Amazon Features In Morgan Stanley Analyst's Top Pick, Says 'Shareholder Returns Could Be Needle-Moving'

Morgan Stanley analyst Brian Nowak had an Overweight rating on Amazon.Com Inc AMZN.

The analyst flagged that while Amazon investor sentiment has improved in recent quarters, the stock performance has still lagged mega-cap peers since July of fiscal 2021 (the beginning of the current Amazon CEO’s tenure) by anywhere from ~1800bp to 5600bp. 

Brian noted that execution missteps, AWS headwinds, retail overbuild, AI sentiment overhangs, and minor revisions led to the stock lagging. However, this is also why Amazon remains Brian’s top pick. 

The analyst noted that better execution, cost discipline, and revisions leave Amazon primed for outsized beats. 

Brian also said Amazon will likely deliver substantial free cash flow revisions from improving North American profitability, a surging digital ad business, and profitable, mid-teens AWS annual top-line growth. 

Brian stated three critical areas for Amazon to execute to drive multi-year outperformance. The areas included a more robust grocery strategy, AWS recapturing pole position in the cloud, and increased and consistent capital returns through a more extensive buyback program. 

Brian highlighted that shareholder returns could be needle-moving too, as even using 25% of annual free cash flow (starting in fiscal 2025) to repurchase shares at his price target would reduce the share count by 1%, and 100% of free cash flow would lead to a 4% reduction in share count.

A consistent capital return strategy would also likely lead to a higher multiple as investors would feel more comfortable capitalizing the free cash flow if they know they see a portion of it returned to them.

Price Action: AMZN shares are trading lower by 1.42% to $158.96 on the last check Tuesday. 

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