Tech stocks were outperforming the market before the coronavirus crisis, and they’ve held up best during the crash. Amazon (AMZN) is a case in point. The company is not only spectacularly well set up to deal with global disruption, but its core premise as an all-encompassing online retailer means it can reap the benefits of the current climate. To wit, while the S&P 500 has entered recession territory with this year’s 20% drop, and most of its peers have struggled since the outbreak began, Amazon is in the green, boasting a 4% upturn in 2020.
What’s more, as employees from a growing amount of struggling industries around the world have been sent home, Amazon has been expanding its work force to accommodate the extra demand, and is about to add 100,000 employees to its payroll.
The unusual activity has not gone unnoticed by Merrill Lynch’s Justin Post. The 5-star analyst reiterates a Buy on Amazon shares, along with a $2,480 price target. The upside from current levels is a solid 27%. (To watch Post’s track record, click here)
As is currently de rigueur on the Street, Post has been crunching the numbers on account of the coronavirus’ effect. As a result, the analyst has increased his revenue estimates for 2020 from $335 billion to $339 billion, while reducing operating profit from $16.5 billion to $13 billion.
These adjustments make sense. During these coronavirus impacted times, Amazon’s revenues will increase as it is seeing extra demand for its offerings. But the margins are lowered as these mostly involve grocery and consumer electronic products while there is less demand for higher margin items such as apparel. Add the extra work force being paid, and the implications are clear.
Post further explained, “Based on BAC card data, Target’s update and public data on Amazon’s hiring and category priorities, we are adjusting our model for: 1) higher expected sales (we now expect +23% y/y in F1Q vs. 21% prior), 2) $1.5bn of incremental 2020 fulfillment costs for additional labor hours and pay/benefits investments to support higher volumes and likely additional cleaning across stores & DCs; and 3) a lower gross margins to reflect mix shift to discretionary categories (Apparel & Accessories) to lower gross margin essentials and CPG, and 4) slightly lower 2Q cloud revenues as we expect an uptick in Online consumer activity to be offset by declines in new business (lift and shift and new customer additions).”
Overall, Amazon currently gets almost total support from the rest of the Street. Barring a single Hold rating, the online giant’s Strong Buy consensus rating breaks down into Buys only – 38, in fact. With an average price target of $2,432.91, the upside potential comes in at 24%. (See Amazon stock analysis on TipRanks)