is working through the stock and that some will want to own Amazon heading into the holidays. He also notes that Amazon is close to lapping the toughest Covid-period comparisons. Anmuth thinks some Street earnings estimates are too high and likely to be reduced, but views that as lowering the bar and potentially acting as a “clearing event” for the stock. And he also sees a potential Amazon Prime price hike in 2022 driving the stock higher.
“We recognize the near-term concerns and uncertainty over the next few months, but we believe there is still significant secular shift toward e-commerce ahead and Amazon has a very strong track record around investing into future growth opportunities,” he writes. Anmuth notes that the stock trades for less than 15 times his below-consensus 2023 estimates on Ebitda, or earnings before interest, taxes, depreciation, and amortization, and finds the stock to offer investors a “compelling opportunity.”
Write to Eric J. Savitz at [email protected]
