Morgan Stanley Bullish On Amazon's New Automated Stores

Amazon.com, Inc. AMZN announced this week that it plans to open 3,000 Amazon Go stores over the next three years, with roughly 50 slated for 2019 openings. 

The Analyst

Morgan Stanley analyst Brian Nowak maintained an Overweight rating on Amazon with a $2,500 price target.

The Thesis

The e-commerce market is becoming more asset-intensive and logistics-focused, and it will be imperative for sector leaders to improve data sets and technology to generate returns, Nowak said in a Thursday note. (See his track record here.) 

Amazon's investment in Go stores could total $500 million to $3 billion, the analyst said. “Given AMZN’s need to invest in in-store automation technologies, cameras and sensors, we would not be surprised to see the cost toward the higher end of this range.”

While this investment appears significant, it is small relative to Amazon’s $200-billion 2018 retail opex, and the stores are likely to operate at higher-than-average grocery margins, Nowak said.

Despite an additional push into pharmacy, Nowak said he expects grocery to remain Amazon's focal point.

“Given this size, combined with the fact that AMZN is now driving two-thirds of the growth in its addressable U.S. consumer expenditure, we think at some point over the next few years AMZN may need grocery to maintain its strong sales growth. Grocery is also an important order/traffic velocity driver, given the average U.S. consumer visits the supermarket 1.6X per week.”

Go’s technology should further Amazon’s attempts to produce deeper and more integrated relationships with consumers while driving stronger purchase behavior and increased data capture, in Morgan Stanley's view. 

Price Action

Amazon shares were up about 1 percent at $1,944.44 at the time of publication Thursday.

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An Amazon Go store in Seattle. Photo by Sikander Iqbal/Wikimedia.