Investors and analysts have been framing the Amazon (AMZN) - Get Amazon.com, Inc. Report sum-of-the-parts valuation wrong, according to a Pivotal Research analyst, who raised his price target for the internet retail giant to $4,500 from $3,925.
Shares of the Seattle-based Amazon were up 1.6% on Thursday to $3,200.08.
Analyst Michael Levine, who kept a buy rating on the shares, said in a note to clients that Amazon's advertising was only 5% of revenue, but is a "far greater contributor" to overall non-Amazon Web Services EBIT margins than Wall Street recognizes.
"Said differently," the analyst said, "if advertising was viewed as a stand-alone business unit ... it would represent well north of 300% of 2020E non-AWS EBIT."
Based on his view that there is "massive upside" to estimates by fiscal year 2024, the analyst increased the firm's target to a Wall Street-high of $4,500.
Levine thinks investors are "materially underestimating" the earnings power of the ad business. He called Amazon the "best mega-cap on a multi-year basis."
"Ironically, AMZN over the last few years has gone from the mega-cap disclosing the least to the one disclosing the most," he said.
Levine estimated that at least 85% to 90% of the Amazon business today is sponsored listings.
"In this scenario," he said, "an advertiser pays for higher placement within the sort order, the user stays on AMZN, and AMZN keeps the transaction and transaction data."
Separately, Jefferies analyst Brent Thill said the company hosted a conference call with a supply chain/logistics expert to discuss the current state of Amazon's fulfillment network.
Thill, who has a buy rating and a $3,144.88 price target, said increased customer demand is causing Amazon to expand capacity at an unprecedented pace and that expanded same-day delivery could be just 12 months away.
In addition, he said, Amazon was taking over delivery for legacy carriers, and recent moves in grocery suggest the company is shifting to a self-distribution model with potential to drive margins higher.
Cowen analyst John Blackledge said in a note to clients that he spoke with an Amazon expert on current trends and "our expert expects strong 4Q demand, starting with Prime Day and through the Holiday season, while ad spend growth will be elevated."
Amazon's Prime Day will be held Oct. 13-14.