Amazon's Profitable Essential Merchandise, Efficiency Gains Set To Drive Growth: Analyst

Morgan Stanley analyst Brian Nowak reiterated Amazon.com Inc (NASDAQ:AMZN) with an Overweight rating and a $210 price target.

Amazon traded at 22 times Nowak’s 2026 free cash flow, representing 29% growth (fiscal 2024-2026 free cash flow per share CAGR). He said this is a ~30% discount to Amazon’s mega-cap tech peer median growth-adjusted multiple on a growth-adjusted basis.

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The price target implies paying 20 times fiscal 2027 free cash flow for 24% growth (fiscal 2025-2027 free cash flow per share CAGR) and 0.8 times on a growth-adjusted basis, a ~20% discount to Amazon’s mega-cap tech peer median growth-adjusted multiple of 1.1 times.

Nowak noted the tactical risk to fourth-quarter EBIT but is buying weakness into fiscal 2025 as the profit challenges are temporary and not structural.

Nowak said Amazon’s growing focus on lower-priced, lower-margin essentials drives merchandise margin pressure, which is holding back the near-term slope of its North American retail profit ramp. Expected discounting in a competitive holiday season creates further near-term uncertainty, he said.

According to the analyst, Amazon makes low-priced essentials profitable and the cost to serve still leads to $8-$9 free cash flow per share. Corporate efficiencies could lead to $2 billion-$4 billion of further savings, and Project Kuiper and headcount models speak to minimal headwinds here.

Nowak said Amazon management’s recent letter outlining an increased focus on efficiency should lead to a further EBIT cushion and upside in fiscal 2025.

Project Kuiper is likely to be manageable from a P&L-impact perspective, Nowak said. He noted Amazon’s growing net cash balance creates a higher probability of capital returns in fiscal 2025.

Nowak projected fiscal 2024 revenue of $633.96 billion and EPS of $4.80. He expects fiscal 2025 revenue of $ 697.94 billion and EPS of $5.93.

AMZN Price Action: Amazon stock is down 1.15% at $182.64 at publication Thursday.

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