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Amazon stock has gotten too cheap to ignore, analyst argues

Amazon's stock has basically priced in elevated inflation and a potential recession, Jefferies long-time tech analyst Brent Thill says, meaning that it's an attractive investment.

Shares of the tech giant have plunged 30% so far in 2022 as investors fret over whether higher interest rates and a potential recession will hammer the e-commerce company's profits. Amazon's stock is the third worst-performer within the closely watched FAANG (Facebook, Amazon, Apple, Netflix, Google) complex, outperforming the stunning 60% declines of Meta and Netflix.

"We believe Amazon's current stock price already embeds headwinds from a recession/cost inflation and expect the market to attribute greater value to core-retail over time as cost headwinds are addressed and profitability expands," Thill wrote in a new note.

Here's more intel from Thill's new note to clients on Amazon:

  • Price Target: $165 (reiterated)

  • Rating: Buy (reiterated)

  • Stock price movement assumed: +42%

Amazon is having a second Prime Day this month, and it could be a big sales tailwind for the retailer ahead of the crucial holiday shopping season.

"Our JefData proprietary survey of ~1,000 U.S. adults on 8/31 showed 82% of Prime subs would participate in a 2nd savings event this year, which is up from 59% for Prime Day. Additionally, 85% of participants who plan to participate in the 2nd event plan to spend over $50, which is up from 80% who spent >$50 on Prime Day. We estimate Amazon could generate $6.1 billion/$4.1 billion in gross merchandise value/Net Sales, which is a 3%/3% tailwind to 4Q22 Net Sales/gross merchandise value growth."

The financial impact of this second Prime Day —and Amazon's leadership position in retail — is likely being overlooked in the valuation of Amazon's core retail business.

"We estimate Amazon's non-retail businesses are worth a combined ~$1.3 trillion by applying peer-based growth-adjusted 2023 EV/ EBITDA multiples of 30x to Amazon Web Services ($938 billion), 20x to Advertising ($366 billion), and 10x to Subscription Services ($40 billion). Our sum-of-the-parts valuation implies the current valuation is ascribing virtually zero value to Core-Retail, resulting in a $29/share free option at Amazon's current price as the stock already embeds meaningful headwinds from a recession/ cost inflation, which limits downside and creates an attractive risk-reward."

A fast-moving conveyor moves a package through a scanning machine on its way to a delivery truck during operations on Cyber Monday at Amazon's fulfillment center in Robbinsville, New Jersey, U.S., November 29, 2021. REUTERS/Mike Segar     TPX IMAGES OF THE DAY
A fast-moving conveyor moves a package through a scanning machine on its way to a delivery truck during operations on Cyber Monday at Amazon's fulfillment center in Robbinsville, New Jersey, U.S., November 29, 2021. REUTERS/Mike Segar TPX IMAGES OF THE DAY

Amazon is a diversified business, which will help cushion the blow from a consumer spending slowdown should the U.S. economy officially enter a recession.

"A key risk for Core-Retail is slowing consumption, although we believe Amazon's geographic diversity will help soften the impact from any areas of regional weakness. Spending in the U.S. remains healthy, with total retail sales growth of 8% year over year and non-store (mostly e-commerce) growth of 12% year over year in August. However, trends have worsened in Europe, with retail sales growth of -2%/-1% year over year in June/July, representing a deceleration from 1% growth in May."

Amazon's profit margins may look better in 2023 as it cuts cost and gets some relief from the red-hot inflation of 2022.

"Amazon is facing $12 billion to $16 billion of cost headwinds in 2022, resulting from a combination of inflation, lower productivity and fixed cost deleverage. Amazon has already begun addressing these cost headwinds, having realized a $2 billion sequential cost reduction in 2Q (from 1Q), driven by cost leverage and improved route density. Amazon also expects to continue reducing costs throughout 2022, which should help drive growth in operating income even if macro pressures causes a slowdown in sales. In addition, AWS is the primary driver of overall operating income and is likely to experience continued impressive growth in 2023, which is supported by strong backlog growth and positive channel checks."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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