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U.S. stocks just ended their nine-week winning streak, as the S&P 500 Index ($SPX) closed the first week of 2024 with losses. Notably, the same tech giants that led the 2023 market rally from the front have looked vulnerable so far in the year. However, while a section of the market believes that valuations of tech stocks leave little on the table for investors this year, many analysts view Amazon (AMZN) as a top buy for 2024.
Last week, five brokerages - namely Piper Sandler, Bank of America, D.A. Davidson, Wolfe, and Wells Fargo - named Amazon their top pick for 2024, in a single day. Apart from these brokerages, many more also have the stock as a top 2024 pick, including JPMorgan, Evercore ISI, Citi, TD Cowen, and Bernstein.
Analysts have been turning incrementally more bullish on AMZN shares even as they are getting cautious on Apple (AAPL), which has received two downgrades in a week – something which is a rarity for the iPhone maker.
Amazon Stock Price Prediction
Wall Street is quite bullish on Amazon stock in 2024, and it has received a consensus rating of “Strong Buy” from analysts. Of the 43 analysts covering the stock, 39 rate it as a “Strong Buy,” while 3 say it's a “Moderate Buy.” One analyst has a “Hold” rating on AMZN, and its mean target price of $177.97 is 20% higher than current price levels.
When compared to its FAANG peers, analysts are the most bullish on Amazon stock in 2024, while they are the most bearish on Netflix (NFLX).
Why is Wall Street So Bullish on AMZN?
Analysts have varying theses for their bullish views on Amazon stock. For instance, Bank of America analyst Justin Post believes that growth in advertising revenues will help add 370 basis points to Amazon’s North America margins. Notably, Amazon is coming up with an ad-supported Prime plan this year, joining ranks with the likes of Netflix and Disney (DIS), which have already launched ad-supported streaming tiers. Also, the U.S. Presidential elections and the Paris Olympics might increase digital ad spending benefiting players like Amazon.
Gil Luria of D.A. Davidson is bullish on Amazon’s enterprise-focused Amazon Web Services (AWS), and believes that while Microsoft’s (MSFT) Azure might grow at a higher pace in percentage terms, AWS will make “similar gains” in absolute dollar terms.
Wells Fargo’s Ken Gawrelski is optimistic about Amazon’s artificial intelligence (AI) pivot and estimates that enterprise AI could account for 7% of AWS revenues in 2024, with bigger gains in 2025 and 2026. Gawrelski also forecasts reacceleration in AWS revenues this year, and sees them rising 17% YoY. The segment’s growth rates have slowed, and were at an all-time low of 12% in Q3. However, as Amazon has also stressed, the revenue growth rate is now stabilizing.
Piper Sandler believes that Amazon’s 2024 earnings estimates are conservative compared to its estimates, and pointed to strong retail margins that the company has reported. Deepak Mathivanan of Wolfe also sees potential for further margin expansion.
Notably, amid the cost cuts (including layoffs), Amazon’s operating margins expanded to 7.8% in Q3 2023, which was the highest since 2021. AWS margins also rose to a seven-quarter high of 30.3% in Q3.
Amazon Stock Has Scope to Run Higher
Amazon was the second-best performing FAANG stock of 2023, with gains of 81% - second only to Meta Platforms (META). I believe that even as Amazon’s multiples (currently 43.8x next 12-month price-to-earnings) are the highest among FAANG peers, the stock still has room to run higher.
In terms of top-line, Amazon’s advertising business is growing at a brisk pace, at an annualized run rate of $50 billion and rising. Amazon's business-to-business (B2B) platform, Amazon Business, is another potential growth driver to watch, and during the Q2 2023 earnings call the company said that the division’s annualized gross revenues are at $35 billion.
The company continues to focus on cost cuts and higher efficiencies, and during the Q3 earnings call, CEO Andy Jassy said, “We have a long way before being out of ideas to improve cost and speed.”
The company, which overinvested in capacity previously, is now better leveraging its infrastructure which bodes well for its margins. A focus on efficiency would mean that Amazon’s bottom line and cash flows would grow at a faster rate than its sales growth in the coming quarters.
Overall, with a good mix of growth, margin expansion, and reasonable valuation multiples, I still see scope for Amazon shares to run higher from these levels.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , META , DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
