Please ensure Javascript is enabled for purposes of website accessibility

Analyst Still Sees "Massive Upside" in Amazon Stock, Raises Price Target to $4,500

By Rich Duprey – Oct 2, 2020 at 11:51AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wall Street is missing the bigger picture with its sum-of-the-parts valuations, says the report.

It's said that analysts are good at drawing straight lines that always go up and to the right, and one Wall Street pro seems to be proving the point. Pivotal Research just raised its price target on Amazon (AMZN -2.72%) to a street-high of $4,500 per share. That's 15% above its previous current $3,900 target, but 43% higher than where the e-commerce giant closed on Wednesday.

Yet, it's not a claim made without basis. Other analysts are missing the crux of Amazon's potential and severely undervaluing its stock because of it, argues the note.

Man pointing up beside wooden arrow

Image source: Getty Images.

Pivotal Research analyst Michael Levine argues the market misunderstands the potential of Amazon's advertising business.

Although ads contribute only 5% of Amazon's total revenue, their impact on operating profit margins is much greater when you remove Amazon Web Services (AWS) from the equation. At $2.1 billion, cloud services represent the vast bulk of Amazon's total operating income.

Put another way, if advertising was viewed as a stand-alone business, it would represent "well north" of 300% of Amazon's estimated non-AWS earnings before interest and taxes for 2020. He says that means there is "massive upside" to Amazon's earnings estimates for fiscal year 2024.

Considering Amazon has already generated around $8 billion in net ad revenue in 2020, and eMarketer forecasts it will grow to $13 billion for the full year (up from $10 billion last year), an argument could be made the analyst isn't bullish enough. Last year, Pivotal thought Amazon's ad revenue would hit $38 billion by 2023, though that was pre-pandemic. 

Amazon is the third largest ad platform behind Facebook and Google. It might not catch them any time soon, but this is a large opportunity that has yet to be fully tapped.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Facebook and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$114.80 (-2.72%) $-3.21
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$136.41 (-3.67%) $-5.20
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$97.42 (-2.63%) $-2.63
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$98.09 (-2.63%) $-2.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
107%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.