Amazon.com Inc
The Amazon Analyst: Cantor Fitzgerald analyst Deepak Mathivanan initiated coverage of Amazon with an Overweight rating and $230 price target.
The Amazon Takeaways: Retail margin expansion for Amazon's key e-commerce business alongside acceleration of AWS makes a healthy combination as an investment thesis, Mathivanan said in a Wednesday note.
"We believe there is runway in both, but the magnitude is likely to moderate compared to trends over the past two years, and the path is unlikely to be linear going forward," the analyst said.
Amazon's "dominant competitive position" in these two segments "provides a lot to be bullish about" for Amazon's stock, he said.
Amazon could have upside to its EBIT estimates, Mathivanan said.
Amazon's retail margin has expanded by 470 basis points over the last six quarters, showing efficiency gains in logistics and advertising revenue, the analyst said. For logistics, he said margin expansion could be uneven over the next few years as Amazon works through operational changes by third-party sellers and suppliers.
"Over the last few quarters, AMZN has made nice progress in terms of improving the process in all three layers (inbound operations, warehousing, delivery) of its logistics operations."
Amazon's regionalization benefits the company, driving top-line growth and helping with cost savings, he said.
"Regionalization involves placing the right inventory at the right location."
This method has helped cut last-mile delivery costs and also increased the ability of same-day and next-day shipped items, which may help Amazon's market share, Mathivanan added.
While Amazon has found cost savings in its retail division and regionalization efforts, the analyst said there could still be runway left to help with cost savings and delivery speed.
For Amazon's AWS cloud business, the analyst said the segment's growth potential is a key investor question.
"In our view, the biggest upside to AWS growth over the next 12-18 months depends on Gen-AI trajectory."
The analyst said upside could come from adoption of Amazon's own generative AI products.
AWS growth is predicted to be in the high teens for the next several quarters in Cantor Fitzgerald's view.
"We believe AMZN has the product portfolio and sales capabilities to deliver stable growth in core cloud migration."
Mathivanan said AI products will play an important role in customers choosing their preferred cloud vendor like AWS or Microsoft's Azure.
"We believe that AWS has a unique competitive position, with strong platform infrastructure capabilities and a comprehensive set of relationships with several LLM vendors on the platform."
Amazon's future catalysts are retail monthly data, new model launches from Amazon large language model partners and the AWS re:Invent event in December, according to the analyst.
AMZN Price Action: Amazon shares are trading 2.16% higher to $177.07 on Thursday and are up 19% year-to-date in 2024.
