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Amazon: More Fuel for the Bulls

·4 min read

What would you tell someone if they were to ask you, “Should I buy Amazon (AMZN) right now?” For Jefferies' Brent Thill the answer is quite clear — the analyst sees this stock as a flower that keeps blossoming.

In a research note issued yesterday, Thill described how Amazon's three biggest business divisions could add up to a $5,700 stock price three years from now -- and create 70% upside for investors who buy in today.

Let's begin with the obvious: Retail. Amazon is the world's biggest online e-tailer, and the company's "core retail" division is a "long-term beneficiary of secular shift to e-commerce," explains Thill. After more than a year of staying at home and ordering products delivered to the home during the coronavirus pandemic, consumers have now been well and truly trained to do much of their shopping online, "engraining" the habit in them.

Granted, it's unlikely that Amazon will be able to maintain the track record established during the heat of the pandemic, and continue growing retail sales 46% annually as it has over the past four quarters (on average). Going forward, the analyst posits a more modest -- but still very respectable -- 17% pace of sales growth in retail over the next three quarters.

This deceleration, warns Thill, could scare many investors away from Amazon stock, and keep the stock price "range-bound" in the near term -- but failing to pounce on this opportunity now would be a mistake. In addition to Amazon's core retail business, you see, which Thill values at $1 trillion three years from now, the company also has a huge and growing advertising business that the analyst believes will be nearly as big -- $600 billion.

"As AMZN becomes an increasingly important channel for [consumer packaged goods] companies," says Thill, "we believe a portion of [such companies' advertising] spending will shift toward search and product placement" on Amazon.com. Thill believes Amazon will also leverage its Prime Video business to provide new places to place ads. And as this business grows, the analyst sees advertising winning a valuation of 11x sales on Wall Street -- $600 billion or more, three years from now.

Last and far from least, Thill highlights Amazon's Amazon Web Services, or AWS business. The engine that pulls Amazon's train already, AWS and its server farms are turning into "the de facto infrastructure provider" for an economy that is increasingly working from home these days. Backlog of AWS contracts waiting to be executed grew 64% in Q3 2020 and 68% in Q4, a trend that suggests that, far from slowing down in the waning days of the pandemic, AWS's business growth is still accelerating.

In Thill's view, this business, too, merits an 11 times sales valuation. By 2024, he thinks it could be make up 40% of Amazon's total market capitalization -- $1.2 trillion.

Add it all up, and Thill believes that the "sum of the parts" (SOTP) of Amazon.com could be worth some $2.8 trillion three years from now, or 70% more than the entire company currently costs. Amazon could even break the $3 trillion barrier if its prescription drug business thrives, and takes a good chunk of the $350 billion in annual U.S. spending on prescription drugs.

For now, with prescription drugs' ultimate success remaining to be proven, Thill isn't factoring it into his SOTP valuation. But once someone does, a $3 trillion valuation shouldn't be out of the question.

In the meantime, Thill places a more traditional one-year-out price target of $4,000 on Amazon stock, and assigns it a "buy" rating. (To view Thill's track record, click here)

The rest of the Street also believes Amazon is poised to execute; all 31 other recent reviews say Buy. The stock, therefore, boasts a Strong Buy consensus rating, accompanied by a $4,102.93 average price target. Investors are looking at upside of ~23%, should the figure be met in the year ahead. (See Amazon stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

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.