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Bank of America: 3 Reasons Why Amazon's a Strong Buy

Amazon stock is BofA’s big bet for 2022. Here's why analyst Justin Post is confident the e-commerce giant will leave 2021 headwinds behind.

Amazon  (AMZN) - Get Amazon.com, Inc. Report shareholders have been on an emotional roller coaster. In 2020, AMZN stock gained over 70%. But in 2021, it grew by less than 4%, lagging both the S&P 500 and the tech-rich Nasdaq Composite.

Justin Post of Bank of America  (BAC) - Get Bank of America Corp Report expects Amazon to come out on top once again. According to the analyst, not only will its e-commerce arm grow, but its cloud and advertising businesses may surpass market expectations.

Figure 1: Amazon Spheres, in Seattle, WA.

Figure 1: Amazon Spheres, in Seattle, WA.

(Read more from the Amazon Maven: Amazon Stock: Can 2022 Be A Year Of Recovery?)

1. The End of Ecommerce Headwinds

2021 was marked by a deceleration in Amazon's e-commerce growth. The main causes of this were shortages in the labor market and COVID-related supply-chain bottlenecks. After the company's strong expansion in 2020, it was a letdown for Amazon's valuation.

But according to Bank of America's Justin Post, those headwinds should ease throughout 2022. He predicts Amazon's "massive infrastructure investment cycle" should finally pay off. And he believes the result will be strong growth in both the company's sales and margins.

“We have a positive outlook for three- to five-year e-commerce growth, given sub-20% penetration," he wrote. "And with market share gains in 2021, we see Amazon as well-positioned for sector growth reacceleration in 2022 and into 2023."

2. Web Services Should Keep Growing

The cloud computing industry is projected to hit $1.3 trillion by 2028. That reflects a compound annual growth rate (CAGR) of 19.1%.

This growth will be made possible by the ongoing adoption of 5G, artificial intelligence algorithms, and the Internet of Things. And it suggests that Amazon Web Services (AWS) will see outstanding growth rates during the coming years.

“The shift to the cloud is also still in its early stages, with only 5-15% of IT spending off-premises," Post wrote. "AWS had a strong 2021, with three straight quarters of accelerating revenue growth and with revenue dollar growth well above peers.”

3. Strength in Advertising

Ten years ago, it would have been hard to believe an e-commerce company could pose a threat to Google  (GOOGL) - Get Alphabet Inc. Class A Report. But Amazon’s “other” segment (which is mostly advertising) generated nearly $21 billion in revenue in 2020.

In his note, Post wrote that, combined, AWS, advertising, and third-party commissions could generate $70 billion in earnings in 2023. The analyst concluded with a strong buy recommendation for Amazon and a target price of $4,450 per share. That would reflect a 37% upside.

(Read more from the Amazon Maven: Amazon Stock: Should You Buy It in January?)

(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)