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With Amazon At A Low, This Expert Sees 41% Upside Potential

Mizuho Securities' James Lee selected his top stock picks for the US, and the first one is Amazon. Here, we’ll dive deeper into Lee’s valuation thesis.

Mizuho Securities' analyst James Lee elected Amazon  (AMZN) - Get Amazon.com, Inc. Report, Uber  (UBER) - Get Uber Technologies, Inc. Report and Meta  (FB) - Get Meta Platforms Inc. Class A Report as his top picks for 2022. His thesis is based on buying “friendly growth valuation for a reasonable price,” and AMZN seems to fit this bill, especially after the tech sector’s recent selloff.

Due to macroeconomic headwinds forecast for Q1 and Q2 of 2022, Mr. Lee revised his FY22 EBITDA target for Amazon down by 6%. However, the analyst still gives this stock a $3,950 target price, implying a 41% upside.

Figure 1: With Amazon At A Low, This Expert Sees 41% Upside Potential.

Figure 1: With Amazon At A Low, This Expert Sees 41% Upside Potential.

(Read more from Wall Street Memes: JPMorgan on Amazon Stock: 43% Upside Potential)

Macroeconomic woes constricting share price

As the Fed is most likely to hike interest rates in the very near future, it seems a risky move to bet on high-growth stocks right now. However, Mr. Lee sees his risk as calculated and argues that, in a rising interest rates scenario, valuation is crucial.

“From an EV/EBITDA two-year forward basis, [the group of stocks Lee has been tracking] actually declined about 15% since midpoint a year to about 12 times from that perspective, [therefore] the valuation seems to be very reasonable. For Amazon right now, it’s actually trading below the historical level,” says Mr. Lee.

The light at the end of the tunnel

Amazon stock had a tough 2021, underperforming both the S&P 500 index and the tech-heavy Nasdaq composite. Will 2022 be different? The answer, according to Mr. Lee, is both no and yes. The analyst does believe AMZN will rebuild momentum, but not until the second half of the year.

As a matter of fact, Mr. Lee argued that the 2022 Q1 revenue consensus estimate for the Seattle-based company is excessively "aggressive." He sees Amazon’s operating income as coming in about 10% below Wall Street’s expectations.

However, as Covid-related headwinds fade away, the Jeffries’ analyst believes the company will regain its margins around the third quarter of this year, arguing that “most of [Amazon’s] incremental costs are short-term."

Wall Street’s perspective

Amazon stock has been sinking during the current market sell-off. Yet Wall Street remains bullish on Bezos’ behemoth. According to TipRanks, among the 26 Wall Street analysts covering the stock (including Mr. Lee), AMZN’s average target price is $4,165 — that implies a 51% upside and in fact places Mr. Lee on the relatively conservative side of things.

Is it time to buy the dip, then? Despite Amazon’s appealing long-term narrative as an e-commerce and cloud-streaming company, the stock market has been hard for growth companies, making it impossible to predict where (and when) its trading price will stabilize.

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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)