Amazon Wins Another Bull After KeyBanc Upgrades Stock

Amazon.com, Inc. AMZN accelerated its profitability over the last few years, and one analyst suspects targeted efforts to improve retail margins will drive an impending inflection.

The Rating

KeyBanc Capital Markets analyst Edward Yruma upgraded Amazon from Sector Weight to Overweight with a $2,100 price target.

The Thesis

KeyBanc expects an inflection in profits before 2022 driven by retail, grocery, advertising and Amazon Web Services (AWS).

Amazon recently announced multiple initiatives slated to expand retail margins, including the closure of its 87 pop-ups and rollout of “Amazon Day” for consumer pickup. The latter is seen to reduce shipment costs.

KeyBanc also suspects efforts to rebalance the merchandise assortment. “We expect that lower velocity or low margin items will increasingly be 3P instead of 1P,” Yruma wrote in a note.

Overall, he anticipates retail margins expanding to the mid-single digits and generating $5 billion in incremental earnings before interest and tax.

Meanwhile, the mid-market grocery store — which Yruma anticipates to be a hybrid of Fresh Pickup and a high-volume mid-size grocer — could drive a margin tailwind.

“While grocery margins are generally low, if AMZN could incentivize consumers to pick up shipments, AMZN could dramatically lower shipping costs,” Yruma wrote. “A retrieved order could save 75 percent of shipping costs.”

By his estimates, advertising could surpass retail in profitability. The unit, in conjunction with AWS, could see revenue rise from $10 billion in 2015 to $100 billion in 2022.

Price Action

At time of publication, Amazon's stock traded at $1,699 per share.

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