Don’t be so quick to sell your house and bet all the after-tax gains on Amazon’s stock price (AMZN) reaching $3,000 in 800 days or so, as one analyst now basically suggests doing.
Piper Jaffray analyst Michael Olson snagged some pre-Memorial Day weekend headlines by saying Amazon’s stock could reach $3,000 sometime between mid-2021 or within 24-36 months. The hypothetical move would mark a 65% price explosion in a stock that is known, for the most part, to only go up over time. Amazon’s market cap assuming a $3,000 stock price would be a shade over $1.5 trillion.
“We have a high degree of confidence that Amazon shares can reach this level with no major acquisitions or other significant changes to the business. A potential AWS (Amazon Web Services) spin-off, however, would, no doubt, help to highlight the relatively low valuation of the other segments,” contends the upbeat Olson.
Getting lost in all the hype around this stock call is a rational discussion of Olson’s assumptions for Amazon’s business. By and large, Olson expects the torrid growth rates Amazon has become known for on Wall Street to slow across the board. Yes, slow, which should make an investor wonder why Amazon won’t need a longer period of time to reach the $3,000 mark (if it does so at all).
Color yours truly a stock geek with no life, but usually a significantly higher stock price in a short period of time comes with accelerating growth rates for a company.
But that’s not what Olson believes here.
“Specifically, we assume a multi-year deceleration in growth for every major category of Amazon's business, along with very minimal adjustment to comp group multiples, despite Amazon growing significantly faster than comps in both the cloud (AWS) and advertising segments,” writes Olson.
The specifics are further fleshed out in Olson’s financial modeling. A couple of quick observations:
Amazon’s North American retail sales growth is expected to slow sequentially each quarter of 2020.
Amazon’s North American retail operating margin is seen on a steady downtrend in 2020.
Shipping and fulfillment costs is expected to spike 19.5% and 21.2%, respectively, in 2020 versus 2019.
Total sales growth is expected to drop below 20% — and stay there — after the second quarter of 2020.
Global retail operating margins seen only rising to 4.3% in 2020 from 2.9% in 2019. Meanwhile, AWS operating margins seen unchanged in 2020 at 29%.
I’m not trying to hate on Amazon’s prospects or Olson’s work (I enjoy his analysis on Netflix (NFLX)). It’s just that big calls such as this need to be carefully scrutinized (as do all Wall Street calls). Remember, Amazon is entering its next decade with shipping costs likely on a permanent uptrend and tougher competition from formidable rivals Walmart (WMT) and Target (TGT).
“We wouldn’t bet against Amazon,” Crossmark Investments global chief strategist Victoria Fernandez said on Yahoo Finance’s ‘The First Trade.’ Fernandez has no positions in Amazon.
Yes, it’s hard to bet against Amazon to Fernandez’s point. Although it’s not hard to view research such as Olson’s with greater skepticism than the norm.
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