Analysts at two major Wall Street firms are optimistic about Amazon. Here's why we are, too

Published Tue, Oct 4 202212:40 PM EDTUpdated Tue, Oct 4 20221:42 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

A pair of positive Wall Street notes on Club holding Amazon (AMZN) hit the tape Tuesday, with analysts maintaining their long-term optimism despite an uncertain macroeconomic outlook. We're encouraged by the research. One of JPMorgan’s top picks The note: JPMorgan’s internet analysts still highlight Amazon as the best idea in their coverage universe “by a wide margin,” favoring the e-commerce and cloud giant over the likes of Netflix (NFLX), Club holding Alphabet (GOOGL) and Pinterest (PINS). Among the reasons for JPMorgan’s optimism: a belief that revenue will accelerate on a year-over-year basis, margins will improve, and moderation on capital expenditures will persist. Put it all together, and the firm expects free cash flow in 2023 to be around $28 billion, a level similar to 2019 and 2020. The analysts acknowledge concerns about the resiliency of Amazon’s e-commerce business in a potential recession. However, JPMorgan argues, “We continue to think higher in-stock levels and faster delivery speeds will be key drivers as Prime returns to normal.” Investors also appear worried about a slowdown affecting Amazon Web Services, the company’s main profit engine, according to JPMorgan. Nevertheless, the analysts there see the unit growing revenue by 31% in the third quarter, slightly above the Wall Street consensus of 30% growth. They also reference AWS's roughly $100 billion backlog. The strong U.S. dollar headwind is another consideration. “We model total [currency-neutral] growth of 19% in 3Q & 20% in 4Q, though we recognize FX will of course weigh on reported growth & profitability,” the analysts wrote. “AMZN is, however, better hedged than some others, with product costs in the local currency and AWS Revenue mostly in USD.” Jefferies sees attractive risk-reward The note: Based on a refreshed sum-of-the-parts analysis, Jefferies analysts believe Amazon's market price places "virtually zero" value on the company's core retail business. A sum-of-the-parts (SOTP) analysis values each part of a company individually, using the multiples that peer businesses receive to help determine what, say, Amazon Web Services is worth on its own. Then, the analysts will add up the values of each unit to determine what the whole company could be valued at. When Jefferies completes this exercise for Amazon, the firm arrives at a value of $1.3 trillion for its non-retail business, which includes $938 billion for AWS, $366 billion for its growing advertising unit, and $40 billion in subscription revenues. Amazon shares have a current stock market value just over $1.2 trillion. "Our SOTP suggests investors are getting the retail business nearly for free," the analysts wrote. The firm values Amazon's core retail operations at roughly $300 billion. As a result, the analysts argue investors are getting a $29 per share "free option at AMZN's current price as the stock already embeds meaningful headwinds from a recession/cost inflation, which limits downside and creates an attractive risk-reward." Beyond just the SOTP analysis, Jefferies points to Amazon's efforts to reduce expenses as one lever to help improve the company's operating income next year, which could help offset a slowdown in revenues related to the weaker macro environment. The company's second Prime Day next week "should cushion estimates against a softer macro," as well, Jefferies predicted, citing a survey the firm conducted that found around 82% of Prime members would participate in the October shopping event. The Club's take We welcome these positive Amazon notes because we also share a similar favorable attitude toward the company. We have a 1 rating on Amazon, meaning we see the stock as a buy at current levels. Jim Cramer has said recently that for new Club members who don't have a mega-cap tech stock in their portfolio, Amazon is the one he'd start with . Just over a week ago, we took advantage of the multiweek slump in Amazon shares to add to our position, buying 75 shares at roughly $116.49 apiece . The price quoted in our trade alert was $113.93, but the price we pay usually differs from our emails because we always wait 45 minutes to book the trade after sending the alert in hopes that our Club members receive a better price than what we do. We're especially glad we made that purchase before these optimistic notes on AMZN dropped. With the overall market in day two of a rally, Amazon shares surged almost 6%, to nearly $123 apiece Tuesday. One reason we've recently become more constructive on Amazon is management's commitment to rightsizing the retail business and getting costs back under control — something both JPMorgan and Jefferies spoke to in their respective notes. Management has been candid that the company expanded too aggressively in an attempt to keep up with the Covid-fueled boom in online shopping, which ultimately hurt profitability. We remain willing to be patient as CEO Andy Jassy works to correct these issues because the main tenants of our investment thesis, such as the growth of cloud computing, are intact. We expect to hear further updates on expenses when the company reports third-quarter earnings later this month. The recent decline in fuel and shipping costs will help in these efforts. Before the Q3 numbers drop, though, we'll also get that second Amazon Prime Day event on Oct. 11-12 about three months after its first global shopping event this year generated record sales. We think this is a well-timed event ahead of the holidays — and the survey data Jefferies cited certainly suggests the second Prime Day could be a success. (Jim Cramer's Charitable Trust is long AMZN and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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A sign directs traffic at an Amazon fulfillment center. Being the world's largest online retail company, Amazon operates more than 175 fulfillment centers worldwide, totaling in over 166 million square feet.

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