Buy Amazon (AMZN) Following its 6-Month Breather - Guggenheim

Guggenheim analyst Robert Drbul reiterated a “Buy” rating on Amazon (NASDAQ: AMZN) given the recent underperformance in the stock price compared to the benchmark S&P 500 index.

Over the past 6 months, AMZN shares have declined ~2% vs. a 19% increase for the S&P 500 as investors rotated from the large-cap high-growth stocks into cyclical plays. Fundamentals are still extremely strong with Drbul stressing that the company’s retail business appears as strong as it ever has.

“In 2020, Amazon's global e-commerce revenue growth rate doubled to roughly +40% YoY from around +20% in 2018/19 (ex-physical stores). Our 2021E full- year growth forecast incorporates a return to the pre-COVID trajectory in the low-20% range, which we believe is achievable despite the challenging YoY compare given our expectation for continued elevated rates of growth in 1H21, particularly 1Q (+42%),” says Drbul in a note.

Similar to the retail business sector, AWS is still in the “early innings of its growth potential” as more and more companies shift to the cloud.

“Gartner (IT) projects global cloud spend as a percentage of enterprise IT spend will rise to 14% in 2024 from 9% in 2020, with ~18% growth in 2021 to ~$305bn. AWS remains the market share leader in cloud infrastructure with >30% share, followed by Microsoft's Azure at around 20% and then Alibaba and Google Cloud with <10% (Synergy Research Group).

“In 4Q20, AWS added more revenue QoQ than in any other quarter in Amazon's history ($1.1bn) and surpassed a $50bn annual run rate, with a strong backlog. Our annual outlook for AWS of ~30% top-line growth and ~30% operating margins is unchanged and continues to support total profitability for AMZN (AWS is ~10% of revenue & 60% of EBIT),” added Drbul.
Drbul expects 2021 to be a year of operating margin improvement for Amazon due to:

1) AMZN laps heavy fulfillment (+50% square footage growth) and COVID-related spend ($11.5bn) of 2020 and,

2) High-margin growth areas continue to scale further, including advertising, which represents the majority of Amazon's reported "Other" line item that surpassed $20bn in revenue in 2020, or 5.5% of total AMZN revenue, up from 3% in 2017;

3) Guggenheim expects "Other" (advertising) revenue to double over the next 2 years to ~$40bn in 2022, representing 7% of total company revenue.

Overall, the analyst expects total reported operating income to grow in the mid-high 20% range over the next two years to support a further margin expansion. This is higher than the bank’s top-line growth expectation in the low-20% range.

Guggenheim has a price target of $4,000 on AMZN, suggesting an upside of about 30% compared to the current market price.

For an analyst ratings summary and ratings history on Amazon.com click here. For more ratings news on Amazon.com click here.

Shares of Amazon.com closed at $3114.50 yesterday.

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