Amazon’s (AMZN) plunge into one-day shipping isn’t necessarily a surprise, but that the company is already facing increased costs associated with the new offering, is a surprise.
Though Amazon warned it would invest an additional $800 million to ensure things run smoothly, last month’s second-quarter earnings showed that costs are quickly adding up. Profit came in lower than expected, with Amazon CFO Brian Olsavsky making clear that this is just the beginning. Nevertheless, the company expects to gain massively in the long-term, as more customers are expected to shop on Amazon because of the faster shipping.
Indeed, after undertaking a ‘deep-dive’ analysis into Amazon’s new Prime One-Day Shipping initiative, 5-star RBC analyst Mark Mahaney has raised his price target for Amazon stock by $50, to $2,600 per share, while maintaining an Outperform rating on the stock. Rising revenue, with one-day shipping as the catalyst, is the driving force in the analyst’s price target raise.
As always, we like to give credit where credit is due. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Mahaney has delivered to his followers a yearly average return of 19.5% with a 60% success rate. Mahaney has earned an average return of 30.1% when recommending Amazon stock and is ranked #78 out of 5,525 analysts.
Though Amazon stock is down following July’s earnings release, the retail giant reported accelerated revenue and paid unit growth, which Mahaney partly attributes to one-day shipping. The analyst believes Amazon “may well generate accelerating Revenue & Unit growth for some time as One-Day goes nationwide & worldwide,” helping offset rising costs. Furthermore, Mahaney says Amazon is “tapping into real demand here” for One-Day, as his survey found the majority of US internet users are interested in such quick service.
Mahaney sees a cycle with one-day making Prime more appealing for consumers, which makes FBA (fulfillment services) more appealing for vendors, which increases supply on Prime, which makes Prime more appealing for consumers…
Mahaney sees one-day as the driving force to stronger growth. The analyst raises his 2020E and 2021E revenue forecast about 1% each, and expects growth to increase from an estimated 20% in 2019, to 21% and 22% in 2020 and 2021, respectively.
All in all, Amazon’s strong hold on the fast-growing e-commerce retail segment makes it one of Wall Street’s favorite stocks for now, and the future. Making matters even better is the one-day shipping offer, which will become commonplace for Prime shoppers very soon. TipRanks analysis of 29 analyst ratings on the stock reflects this, showing a Strong Buy consensus, with all 29 analysts recommending Buy. The average price target stands at $2,298.93, which represents nearly 28% upside from current levels. (See AMZN’s price targets and analyst ratings on TipRanks)