Amazon's stunning growth in a new unexpected market will boost the company's shares, according to a small Wall Street firm.
Atlantic Equities reaffirmed its overweight rating for the e-commerce giant, predicting its ad sales will nearly quintuple during the next four years.
"Amazon's advertising business is growing in importance, representing an increasingly material source of profits as Sponsored Products continues to grow rapidly and more brand-oriented offerings are introduced," analyst James Cordwell wrote in a note to clients Thursday entitled "Advertising's significance underappreciated."
"With additional benefits in building relationships with consumer goods and apparel companies, we have increased confidence in Amazon's long-term revenue and margin potential."
Cordwell raised his price target for Amazon shares to $1,250 from $1,120, representing 26 percent upside from Wednesday's close.
The analyst cited how the company's Sponsored Products sales grew more than 100 percent this year. The offering gives third-party sellers the ability to advertise on Amazon website's product search results. He predicts Sponsored Products sales will rise to $8.8 billion by 2020 from an estimated range of $1.5 billion to $2 billion last year.
"While Sponsored Products targets promotional ad dollars, we believe Amazon is also starting to focus on brand advertising," he wrote. "This represents a major revenue opportunity, but could also be important in building broader relationships with major apparel brands."
Cordwell predict Amazon's brand advertising sales will grow to $3.2 billion by 2020. As a result, he forecasts the company's total ad revenue will rise to $12 billion in four years from nearly $2.5 billion last year.
Amazon shares have rallied 33 percent this year through Wednesday, compared with the market's 14 percent gain.
Its shares are roughly flat in the Thursday premarket session after the report.