The recovery of Amazon.com Inc.’s AWS cloud-computing business is a hot area of stock-market debate nowadays, but one analyst sees a bright picture as he looks past that issue.
“Admittedly, we are not able to get investors comfortable on AWS’s near-term growth rate, or the [fourth-quarter operating-income] guide,” MoffettNathanson analyst Michael Morton wrote Wednesday, but he’s increasingly optimistic about the company’s earnings potential in 2024.
Morton upped his estimates for Amazon’s
AMZN,
2024 earnings before interest and taxes to $51 billion from $45 billion, citing his heightened belief that Amazon can improve its cost centers.
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“For a company that rarely provides a glimpse under the hood, [Chief Executive] Andy Jassy’s comments on the 2Q23 call suggest $2.6B in gross profit benefit from the regionalization of the fulfillment network on ‘a 19% reduction in miles traveled to deliver packages to customers,’” Morton wrote.
By his estimation, Amazon shells out $17 billion on fuel every year, so that 19% cut could mean 11 cents in savings per unit globally, he said. “It might not sound like a lot, but Amazon ships 22 billion packages per year, and it quickly adds up,” Morton said.
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Morton sees other profit drivers as well, including around pricing. “After years of Amazon absorbing higher prices from 1P [first-party] vendors, it’s time for the 1P vendors to bear the costs, allowing 1P gross margins to improve, driving an incremental $3.4B in gross profit to our prior estimate,” he noted.
He also commented on potential top-line tailwinds, including traction with same-day and one-day shipping, which is helping the company pick up market share. Plus, Amazon’s advertising business is performing better than the broader industry, in Morton’s view.
He has a buy rating and $189 target price on Amazon shares, which advanced 1.8% in Wednesday’s session.