Here’s Why You Should Remain Bullish on Amazon (AMZN) Stock

Amazon (AMZN) made news late last week when the Wall Street Journal reported the e-commerce giant will open its own chain of brick-and-mortar grocery stores by the end of the year. While Amazon has disrupted much of the retail world, grocery remains an area where it has struggled to have the same impact has it has in other industries. But while many see this as a market-shaking piece of news (shares of grocery stores Krogers and Walmart traded down on the news), Evercore ISI analyst Anthony Diclemente is bullish on Amazon for an entirely different reason — gross profitability.

DiClemente reiterates an Outperform rating on AMZN stock, while raising his price target to $1,965, which implies nearly 15% upside from current levels. (To watch the analyst’s track record, click here)

DiClemente says that “the pace of Amazon’s [year-over-year] revenue growth often dominates headlines” but believes gross profit is a more important indicator for the company moving forward. DiClemente points out that, “given Amazon’s shifting business mix, the pace of gross profit growth has become a more relevant indicator of the health of the business, and as such, should be the key metric used to value the company.”

Judging amazon on gross profit over any other metric is a result of “1) the engine of growth for Amazon e-commerce is the 3P marketplace (>50% of units), where Amazon collects high gross margin fee revenue; and 2) the majority of profitability improvement [which] is coming from high-margin revenue buckets like Sub. Services (mainly Prime), AWS, and Advertising.”

The analyst remains bullish on Amazon “at least in part because the company’s gross profit is expected to grow ~400bps faster than revenue for AMZN over the next 3 years.” He continues, saying his “analysis of gross margins allows us a more granular approach to AMZN SOTP valuation, and includes a number of key valuation implications,” including first-party e-commerce (estimated at $230/share), third-party marketplace ($490/share), advertising ($150/share) and AWS($990/share).

All in all, Wall Street is extremely optimistic on Amazon. Amazon has proven itself as the outright leader in e-commerce, while customers continue to show preference for online shopping over that in stores. The retail giant’s success in AWS and now advertising has helped profitability, which has further boosted investor confidence in the company.

TipRanks analysts of 36 analyst ratings on the stock shows a consensus Strong Buy rating. Of the 36 analysts, only one recommends Hold while the rest say Buy. There is a $2,121.26 average price target on the stock, representing a 25% rise from current levels. (Get TipRanks’ free analysis report on AMZN)


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