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Amazon: An Attractive Risk-Reward Play

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Amazon (AMZN) saw exponential growth in 2020 with pandemic-driven tailwinds pushing it forward. 2021, however, has turned out to be much more of a challenge on several levels, resulting in the stock’s underperformance.

Jefferies’ Brent Thill cites “difficult comps, labor shortages, and supply-chain disruptions” as reasons why Amazon’s “multiple” has dropped by ~25% since mid-2020.

Despite the segment representing just 12% of the company’s Operating Income (69% of sales), the analyst believes the “key overhang” has been the slowdown in core-Retail sales growth as the company has encountered some very tough comps.

The Q2 sales shortfall - the first miss in 3 almost years - along with “continuing pressure” on operating income margin due to logistics investments and a “tight” labor market, was not well-received by investors. Add to that the fact Amazon’s Q3 sales guidance was 6% lower than the high end of the Street’s and you can understand investors’ concerns.

However, Thill thinks the worries are overblown. “Despite the slowdown, our 2H core-Retail Sales estimate represents ~24% 2-yr growth, which is above pre-pandemic levels (18% in FY19) and supports our view that e-comm adoption has permanently increased,” the 5-star analyst reassured.

Furthermore, as the “temporary headwinds” fade, Thill expects margins and FCF will “better reflect the benefit of faster growth” in the higher-margin AWS and Advertising. These are elements of Amazon’s business Thill thinks the market “underappreciates,” believing these segments to be “key drivers of shareholder value. “

While the pair made up only 17% of revenue in 2020, they provided the bulk of Operating Income (75%) while representing 64% of Thill’s SOTP (sum of the parts) valuation. Both also beat consensus estimates in Q2 and “accelerated sequentially.” As such, the analyst sees “faster growth in AMZN's highest-margin businesses, resulting in upside to consensus Op Income over time.”

With lowered expectations following the 3Q guide-down and abetted by the aforementioned ~25% “multiple compression”, Amazon offers an “attractive risk-reward.”

To this end, Thill reiterated a Buy rating, backed by a $4,200 price target. The implication for investors? Upside of 22%. (To watch Thill’s track record, click here)

The rest of the Street agrees almost to a tee; the average price target is virtually identical to Thill’s. Additionally, there are only Buy reviews on record for the ecommerce giant – 31, in fact – all coalescing to a Strong Buy consensus rating. (See Amazon 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.