The time is ripe to pounce on Amazon's stock, argues Guggenheim analyst Robert Drbul.
"Over the past six months, Amazon shares have declined ~2% vs. a 19% increase for the S&P 500. While the company will be up against difficult top-line comparisons in coming quarters, we see a favorable backdrop for shares through the balance of 2021 as 1) top-line growth rates are likely to remain robust (in the 20% range, by our estimates), 2) AWS and cloud computing trends remain strong, and 3) profitability gains materialize as high-margin business segments scale further and as Amazon laps heavy investment made in 2020 (including COVID-related spend and fulfillment center expansion)," Drbul writes in a new research note.
Drbul sees fair value on Amazon (AMZN) to $4,000 a share, up about 30% from current levels.
To be sure, Amazon's usually hot stock has been stuck in the mud of late. Year-to-date, Amazon shares are down 4% versus a 7% gain on the S&P 500 and 4.4% pop on the Nasdaq Composite. It's the second worst-performing component of the closely watched FAANG index (Facebook, Amazon, Apple, Netflix and Google) of tech giants — Apple shares have shed 7% this year.
Most Wall Street analysts point to the potential for slowing sales and earnings growth this year as Amazon cycles a major pickup in business at the start of the pandemic in 2020 for the stock's weakness. Others have voiced some concern about Amazon founder and CEO Jeff Bezos preparing to step aside as CEO in the third quarter.
Drbul thinks the concerns on the fundamentals of Amazon's business are overblown, however.
"In our view, Amazon's retail business appears as strong as it ever has. 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 year-over-year compare given our expectation for continued elevated rates of growth in 1H21, particularly 1Q (+42%). Our model incorporates a more normalized level of growth in 2Q-4Q (+high-teens growth), which could prove conservative (2Q in particular) given ongoing COVID-related restrictive measures. In addition, we would highlight the expansion and rollout of free one-day delivery with Prime and robust rates of membership growth as additional supportive factors that should help Amazon "comp the COVID comp," contends Drbul.
Adds Drbul, "We believe AWS remains in the early innings of its growth potential and should benefit in coming quarters/years as companies accelerate their shift to the cloud, in part driven by COVID."
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