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Morgan Stanley: Amazon Has a Billion-Dollar Opportunity in 2022

Amazon’s investments in storage and logistics networks ate away at its cash flows throughout 2021. But the company’s strategy to mitigate those expenses might boost EBIT by $1 billion, according to this Morgan Stanley analyst.

At their recent Q3 earnings conference, the top and bottom lines of Amazon’s e-commerce segment fell short of Wall Street’s expectations. There were three main drivers of this miss: 1) consumers returning to their old (in-person) shopping patterns, 2) increased labor costs, and 3) supply chain disruptions. Hefty profits from AWS prevented the company’s consolidated bottom line from experiencing major losses.

Figure 1: Amazon's headquarters in Seattle, WA.

Figure 1: Amazon's headquarters in Seattle, WA.

But Amazon may have found a new solution to its e-commerce struggles: increasing FBA (Fulfilled by Amazon) fees. Morgan Stanley’s Brian Nowak believes that changes in this fee structure could generate an extra $1 billion of EBIT.

(Read more from Amazon Maven: Amazon Stock: Will It Ramp Up Into 2022?)

Sending fee revenues straight to the bottom line

FBA is Amazon’s storage and logistics service for sellers. Businesses dispatch their merchandise to Amazon fulfillment centers. Then, when a customer makes a purchase, Amazon packs and ships the order. Finally, businesses receive the sale value of the order, minus a fee for FBA services.

The bad news for sellers, but the good news for shareholders, is that this fee, which has historically been in the 2-3% range, will now be hiked to 5.2%. Mr. Nowak estimates FBA fees generated $45 billion in revenue in 2021.

Factoring in 18% business growth and sticking with the 2%-3% fee rate, Amazon could expect $54 billion in revenues for 2022. But the new 5.2% rate would result in an additional $1 - 2 billion in revenues, $1 billion of which would flow directly to EBIT.

The big picture

Mr. Nowak notes that the increase in Amazon’s FBA fee “may not be material alone,” but that it is just one of the “many levers and factors” which will enable Amazon to “deliver stronger multi-year profitability.”

The Morgan Stanley analyst believes that, as we move away from the pandemic, Covid-related costs and labor inefficiencies should diminish, which would, in turn, lead to a decline in Amazon’s operating expenses. Meanwhile, the company will continue to benefit from economies of scale, high-margin revenue streams, and a possible increase in the membership price for Prime.

A conservative valuation

According to Mr. Nowak, Amazon’s current valuation is “under-appreciating the multi-year durability of top-line retail revenue growth and company-wide profitability as the company grows into its outsized '20/'21 build.”

Mr. Nowak concluded his analysis by assigning Amazon stock a target price of $4,000. Considering that Nowak valued AMZN at $4,500 just this past May, we could infer that the company’s Q3 financial results tamped down some of his bullishness for 2022. Still, a $4,000 price target implies 16% upside, which may even be on the conservative side, considering the Wall Street average price target stands at $4,125.

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

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(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)