It is hard to argue with Amazon’s (AMZN) performance in 2020. Even amidst a global pandemic and a struggling economy, all the cards have fallen into place for the e-commerce behemoth. Amazon has seen revenue soar during the viral outbreak and so has its stock. Shares are up by 70% on a year-to-date basis.
However, one analyst thinks the Street has got it all wrong on Amazon. So, is there a bear among the long list of Wall Street Amazon bulls?
On the contrary. Pivotal analyst Michael Levine argues the Street is undervaluing Amazon’s SOTP (sum of the parts). In fact, the analyst calls Amazon “the best mega cap on a multiyear basis” and has just increased his price target to a Street high of $4,500. Levine, therefore, expects shares to add another 43% from current levels. No need to add, but the analyst’s rating stays a Buy. (To watch Levine’s track record, click here)
Levine argues investors are “materially underestimating the earnings power of the business.” The 5-star analyst, however, doesn’t exempt Pivotal from misjudging Amazon’s future earnings potential.
“We and almost every other investor we have spoken to over the years, has been framing the AMZN SOTP valuation wrong,” Levine said. “Amazon advertising is only ~5% of revenues, but is a far greater contributor to overall non-AWS EBIT margins than the street recognizes. Said differently, if advertising was viewed as a stand-along business unit, it would represent well north of 300% of 2020E non-AWS EBIT.”
Levine claims “valuation is often more of an art-form than pure science,” but that after all, what really matters is “what is the underlying earnings potential of the business.”
And here is where after crunching the numbers, Levine arrives at an estimate far above the current consensus. Splitting Amazon’s business into two segments of AWS and Everything Else, Levine takes AWS Revenues and EBIT estimates for 2024, adds the rest (the majority of which is made up of the aforementioned expected advertising revenue) and concludes Amazon has “massive upside by 2024E.” His sums estimating EBIT “Earnings Power” of $91 billion vs the Street’s call for $69 billion.
“Long term,” Levine concludes, “We would bet that over a 4-year period a Long AMZN / Short the market position will be handsomely rewarded.”
Levine may now be Wall Street’s most prominent Amazon bull, but the company hardly lacks support among his colleagues. A full house of 37 Buys culminates in a Strong Buy consensus rating, backed by a $3,748.71 average price target. Investors are therefore looking at a potential 19% of upside over the coming months. (See Amazon stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.