UBS analysts think it's likely Amazon.com Inc (NASDAQ:AMZN) can expand its North American retail margins to double digits over time, calling the e-commerce giant their top idea in Internet while reiterating a ‘Buy’ rating on the stock with a 12-month price target of $175 per share.
In an update to clients, they noted that margins will get a boost as the company unveils efficiency drives like regionalizing its fulfillment network, pulls levers to recoup cost inflation, reduces investment levels in moonshots such as Alexa, and generally focuses on efficiency while keeping headcount growth moderate and grows into capacity.
“Long term, we could see margins approach 2020 ex-COVID margins which we estimate at 7% in North America and 6% overall,” the analysts wrote.
They also estimate the new 2% fees imposed on Seller-Fulfilled Prime (SFP) could lead to an incremental revenue of $0.5 billion to $1.3 billion to their 2024 estimates at high incremental margin of 85%, providing yet another level for retail margin expansion.
As well, analysts at UBS stated that scaling the advertising business presents another key lever for Amazon to show significantly higher margins in the retail business over time, as the company grew ad revenue from $8.5 billion in 2018 to what they estimate will be $52.6 billion in 2024.
Shares of Amazon.com climbed nearly 4% to $143.13 in late-afternoon trading on Monday and have gained 67% year to date.
Contact Sean at sean@proactiveinvestors.com