The recovery of Amazon.com Inc.’s AWS cloud-computing business has become a topic of intense debate in the stock market. However, one analyst is looking beyond the current issues and sees a bright future for the company.
MoffettNathanson analyst Michael Morton acknowledges that investors may have concerns about AWS’s near-term growth rate and the fourth-quarter operating income guide. Nonetheless, he is increasingly optimistic about Amazon’s earnings potential in 2024.
Morton has revised his estimates for Amazon’s 2024 earnings before interest and taxes (EBIT) from $45 billion to $51 billion. He believes that Amazon can enhance its cost centers, contributing to this favorable outlook.
Regionalization of the Fulfillment Network
Morton points to Chief Executive Andy Jassy’s comments on the 2Q23 call as a significant factor in his optimism. Jassy suggested that the regionalization of the fulfillment network could yield a $2.6 billion gross profit benefit, with a 19% reduction in miles traveled to deliver packages to customers.
Amazon’s annual fuel expenditure amounts to $17 billion, and a 19% reduction could translate into savings of 11 cents per unit globally. Considering that Amazon ships 22 billion packages per year, these savings quickly add up.
Opportunities for Increased Profit
Morton identifies pricing as another potential driver of profit growth for Amazon. After years of absorbing higher prices from first-party vendors, the time has come for these vendors to bear the costs. This shift is expected to improve first-party gross margins and generate an additional $3.4 billion in gross profit compared to previous estimates.
Moreover, Morton sees additional top-line tailwinds for Amazon. The company’s traction with same-day and one-day shipping has helped it gain market share. Furthermore, Amazon’s advertising business is outperforming the broader industry.
Analyst’s Outlook and Target Price
Morton has a buy rating and a target price of $189 on Amazon shares. In Wednesday’s session, the stock advanced by 1.8%.
In conclusion, while AWS’s near-term growth rate may be a subject of concern, Morton’s analysis highlights several factors that contribute to Amazon’s positive outlook for 2024. Improved cost centers, the regionalization of the fulfillment network, favorable pricing dynamics, and successful ventures in same-day shipping and advertising all contribute to a promising future for the company.
