Amazon.com Inc (NASDAQ:AMZN)’s shares have climbed 71% so far in 2023 but analysts at Jefferies see more upside due to an improving outlook for its Amazon Web Services (AWS) unit and its enhancing position in artificial intelligence.
From its Tuesday’s close at $144, the analysts noted that Amazon has another 22% to go to meet their $175 price target.
The company's shares gained 2.2% to $147 on Wednesday morning.
The analysts noted that AWS and advertising account for 43% and 31% of Amazon’s valuation respectively. Although they only comprise roughly 25% of net sales, they contribute the majority of the company’s operating income.
“To put their impact into perspective, we expect AWS alone will comprise 71% of AMZN's total operating income in FY23, but only 16% of AMZN sales,” the analysts wrote in a client note.
“Encouragingly, we highlight that AMZN's most profitable segments (AWS and Advertising) are expected to also be the two fastest growing segments in 2024E and 2025E, which should aid further margin expansion as North America fulfillment benefits from regionalization changes.”
The analysts see the opportunity for Amazon to drive continued positive estimate revisions as its “regionalization” strategy to ship products to customers from the warehouses closest to them results in lower fulfillment costs, its international losses narrow and margins at AWS recover.
Additionally, while investors don’t appear to be embedding value in Amazon’s shares today for its AI efforts, the analysts expect the company to launch multiple AI efforts in 2024, supporting their valuation.
“On the 3Q23 earnings call (CEO) Andy Jassy highlighted that he believes generative AI will contribute ‘tens of billions of dollars of sales for AWS over the next several years,’” the analysts said.
“We are raising our FY24 operating income estimate by 2% and are now 3% above consensus. However, we believe NA regionalization efforts, an AWS margin recovery and continued cost discipline could drive upside to our above consensus estimates.”
Contact the author at stephen.gunnion@proactiveinvestors.com