Amazon shares are hovering near record high territory with the tech behemoth's second-quarter earnings on deck. Still, there is further upside ahead for Amazon stock, helped by its high-margin cloud and advertising businesses, an analyst said.
Jefferies analyst Brent Thill reiterated a buy rating for Amazon stock and upped the firm's price target for AMZN to 235, from the previous 225.
"Continued (Amazon Web Services) and advertising momentum combined with retail operating leverage should support 18%+ upside" to Jefferies target price, Thill told clients late Monday.
On the stock market today, Amazon stock gained a fraction to close at 199.34.
AWS And Advertising Drive Amazon Stock
The analyst set the target price based on a sum-of-the-parts analysis for Amazon's overall business. Amazon Web Services and the company's advertising business drive 71% of the $2.5 trillion enterprise value Jefferies sees for Amazon stock.
"The two highest operating margin businesses are taking the front stage, driving improving profitability and EV for the whole company," Thill wrote.
For the cloud business, Jefferies expects year-over-year revenue growth to accelerate and reach 21% by the fourth quarter of this year, compared to 13% growth in Q4 2023. AWS will get a boost as companies "modernize IT stacks in order to take advantage of gen AI," in Thill's view.
Advertising, meanwhile, is holding steady around 20% year-over-year quarterly sales growth. While that business mostly sells product placements on Amazon's website and app, the company is now selling advertising within Prime Video. Ads on the streaming service could generate just under $3 billion in sales this year to $57 billion in total ad sales, according to Jefferies' estimates.
The core retail business, meanwhile, will drive two-thirds of Amazon's $639 billion in estimated 2024 revenue, according to Jefferies, but only contributes about 26% of Amazon's potential enterprise value. The retail business has focused on boosting efficiency, Thill noted, helping drive higher margins.
On the other hand, the risks to Jefferies' analysis include faster-than-expected deceleration for AWS and advertising sales. Another potential risk is Temu, Shein, TikTok and other Chinese retailers affecting Amazon's U.S. retail sales, according to Jefferies note.
Amazon Near Buy Zone
Amazon stock opened trading within a buy range that extends to 201.29. Shares cleared a flat base buy point of 191.70 late in June. The company's breakout also helped it reach a new milestone: A $2 trillion market cap. It is just the fifth company to reach that mark.
Shares have been hovering around 200 for the past week, with an intraday high of 201.20 on Monday.
Amazon stock is on the IBD Leaderboard list. It also an IBD Tech Leader.
The company has not set a date for the release of its second quarter results. Last year, Amazon reported Q2 results on August 3.
