Amazon.com, Inc. AMZN shares haven't really taken off this year. An analyst at Morgan Stanley delved into the valuation of the e-commerce giant, which is currently at a trough, and how it can bounce back.
The Amazon Analyst: Analyst Brian Nowak maintained an Overweight rating and $4,300 price target on Amazon shares.
The Amazon Thesis: Investment spending is real at Amazon, and signs of growing 3P logistics and same-day shipping offerings signal where the company is investing for multi-year growth, Nowak said in a note.
Amazon is opening more logistics square feet than Morgan Stanley expected, with more staffing, and higher cost per hour, the analyst said. The company is now reportedly enabling sellers to use Amazon logistics and shipping services to sell items on rival marketplaces, he added.
This is a continuation and next key step in Amazon's multi-year investment and pushes into fulfilling and shipping more of the $550 billion non-Amazon e-commerce in the U.S., the analyst said.
Amazon's same-day offering reach doubled to 18% of the U.S. population, Nowak noted.
"While we believe part of this investment is related to 'catching-up' to outsized demand from 2020, we believe part of it is related to new initiatives to drive continued durable multi-year growth," the analyst wrote in the note.
Related Link: Why This Amazon Analyst Sees Risk To Short-Term Revenue Guidance
Amazon shares, the analyst said, are back at their historical trough multiple, as profit uncertainty has driven the stock down to 16 times on Morgan Stanley's new lower 2022 EBITDA estimate. The valuation suggests investment spending is priced in, the analyst said.
The returns and faster growth from these investments will hinge on the following three factors, the analyst said.
- Faster-than-expected top-line growth from the current businesses into the holidays
- Growing evidence of traction of third-party logistics and/or faster share gains in the same day cities
- Lower-than-expected company-wide incremental profit pressure from investment spend
The continued strength of Amazon's high margin revenue streams including AWS, advertising and subscription are fueling this investment and eventual outsized profitability, Nowak said.
AMZN Price Action: At last check, Amazon's shares were down 0.11% at $3,341.25.
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