Amazon,com, Inc. (Nasdaq: AMZN) caught Wall Street off guard last week with a huge second-quarter earnings beat. But even with AMZN stock up more than 52 percent year-to-date, analysts say there could be plenty more earnings upside to come in future years.
Morningstar analyst R.J. Hottovy raised his fair value estimate for AMZN stock from $1,900 to $2,200 on Monday. Hottovy says Amazon has been expanding outside of its core businesses of AWS cloud services, Prime membership and third-party e-commerce sales and creating some long-term cash flow opportunities that will continue to boost margins.Read more ↓
“With greater visibility for some of Amazon’s highest-margin categories, we now think 8 percent operating margins are achievable over the next five years (assuming top-line growth in the low to mid-20s),” Hottovy says.
Hottovy says scaling Amazon fulfillment centers, adding a greater mix of 30 percent margin AWS revenue, growing advertising services, licensing Alexa technology and pursuing other opportunities will help inflate Amazon’s margins and profitability over time.
Morningstar is forecasting annual revenue growth of 23 percent for Amazon over the next five years, including 13 percent annual growth in online sales. In that same period, Hottovy expects annual sales growth of 9 percent in physical store sales, 26 percent in third-party seller services, 37 percent in subscription services, 33 percent in AWS and 66 percent in advertising.
He also says investors shouldn’t worry too much about Amazon’s bloated traditional valuation metrics because heavy investments continue to distort the true picture in the near-term.
“We believe Amazon warrants a premium valuation based on its wide economic moat, meaningful avenues for growth, and longer-term margin expansion potential,” Hottovy says.
In the near term, he says Amazon will grow full-year 2018 revenue by 34 percent and should be well-positioned to hit or exceed its third-quarter revenue and operating income targets.
Based on Hottovy’s new fair value estimate, Amazon should be valued at well over the $1 trillion level. AMZN stock needs to gain less than 17 percent to reach that historic milestone. Amazon’s market cap is currently $858 billion. While Apple (AAPL) is currently the closest to the $1 trillion mark with a market cap of $949 billion, a recent poll by CNBC found that nearly 70 percent of institutional investors believe Amazon will be the first company to make it to $1 trillion.