Amazon Can Outperform With AWS And Ad Revenue Surge: Analyst

Wedbush analyst Scott Devitt reiterated Amazon.com Inc AMZN with an Outperform and a $180 price target.

Amazon will report 3Q23 results on October 26 after the market closes. Shares have underperformed the market and mega-cap tech since the stock’s initial move higher following 2Q results.

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Devitt said investor sentiment for Amazon is mixed heading into 3Q results as investors continue to debate the trajectory of AWS growth and the company’s overall AI strategy, regulatory challenges and the outcome of the FTC lawsuit filed last month, potential retail margin pressure due to rising oil prices and ongoing competition from Chinese entrants. 

The analyst sees catalysts ahead as retail margins continue to increase and AWS growth accelerates against easing comps. 

With margins rising, Amazon stock is well positioned for a period of outperformance.

The analyst analyzed ten years of historical data and identified all periods when Amazon’s operating margin increased or decreased on a Y/Y basis for two or more consecutive quarters. 

Devitt then compared share price returns during those periods and found that, on average, AMZN shares have appreciated 84% when operating margins are rising versus just 1% when operating margins are declining.

He believes the company is early in the current margin cycle, with ~360bps of expected Y/Y margin expansion in 2H23 and ~140bps likely in 2024, supported by rising fulfillment utilization, easing inflation, limited corporate headcount growth, and continued advertising momentum. The backdrop for digital advertising growth remains healthy. 

Amazon should continue to attract a significant share of incremental retail media ad dollars, in addition to off-platform advertising opportunities and the recently announced introduction of video ads on Prime Video, which he said could add $6.6 billion to $8.0 billion of annual revenue. 

The ongoing mix shift to higher margin advertising revenue and rising margins in the core retail business should support North American segment margins above pre-pandemic levels by 2025. 

While Devitt acknowledges the uncertainty related to AWS, he said investors may be overlooking the relative strength of the advertising business, which is on pace to reach $46 billion this year and is likely operating at margins above 60% versus ~25% for AWS.

The analyst reiterates 3Q revenue of $142.0 billion (+11.7% Y/Y), roughly in line with consensus of $141.6 billion.

eCommerce growth expectations for the holiday season are mid-single to the low-double-digit range.

Price Action: AMZN shares traded lower by 1.51% at $129.46 on the last check Wednesday.