Amazon: A $1.7 Trillion Company With Nothing But Blue Skies Above

·3 min read

With just a 2.5% gain year to date -- against a 29% gain for the S&P 500 -- Amazon (AMZN) stock hasn't been quite the outperformer this year that it was in 2020 (when Amazon stock racked up 74% gains). If you already own Amazon stock, that's probably been a bit of a disappointment to you.

But if you don't own Amazon stock, well, RBC Capital analyst Brad Erickson thinks it just might be an opportunity.

After last year's amazing run, and this year's rather flat performance, Amazon stock carries a sky-high market capitalization of ~$1.7 trillion, and yet, in initiating coverage of the stock, Erickson made the argument that even from this lofty price, Amazon can still "outperform" the market. In fact, he anticipates that within a year, Amazon shares will fetch $4,150 apiece, and deliver 26% profits to new buyers. (To watch Erickson's track record, click here)

What makes Erickson so optimistic about Amazon?

Well, there's the obvious of course: "AMZN is one of the internet's largest true alpha dogs, in our view," writes the analyst, boasting "unmatched scale and advantage in verticalized E-commerce combined with its industry-leading cloud business" and a "burgeoning advertising business" on top of all that. Although at $443 billion in annual sales, Amazon is already a pretty big business, Erickson points out that there are still "trillions of dollars of annual [retail sales being conducted in physical stores offline] left to shift online."

In retail alone, therefore, Erickson believes investors can look forward to "years of growth and likely share gains," and as those gains rack up, Amazon will "drive further compounding scale advantages, margin expansion, earnings growth and [have opportunities to expand] into new adjacent verticals." Beyond that, the analyst sees opportunities for Amazon to grow its "Prime, AWS, and advertising" businesses.

Advertising, especially. "Amazon advertising is early days & under-penetrated," argues Erickson, and perversely, he also cites "industry contacts" criticizing Amazon's advertising business for "sub-par" performance and poor "measurability" of its ads' effectiveness as a plus for the stock. Because if Amazon's advertising business currently looks somewhat broken, this means that the company has an opportunity to fix it, to improve it, and to make it even more profitable in the future.

But what about regulatory risk, you ask? Isn't Congress looking to break up Amazon, or at least slow it down so that other businesses can compete with it?

Well, yes it is, and Erickson acknowledges this. Still, he views the regulatory risk as "low," surmising that Congress won't want to set a "precedent" of "regulators arbitrarily limiting a single company's particular business unit's ability to fund another." (Although that might be news to Standard Oil, Ma Bell, and Microsoft...)

Worst case, though, if Congress were to demand that Amazon be broken up, Erickson says "it wouldn't matter too much [because] some sort of consumer/enterprise split would likely continue being owned by the same shareholders," and as a whole, a collection of separate formerly-Amazon companies would still collectively generate "strong margins and cash flow" for investors.

Ultimately, Erickson concludes that "we see no reason why 15% or even faster growth isn't possible [for Amazon] over the next 3-5 years" -- leaving investors to ponder only the question of whether 15% growth is enough to justify Amazon's 60x P/E ratio.

Overall, Amazon has a rare bullish outlook according to the Street. TipRanks reveals that in the last three months, Amazon has received no less than 32 buy ratings - giving it a Strong Buy analyst consensus. Meanwhile, the $4,212.39 average price target translate into 28% upside potential from the current share price. (See AMZN stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.