It hasn’t been a great year for Amazon’s (AMZN) - Get Amazon.com, Inc. Report stock. Year-to-date, it’s up only roughly 10%. That means Amazon has underperformed the S&P 500 (27%), the Nasdaq Composite (24%), and its FAANG peers – Meta (FB) - Get Meta Platforms Inc. Class A Report, Apple (AAPL) - Get Apple Inc. Report, Netflix (NFLX) - Get Netflix, Inc. Report, and Alphabet (GOOG) - Get Alphabet Inc. Class C Report.
The reasons for AMZN’s less-than-stellar year are well-known by now: In addition to increased e-commerce competition, Amazon has had to contend with both supply-chain bottlenecks and labor constraints.
However, UBS analyst Kunal Madhukar believes 2022 could be Amazon’s year. In fact, he has named the e-commerce giant his favorite U.S. tech stock and set his price target at $4,700 per share. That would imply upside of roughly 36%.
Why is Madhukar so bullish on Amazon? Let’s dig in.
(Read more from Amazon Maven: Amazon Stock: Logistics Network At The Center Of The Bull Thesis)
Multiple levers of growth
UBS’s Madhukar believes that Amazon can easily improve its profitability by leaning on its multiple business arms. Despite the e-commerce segment’s struggle to keep traction in 2021, the company can still count on its cloud-computing unit – AWS (Amazon Web Services) – as well as on its advertising segment.
In addition, Amazon can simply raise its prices.
In fact, Amazon has already announced it will elevate its FBA (Fulfillment by Amazon) fees in 2022, which should add an extra $1 billion to Amazon’s bottom line, according to Morgan Stanley.
But UBS analysts go even further, arguing the price of Prime membership should also be adjusted.
Since its last Prime price increase, in 2018, Amazon has been investing heavily in faster delivery services and expanding its Prime Video content. There’s no coincidence there.
“Higher Prime and FBA prices could contribute $8 billion to $30 billion to revenue and $8 billion to $26 billion [earnings before interest and taxes] annually, most of which is not in our estimates,” said a recent UBS report.
Mr. Madhukar is more optimistic for both Amazon’s retail and AWS segments than the rest of Wall Street. “The shares could see a multiple re-rating on positive estimate revisions for retail and Web Services, as consensus revenue estimates are too conservative,” he noted in his recent report.
However, as Barron’s has pointed out, “Even without big price rises between 2021 and 2023, Amazon will benefit from an incremental $12 billion of AWS earnings before interest and taxes (EBIT) and $15 billion of incremental advertising EBIT.”
Should you buy Amazon on the dip?
Amazon’s most recent financial reports have missed both top and bottom lines. E-commerce growth has decelerated in 2021, while at the same time the company has been investing heavily in logistics and infrastructure.
But UBS analyst Kunal Madhukar has faith that, by strategically playing its AWS and advertising segments – and by increasing prices – Amazon might see improved profit margins by the second half of 2022.
It’s hard to pin down a 2022 consensus price target for Amazon. Each different analyst covering the stock has different forecasts for each of Amazon’s different business segments.
Still, Wall Street would appear to agree that AMZN is a strong Buy right now. This implies its long-term fundamentals are at least solid.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)